The function of education is to teach one to think intensively and to think critically... Intelligence plus character – that is the goal of true education

The function of education is to teach one to think intensively and to think critically... Intelligence plus character – that is the goal of true education.

— Martin Luther King Jr., American civil rights leader (1929-1968)

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THE PURPOSE OF THE PURPOSE OF ACCOUNTINGACCOUNTING

FINANCIAL INFORMATIONFINANCIAL INFORMATIONABOUT A BUSINESSABOUT A BUSINESSTO INDIVIDUALS TO INDIVIDUALS AND ORGANIZATIONSAND ORGANIZATIONS

TO PROVIDE:TO PROVIDE:

Forms of Business Forms of Business OrganizationOrganization

Sole proprietorshipSole proprietorship

PartnershipPartnership

CorporationCorporation

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Sole ProprietorshipSole Proprietorship

Business owned Business owned by one personby one person

Simple to Simple to establishestablish

Owner controlledOwner controlledTax advantagesTax advantagesOwner personally Owner personally

liableliableFinancing difficultFinancing difficult

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PartnershipPartnership

Two or more Two or more ownersowners

Simple to Simple to establishestablish

Shared controlShared controlBroader skills & Broader skills &

resourcesresourcesTax advantagesTax advantagesPersonal liabilityPersonal liability

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CorporationCorporation

Separate legal Separate legal entity owned by entity owned by stockholdersstockholders

Easy to transfer Easy to transfer ownershipownership

Greater capital Greater capital raising potentialraising potential

Lower legal Lower legal liabilityliability

Unfavorable tax Unfavorable tax treatmenttreatment

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THE ACCOUNTING PROCESSTHE ACCOUNTING PROCESS

Accounting Is A System Of:Accounting Is A System Of:

It is accomplished in 6 steps:

Gathering financial Gathering financial informationinformation

About a businessAbout a businessAnd reporting it to usersAnd reporting it to users

STEP ONESTEP ONE

ANALYZING

Looking at events that have taken place and thinking about how they affect the business

STEP TWOSTEP TWO

Entering financial information about events into the accounting system

RECORDING

STEP THREESTEP THREE

Sorting and grouping similar items together

CLASSIFYING

STEP FOURSTEP FOUR

Bringing the various items of information together to determine a result

SUMMARIZING

STEP FIVESTEP FIVE

Giving the results to interested parties

REPORTING

STEP SIXSTEP SIX

Deciding the meaning and importance of the information in various reports

INTERPRETING

Study Objectives of Study Objectives of Chapter 1Chapter 1

1.1. Understand the content and Understand the content and purpose of each of the financial purpose of each of the financial statements. statements.

a)a) Clarify the meaning of Clarify the meaning of assetsassets, , liabilitiesliabilities, and , and stockholders’ equitystockholders’ equity..

b)b) Learn what the basic accounting Learn what the basic accounting equation tells us about a business.equation tells us about a business.

2.2. Describe the components that Describe the components that supplement the financial supplement the financial statements in an annual report.statements in an annual report.

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Study Objectives of Study Objectives of Chapter 1Chapter 13.3. Identify the users and uses of Identify the users and uses of

accounting information.accounting information.4.4. Explain the 3 principal business Explain the 3 principal business

activities that affect cash.activities that affect cash.

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Define some terms:Define some terms:

SalesSales RevenueRevenue ExpenseExpense AssetAsset LiabilityLiability Owner’s EquityOwner’s Equity

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Content and Purpose of Financial Content and Purpose of Financial StatementsStatements

Businesses tell users how they are doing through four financial statements:

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How would you answer the question, “How is your business doing?”

Four Financial StatementsFour Financial Statements

Income StatementIncome Statement

Retained Earnings StatementRetained Earnings Statement

Balance SheetBalance Sheet

Statement of Cash FlowsStatement of Cash Flows

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Over Time

Over Time

Over Time

At some point in Time


Did you make any money???Did you make any money???

Summarizes revenues and expenses Summarizes revenues and expenses

for period: for period: month, quarter, year.month, quarter, year.

