Financial and Managerial Accounting

John J. Wild Third Edition

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1
Introducing Accounting in Business

Conceptual Chapter Objectives

C1: Explain the purpose and importance of accounting in the information age. C2: Identify users and uses of accounting. C3: Identify opportunities in accounting and related fields. C4: Explain why ethics are crucial to accounting. C5: Explain GAAP, and define and apply several key accounting principles. C6: Appendix 1B: Identify and describe the three major activities of organizations.
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Analytical Chapter Objectives

A1: Define and interpret the accounting equation and each of its components. A2: Analyze business transactions using the accounting equation. A3: Compute and interpret return on assets. A4: Appendix 1A: Explain the relationship between return and risk.

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Procedural Chapter Objectives

P1: Identify and prepare basic financial

statements and explain how they interrelate.

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C1

Importance of Accounting
is a Accounting system that Identifies

Records information that is

Relevant Reliable Comparable

Communicates

to help users make better decisions.

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C1

Accounting Activities
Identifying Business Activities Recording Business Activities Communicating Business Activities

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C2

Users of Accounting Information

Internal Users External Users

Lenders

Consumer Groups

Managers Officers

Sales Staff Budget Officers

Shareholders External Auditors Governments Customers

Internal Auditors Controllers

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C2

Users of Accounting Information

External Users Internal Users

Financial accounting provides external users with financial statements.

Managerial accounting provides information needs for internal decision makers.

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C3

Opportunities in Accounting
Financial Managerial
General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers

Taxation
Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans FBI investigators Market researchers Systems designers Merger services Business valuation Forensic accountant Litigation support Entrepreneurs
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Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation

Accountingrelated

C3

Accounting Jobs by Area

Public accounting 25%

Private accounting 60%

Government, not-for-profit, & education 15%

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C4

EthicsA Key Concept

Ethics
Beliefs that distinguish right from wrong Accepted standards of good and bad behavior

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C4

Guidelines for Ethical Decisions

Identify ethical concerns Analyze options Make ethical decision

Use personal Consider all good and bad ethics to recognize ethical consequences. concern.

Choose best option after weighing all consequences.

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C5

Generally Accepted Accounting Principles

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Relevant Information Reliable Information Affects the decision of its users. Is trusted by users.
Used in comparisons across years & companies.
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Comparable Information

C5

Setting Accounting Principles

The Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.

The International Accounting Standards Board (IASB) issues international standards that identify preferred accounting practices in other countries. The IASB does not have authority to impose its standards on companies.
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C5

Principles of Accounting
Revenue recognition principle provides guidance on when a company must recognize revenue. Business entity means that a business is accounted for separately from its owner or other business entities. Matching Principle prescribes that a company must record its expenses incurred to generate the revenue.

Cost principle means that accounting information is based on actual cost. Going-concern means that accounting information reflects a presumption the business will continue operating. Monetary unit means we can express transactions in money.

Full disclosure principle requires a company to report the details behind financial statements that would impact users decisions.
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C5

Business Entity Forms

Sole Proprietorship

Partnership

Corporation

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A1

Accounting Equation
Assets

Liabilities

Equity

Assets

Liabilities & Equity

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A1

Assets
Cash Accounts Receivable Notes Receivable

Vehicles

Resources owned or controlled by a company

Land

Store Supplies

Buildings Equipment
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A1

Liabilities
Accounts Payable Notes Payable

Creditors claims on assets

Taxes Payable Wages Payable

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A1

Equity
Contributed Capital Retained Earnings

Owners claim on assets

Dividends
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A1

Expanded Accounting Equation Assets Assets

= =
_

Liabilities Liabilities

+ +
Revenues

Equity Equity

Common Stock

Dividends

_ Expenses

Retained Earnings
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A2

Transaction Analysis

J. Scott invests $20,000 cash to start the business in return for stock.
Assets Cash Supplies Equipment (1) $ 20,000 = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000

$ 20,000 $

$ $

20,000

$ 20,000

$ 20,000

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A2

Transaction Analysis
Purchased supplies paying $1,000 cash.
Assets = uipment Lia ilities Acc unts tes Paya le Paya le + uity mm n t c $ 20,000

ash upplies (1) $ 0,000 (2) (1,000) $ 1,000

$ 19,000 $ 1,000 $ $ 20,000

$ $

20,000

$ 20,000

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A2

Transaction Analysis
Purchased equipment for $15,000 cash.
Assets = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000

Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000

4,000 $ 1,000 $ $ 20,000

15,000 =

$ $

20,000

$ 20,000

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A2

Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
Assets =

Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 (4) 200 1,000 $ 4,000 $ 1,200 $ $ 21,200 16,000 =

Liabilities Accounts Notes Payable Payable

Equity Common Stock $ 20,000

$ 1,200 $ 1,200 $ $ 21,200

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$ 20,000

A2

Transaction Analysis

Borrowed $4,000 from 1st American Bank.

