Chapter 1

I ntroduction to Accounting
and Business
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the importance of business ethics and
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
Objectives
After studying this
chapter, you should
be able to:
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
Objectives
8. Describe the financial statements of a
corporation and explain how they interrelate.
9. Use the ratio of liabilities to stockholders
equity to analyze the ability of a business to
withstand poor business conditions.
Manufacturing Business
Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
Merchandising Business
Product
Wal-Mart General merchandise
Toys R Us Toys
Circuit City Consumer electronics
Lands End Apparel
Amazon.com Internet books, music, video
retailer
Types of Businesses
Service Business
Product
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
Types of Businesses
There are three types of
business organizations
Proprietorship
Partnership
Corporation
A proprietorship
is owned by one
individual.
Advantages
Ease in organizing
Low cost of
organizing
Disadvantage
Limited source of
financial resources
Unlimited liability
Joes
A partnership is
owned by two or
more individuals.
Advantages
More financial
resources than a
proprietorship.
Additional
management skills.
Disadvantage
Unlimited liability.
Joe and Martys
A corporation is
organized under state
or federal statutes as a
separate legal entity.
Advantage
The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
Double taxation.
J & M, Inc.
Business Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.
Business Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Wal-Mart
Southwest Airlines
Business Strategies
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
Value Chain of a Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Inputs
Business
Processes
Products or
Services
Customer
Value
A business stakeholder is a person or
entity having an interest in the
economic performance of the business.
Business Stakeholders
2
Assess
stakeholders
informational
needs.
The Process of Providing
Information
STAKEHOLDERS
Internal:
Owners,
managers,
employees
External:
Customers,
creditors,
government
1
Identify
stake-
holders.
Accounting
Information
System
Design the
accounting
information
system to meet
stakeholders
needs.
3
4
Record
economic
data about
business
activities
and events.
The Process of Providing
Information
5
Prepare
accounting
reports for
stakeholders.
STAKEHOLDERS
Internal:
Owners,
managers,
employees
External:
Customers,
creditors,
government
Accounting
Information
System
The Process of Providing
Information
Business Ethics
1. Avoid small ethical lapses.
2. Focus on your long-term
reputation.
3. You may expect to suffer
adverse personal
consequences for holding
to an ethical position.
Sound
Principles that
form the
foundation for
ethical
behavior
Profession of Accounting
Accountants employed by a business firm or
a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
Generally Accepted
Accounting
Principles (GAAP)
The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
The objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
The Accounting Equation
Assets = Liabilities + Owners Equity
The resources
owned by a
business
The Accounting Equation
Assets = Liabilities + Owners Equity
The rights of the
creditors, which
represent debts
of the business
The Accounting Equation
Assets = Liabilities + Owners Equity
The rights of the
owners
What is a business
transaction?
A business transaction is an economic event or
condition that directly changes an entitys financial
condition or directly affects its results of operations.
On November 1,
2005, Chris
Clark organized
a corporation
that will be
known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions in
return for shares of stock in the
corporation.
Capital Stock
25,000 Investment by
stockholder
Cash
25,000
a.
Assets Owners Equity
=
=
b. NetSolutions exchanged $20,000 for land.
Capital Stock
25,000
Cash + Land
25,000
Bal.
Assets Owners Equity
=
=
b. 20,000 +20,000
Bal. 5,000 20,000 25,000
Accounts Capital
Cash + Supplies + Land Payable Stock
Assets
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owners
Liabilities + Equity
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
d. + 7,500 + 7,500
Assets
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Owners
Liab . + Equity
=
Bal. 5,000 1,350 20,000 1,350 25,000 =
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
Fees
earned
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
Assets
Owners
Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
e. 3,650 2,125
800
450
275
=
Bal. 8,850 1,350 20,000 1,350 25,000 3,850
=
Expenses
f. NetSolutions paid $950 to
creditors during the month.
Assets
Owners
Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
Bal. 8,850 1,350 20,000 1,350 25,000 3,850
=
=
f. 950 950
Bal. 7,900 1,350 20,000 400 25,000 3,850
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Assets
Owners
Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
=
= Bal. 7,900 1,350 20,000 400 25,000 3,850
g. 800 800
Bal. 7,900 550 20,000 400 25,000 3,050
Supplies
Expense
h. At the end of the month, NetSolutions
pays $2,000 to stockholders.
Assets
Owners
Liab . + Equity
Accounts Capital Retained
Cash + Supplies + Land Payable + Stock + Earnings
= Bal. 7,900 550 20,000 400 25,000 3,050
h. 2,000 2,000
Bal. 5,900 550 20,000 400 25,000 1,050
=
=
Dividends
Increased by
Capital Stock
Effects of Transactions on Owners Equity
Stockholders
investments
+
Decreased by
Increased by
Retained Earnings
Effects of Transactions on Owners Equity
Revenues
+
Expenses

Decreased by
Dividends

Accounting reports, called
financial statements,
provide summarized
information to the users.
Financial Statements
Income statementA summary of the
revenue and expenses for a specific
period of time.
Retained earnings statementA
summary of the earnings retained in the
corporation for a specific period of time.
Balance sheetA list of the assets,
liabilities, and stockholders equity as of a
specific date.
Statement of cash flowsA summary of
the cash receipts and disbursements for a
specific period of time.

Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00 Wages expense
800 00
Supplies expense
450 00 Utilities expense
275 00 Miscellaneous expense
Total operating expenses 4 450 00

NetSolutions
Income Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00
Transfer this
amount to the
retained earnings
statement.
NetSolutions
Retained Earnings Statement
For the Month Ended November 30, 2005
Less dividends 2 000 00
Retained earnings, November 30, 2005 $1 050 00
Net income for November $3 050 00
From the income
statement
Transferred to the
balance sheet
Assets Liabilities
NetSolutions
Balance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Stockholders Equity
Land 20 000 00 Capital Stock $25,000
Ret. Earnings l,050 26 050 00
Total liabilities and
Total assets $26 450 00 stockholders equity $26 450 00
From the
retained earnings
statement
This balance sheet presented
using the account form
When the balance sheet displays
the liabilities and stockholders
equity below the assets, the report
form is being used.
Cash flows from operating activities:
Cash received from customers $ 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owners investment $25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Should match Cash on the balance sheet
)
Statement of Cash Flows
Cash Flows from Operating ActivitiesThis
section reports a summary of cash receipts and
cash payments from operations.
Cash Flows from I nvesting ActivitiesThis section
reports the cash transactions for the acquisition and
sale of relatively permanent assets.
Cash Flows from Financing ActivitiesThis
section reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
Ratio of liabilities
to stockholders
equity
=
Total Liabilities
Total stockholders equity
The ratio of liabilities to stockholders equity
allows bankers, creditors, and other stakeholders
a means of analyzing the corporations ability to
withstand poor business conditions.
Financial Analysis and
Interpretation
Ratio of liabilities
to stockholders
equity
=
$400
$26,050
=

0.015
Ratio of liabilities
to stockholders
equity
Financial Analysis and
Interpretation
The End
Chapter 1