If revenue > expense = If revenue > expense = Net Income.Net Income.

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20Do this statement first!Do this statement first!


Retained Earnings Retained Earnings StatementStatement

Shows changes in retained earnings Shows changes in retained earnings

for period: for period: month, quarter, yearmonth, quarter, year

Beginning balanceBeginning balance

AddAdd Net Income from income Net Income from income

statement.statement.

Deduct DividendsDeduct Dividends

Ending balanceEnding balance

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Retained Earnings Retained Earnings StatementStatement

22Do this statement second!


Reports Reports assetsassets and claims to assets.and claims to assets.

Claims of creditors, Claims of creditors, liabilities.liabilities.

Claims of owners, Claims of owners, stockholders’ stockholders’

equity.equity.

Assets = Liabilities + Stockholders’ Assets = Liabilities + Stockholders’

EquityEquity

Specific date – Specific date – one point in time!one point in time!

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From Retained From Retained Earnings Earnings StatementStatement


Provides information about cash Provides information about cash

receipts and cash paymentsreceipts and cash payments

Summarizes for period: Summarizes for period: month, month,

quarter, year.quarter, year.

Cash effects of operating, Cash effects of operating,

investing, and financing investing, and financing

activities.activities.

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Where did the cash come from?Where did the cash come from?

How was cash used during the How was cash used during the

period?period?

What was the change in the cash What was the change in the cash

balance during the period?balance during the period?

A company cannot survive without A company cannot survive without

cash!cash!

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Statement of Cash Flows..Statement of Cash Flows..

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Agrees Agrees

withwith Balance Balance SheetSheet

Three Business Activities that Three Business Activities that affect Cashaffect Cash

OperatingOperating

InvestingInvesting

FinancingFinancing

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Operating ActivitiesOperating ActivitiesRevenuesRevenues are the increases in are the increases in

assets resulting from the sale of a assets resulting from the sale of a product or serviceproduct or service

ExpensesExpenses are the cost of assets are the cost of assets consumed or services used in consumed or services used in generating revenue.generating revenue.

If revenue If revenue >> expense expense == Net Net IncomeIncome

If revenue If revenue << expense expense == Net Net Loss!Loss!

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Operating ActivitiesOperating Activities

What the business What the business does to make does to make money;money;◦ Selling goodsSelling goods◦ Providing servicesProviding services◦ ManufacturingManufacturing◦ Cost of SalesCost of Sales◦ AdvertisingAdvertising◦ Paying employeesPaying employees◦ Paying utilitiesPaying utilities

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Investing ActivitiesInvesting Activities

Investments in the Investments in the company’s future company’s future (Obtaining resources or assets to (Obtaining resources or assets to operate the business)operate the business)

◦ LandLand◦ BuildingsBuildings◦ VehiclesVehicles◦ ComputersComputers◦ FurnitureFurniture◦ EquipmentEquipment

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Financing Activities – Financing Activities – Raising Raising money to finance the businessmoney to finance the business

Borrowing createsBorrowing creates liabilitiesliabilities◦ Bank loansBank loans◦ Debt securitiesDebt securities◦ Goods on credit or Goods on credit or

payablespayables

Selling stockSelling stock creates creates stockholders’ stockholders’ equityequity

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To be continued in

chapter 13.

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Users of Financial InformationUsers of Financial InformationInternalInternal

InternalInternal vs.vs.

ExternaExternall

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AssetsAssets

Resources owned by the business to be Resources owned by the business to be used to generate future revenueused to generate future revenue◦ CashCash◦ Accounts receivableAccounts receivable◦ InventoriesInventories◦ Furniture and fixturesFurniture and fixtures◦ EquipmentEquipment◦ SuppliesSupplies

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LiabilitiesLiabilitiesObligations or debts of the Obligations or debts of the

businessbusiness◦Notes payableNotes payable◦Accounts payableAccounts payable◦Interest payableInterest payable◦Salaries payableSalaries payable◦Unearned revenueUnearned revenue

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Stockholders’ EquityStockholders’ Equity

Ownership claims on assetsOwnership claims on assets◦Paid-in capitalPaid-in capital

Common stockCommon stock

◦Retained earningsRetained earnings

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Basic Accounting Basic Accounting EquationEquation

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AssetsAssets

= =

Liabilities + Stockholders’ EquityLiabilities + Stockholders’ Equity

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Which is Which is notnot one of the three forms of one of the three forms of business organization?business organization?

a.a. Sole proprietorship.Sole proprietorship.

d.d. Corporation.Corporation.

c.c. Partnership.Partnership.

b.b. Creditorship.Creditorship.