Assets Cash Supplies Equipment (1) $ 20,000 (2) (1,000) $ 1,000 (3) (15,000) $ 15,000 (4) 200 1,000 (5) 4,000 $ 8,000 $ 1,200 $ 16,000 $ 25,200 = = Liabilities Accounts Notes Payable Payable + Equity Common Stock $ 20,000

$ 1,200 $ $ 1,200 $ $ 4,000 4,000 25,200

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$ 20,000

A2

Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock $ 20,000

$ 8,000 $ 1,200 $ $ 25,200

16,000 =

1,200 $

4,000

$ 20,000

$ 25,200

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A2

Transaction Analysis

Now, lets look at transactions involving revenue, expenses and dividends.

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A2

Transaction Analysis

Provided consulting services receiving $3,000 cash.

Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock Revenue $ 20,000 $ 3,000

$ 11,000 $

1,200 $

16,000 =

$ 1,200 $ 4,000 $ 28,200

$ 20,000 $ 3,000

$ 28,200

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A2

Transaction Analysis
P aid salaries o f $800 to em p lo yees.
Assets = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Stock Revenue Expenses $ 20,000 $ 3,000 $ (800) $ 20,000 $ 3,000 $ (800)

Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 (7) (800) $ 10,200 $ 1,200 $ 16,000 =

$ 1,200 $

4,000

$ 27,400

$ 27,400

R em em b er th at exp en ses decrease eq u ity.

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A2

Transaction Analysis

D ivid en d s o f $500 are p aid to sh areh o ld ers.

Assets Cash Supplies Equipment Bal. $ 8,000 $ 1,200 $ 16,000 (6) 3,000 (7) (800) (8) (500) $ 9,700 $ 1,200 $ 16,000 $ 26,900 = = Liabilities Accounts Notes Payable Payable $ 1,200 $ 4,000 + Equity Common Dividends Revenue Expenses Stock $ 20,000 $ 3,000 $ (800) $ (500) $ 20,000 $ (500) $ 3,000 $ (800)

$ 1,200 $

4,000

$ 26,900

R em em b er th at d ivid en d s d ecrease eq u ity.

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P1

Financial Statements
Lets prepare the Financial Statements reflecting the transactions we have recorded.
1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

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P1

Income Statement
cott om pa n ncom e ta te m e nt onth Ende d e ce m be r 3

For

Re ve nue s: onsu tin re ve nue Ex pe nse s: a a rie s e x pe nse Ne t incom e

3 8

Net income is the difference between Revenues and Expenses.

The income statement describes a compan s revenues and expenses a on with the resu tin net income or oss over a period of time due to earnin s activities.
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P1

Statement of Retained Earnings

or co tt o m a n y n co m e ta te m e n t o n th En d e d e ce m b e r , 009

Re e n e s o n s tin g re e n e E e n se s a a rie s e e n se e t in co m e

,000 00 , 00

The net income of $ , 00 increases Retained Earnings by $ , 00.

cott om any tatement of Retained Earnings or onth Ended ecember , 009

Retained Earnings, ec. , 009 $ s et income ess i idends Retained Earnings, ec. , 009 $

, 00 500 ,700
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P1

Balance Sheet
The Balance Sheet describes a companys financial position at a point in time.
Scott Company Balance Sheet December 31, 2009 Assets $
Scott Company Statement of Retained Earnings For Month Ended December 31, 2009 Retained Earnings, Dec. 1, 2009 Plus: Net income Less: Dividends Retained Earnings, Dec. 31, 2009 $ 2,200 500 1,700

Cash Supplies Equipment

9,700 1,200 16,000

Total assets

26,900

Liabilities Accounts payable Notes payable Total liabilities Equity Common stock Retained earnings Total liabilities and equity

1,200 4,000 5,200 20,000 1,700

26,900
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P1

Statement of Cash Flows

Scott Company Statement of Cash Flows For Month Ended December 31, 2009 Cash flows from operating activities: Cash received from clients $ 3,000 Purchase of supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities Cash flows from investing activities: Purchase of equipment (15,000) Net cash used in investing activities Cash flows from financing activities: Investment by Shareholders 20,000 Borrowed at bank 4,000 Dividends Paid (500) Net cash provided by financing activities Net increase in cash Cash balance, December 1, 2009 Cash balance, December 31, 2009

1,200

(15,000)

$ $

23,500 9,700 9,700

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A3

Return on Assets (ROA)

Return on assets Net income Average total assets

ROA is viewed as an indicator of operating efficiency.

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End of Chapter 1

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