Question 1Question 1

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Which is an advantage of corporations Which is an advantage of corporations relative to partnerships and sole relative to partnerships and sole proprietorshipsproprietorships??

a. a. Lower taxes.Lower taxes.

d. d. Most common form of business organization.Most common form of business organization.

c.c. Reduced legal liability for investors.Reduced legal liability for investors.

b. b. Harder to transfer ownershipHarder to transfer ownership


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Which is Which is notnot one of the three primary one of the three primary business activities that affect cash?business activities that affect cash?

a.a. Financing.Financing.

d.d. Investing.Investing.

c.c. Advertising.Advertising.

b. b. Operating.Operating.


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Which of the following is Which of the following is notnot a correct a correct representation of the accounting equation?representation of the accounting equation?

a. a. Assets Assets == Liabilities Liabilities ++ Stockholders’ Equity Stockholders’ Equity

d. d. Assets - Assets - Stockholders’ Equity Stockholders’ Equity = = Liabilities Liabilities

c. c. Assets Assets + + Stockholders’ Equity Stockholders’ Equity = = Liabilities Liabilities

b. b. Assets - Liabilities = Stockholders’ EquityAssets - Liabilities = Stockholders’ Equity


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Using the accounting equation, answer the following question.

If Liabilities = $10,000 and

Then Assets =

Stockholders’ Equity = $20,000


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If Assets = $75,000

Then Stockholders’ Equity =

And Liabilities = $35,000


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ANSWERSANSWERS

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Which is Which is notnot one of the three forms of one of the three forms of business organization?business organization?

a.a. Sole proprietorship.Sole proprietorship.

d.d. Corporation.Corporation.

c.c. Partnership.

b.b. Creditorship.Creditorship.


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Which is an advantage of corporations Which is an advantage of corporations relative to partnerships and sole relative to partnerships and sole proprietorshipsproprietorships??

a. a. Lower taxes.Lower taxes.

d. d. Most common form of business organization.Most common form of business organization.

c. Reduced legal liability for investors.c. Reduced legal liability for investors.

b. b. Harder to transfer ownershipHarder to transfer ownership

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a.a. Financing.Financing.

d.d. Investing.Investing.

c.c. Advertising.Advertising.

b. b. Operating.Operating.

Which is Which is notnot one of the three primary one of the three primary business activities that affect cash?business activities that affect cash?


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Which of the following is Which of the following is notnot a correct a correct representation of the accounting equation?representation of the accounting equation?

a. a. Assets Assets == Liabilities Liabilities ++ Stockholders’ Equity Stockholders’ Equity

d. d. Assets - Assets - Stockholders’ Equity Stockholders’ Equity = = Liabilities Liabilities

c. c. Assets Assets + + Stockholders’ Equity Stockholders’ Equity = = LiabilitiesLiabilities

b. b. Assets - Liabilities = Stockholders’ EquityAssets - Liabilities = Stockholders’ Equity


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If Liabilities = $10,000 and

Then Assets =

Stockholders’ Equity = $20,000

$30,000 $30,000 == $10,000 $10,000 ++ $20,000 $20,000

$30,000$30,000


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If Assets = $75,000

Then Stockholders’ Equity =

And Liabilities = $35,000

$40,000$40,000

$75,000 $75,000 == $35,000 $35,000 ++ $40,000 $40,000


Supplements to the Financial Supplements to the Financial Statements in an Annual Statements in an Annual ReportReport

Management Discussion and Management Discussion and AnalysisAnalysis

Notes to Financial StatementsNotes to Financial Statements

Auditor’s reportAuditor’s report

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Management’s Discussion and Management’s Discussion and Analysis covers three items:Analysis covers three items:

1.1. LiquidityLiquidity

2.2. Capital resourcesCapital resources

3.3. Results of Results of

operationsoperations

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Management’s Discussion and Management’s Discussion and AnalysisAnalysis

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Explanatory notes and Explanatory notes and supplementary schedulessupplementary schedules

Clarifies information in financial Clarifies information in financial statementsstatements

Expands with additional detailExpands with additional detailDescribes accounting policiesDescribes accounting policiesExplains uncertainties and Explains uncertainties and

contingenciescontingencies

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Auditor’s ReportAuditor’s Report

Certified Public Accountant – CPACertified Public Accountant – CPAAuditor (CPA) conducts Auditor (CPA) conducts

independent examination of independent examination of financial statementsfinancial statements

Fair representation?Fair representation?Follow Follow generally accepted generally accepted

accounting principles (GAAP)?accounting principles (GAAP)?Unqualified opinionUnqualified opinion

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Auditor’s ReportAuditor’s Report

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Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings ?Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600

CSU begins on CSU begins on Jan. 1, 2007Jan. 1, 2007

For year For year ended ended Dec. Dec. 31, 2007,31, 2007, prepareprepare Income Income

statementstatement Retained Retained

earnings earnings statementstatement

Balance sheetBalance sheet

Problem: CSU CorporationProblem: CSU Corporation

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Action step 1:Action step 1: Report the Report the revenues & revenues & expenses for expenses for a period of a period of time, time, Income Income StatementStatement


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Action step 1:Action step 1: Report the Report the revenues & revenues & expenses for expenses for a period of a period of time, time, Income Income StatementStatement


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CSU CorporationCSU CorporationIncome StatementIncome Statement

For the Year Ended December 31, 2007For the Year Ended December 31, 2007

Create the headingCreate the heading

Name of the Name of the statementstatement

Name of the Name of the companycompany

Period Period of timeof time


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For the Year Ended December 31, 2007For the Year Ended December 31, 2007RevenuesRevenues

Service revenueService revenue $17,000$17,000

List the revenuesList the revenues

Use dollar signs to denote U.S. currencyUse dollar signs to denote U.S. currency




Service revenueService revenue $17,000$17,000ExpensesExpenses

Rent expenseRent expense $9,000$9,000Insurance expenseInsurance expense 1,000 1,000Supplies expenseSupplies expense 200 200

Total expensesTotal expenses 10,20010,200

________________

List the expenses & underline sub-totalsList the expenses & underline sub-totals




Service revenueService revenue $17,000$17,000ExpensesExpenses

Rent expenseRent expense $9,000$9,000Insurance expenseInsurance expense 1,000 1,000Supplies expenseSupplies expense 200 200

Total expensesTotal expenses 10,200 10,200Net IncomeNet Income $ 6,800$ 6,800

Calculate net income: revenues - expensesCalculate net income: revenues - expenses

________________________________

________________________________


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Action step 2: Action step 2: Show Show amounts and amounts and causes of causes of changes in changes in retained retained earningsearnings

Use Net Use Net Income from Income from Income Income StatementStatement

DividendsDividends


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CSU CorporationCSU CorporationRetained Earnings StatementRetained Earnings Statement

For the Year Ended December 31, 2007For the Year Ended December 31, 2007

Retained earnings, January 1Retained earnings, January 1 $ 0$ 0Add: Net incomeAdd: Net income 6,8006,800

6,8006,800Less: DividendsLess: Dividends 600 600Retained earnings, Dec. 31 Retained earnings, Dec. 31 $ 6,200$ 6,200

____________


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Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings $6,200Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600

Action step 3: Action step 3: Present assets Present assets and claims to and claims to those assets those assets at a specific at a specific point in time point in time on the on the Balance SheetBalance Sheet

Use $6,200 Use $6,200 Retained Retained earnings from earnings from previous previous statement!statement!


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Documents

The function of education is to teach one to think intensively and to think critically... Intelligence plus character – that is the goal of true education