C1--1 Learning Objectives 1.Nature of a Business 2.The Role of Accounting in Business 3.Profession...

Learning Objectives

1. Nature of a Business

2. The Role of Accounting in Business

3. Profession of Accounting

4. Generally Accepted Accounting Principles

5. Assets, Liabilities, and Owner’s Equity

6. Business Transactions

7. Financial Statements

8. Financial Analysis and Interpretation

Ch 01 Introduction to accounting and business

1. Nature of a Business

In general, a business is an organization in which basic resources(inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

2. The objective of a business

The objective of most businesses is to maximize profits.

Revenue – expense = profit

3. The types of a business

Manufacturing business Merchandising business Service business

three types :1. a proprietorship (not a legal entity)

2. a partnership (not a legal entity)

3. a corporation (a legal entity)

Example: The Coca-Cola Company has 3.5 billion shares of stock owned by stockholders.

4.The types of business organizations

ProprietorshipsProprietorshipsProprietorshipsProprietorships

• What are some advantages?

– total undivided authority

– no restrictions on type of business – must be legal

• What are some disadvantages?

– unlimited liability

– limitation on size – fund raising power

Partnerships

• What are some advantages?– better credit standing – possibly– more brain power, but consultation with

partners required• What are some disadvantages?– unlimited personal liability for general

partners– need for written partnership agreement

Corporations

• What are some advantages?

– separate legal existence

– limited liability of stockholders

– transferability of ownership relatively easy

• What are some disadvantages?

– taxes – possible double taxation

– extensive governmental regulation

5. The role of accounting in business

Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business.

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Identificationof Users

UserInformation

AccountingSystem

Accounting — An Information Process Accounting — An Information Process

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UserInformation

AccountingSystem

Economic Dataand Activities

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UserInformation

AccountingSystem

Reports

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UserInformation

AccountingSystem

Reports

UserDecisions

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EXTERNAL USERS

Financial AccountingFinancial Accounting• investors• creditors• regulators• customers• competitors

• owners• managers• employees

INTERNAL USERS

ManagerialManagerial AccountingAccounting

6. Users of Accounting Information6. Users of Accounting Information6. Users of Accounting Information6. Users of Accounting Information

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IndustryIndustry

Vice PresidentFinance

CPA FirmsCPA Firms

ChiefAccountant

StaffAccountant

Controller

Partner

Manager

SeniorAccountant

JuniorAccountant

College Graduates

7. The Accounting Profession 7. The Accounting Profession

Private Accounting

Public Accounting

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Private Sector(FASB)

Private Sector(AICPA) (IMA)

GAAPGAAP

8. The GAAP

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The entity concept

The activities of a business are recorded separately from the activities of the stakeholders.

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The Cost Principle

Assets and servicesacquired

should be recordedat their actual cost.

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Resources

The Accounting EquationThe Accounting Equation

What are an organization’s resources called?

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Assets

Resources = Sources

What are the sources of the assets?

Cost of resources usedin the business

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Assets

Liabilities

Owner’sEquity

Resources = Sources

Cost of resources usedin the business

Resources supplied by

creditors and owners

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a. On November 1 2002, Chris Clark deposits $25,000 in a bank account for NetSolutions.

ASSETS

Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions

OWNER’S EQUITY

LIABILITIES

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a. Chris Clark deposits $25,000 in a bank account for NetSolutions.

ASSETS

OWNER’S EQUITYCash Cash 25,00025,000

LIABILITIES

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a. Chris Clark deposits $25,000 in a bank account for NetSolutions.

ASSETS

OWNER’S EQUITYCash Cash 25,00025,000

LIABILITIES

Chris Clark, Chris Clark, Capital Capital 25,00025,000

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b. NetSolutions buys land for $20,000.

ASSETS

=OWNER’S EQUITY

LIABILITIES

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (20,000)(20,000)

Land Land 20,00020,000

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ASSETS

=OWNER’S EQUITY

LIABILITIES

c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies 1,3501,350

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Accounts PayableAccounts Payable1,3501,350

Supplies Supplies 1,3501,350

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ASSETS

=OWNER’S EQUITY

LIABILITIES

d. NetSolutions earns fees of $7,500, receiving cash.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 7,5007,500

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash 7,5007,500

Fees Earned Fees Earned 7,5007,500

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ASSETS

=OWNER’S EQUITY

LIABILITIES

e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (3,650)(3,650)

ExpensesExpenses(3,650)(3,650)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

f. NetSolutions pays $950 to creditors on account.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (950)(950)

Accounts PayableAccounts Payable(950)(950)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

g. At the end of the month, the cost of supplies on hand is $550.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies (800)(800)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Supplies Supplies (800)(800)

Supplies ExpenseSupplies Expense(800)(800)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

h. Chris Clark withdraws $2,000 in cash.

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)

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ASSETS

=OWNER’S EQUITY

LIABILITIES

Cash Cash (2,000)(2,000)

Chris Clark, Chris Clark, DrawingDrawing(2,000)(2,000)

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• Questions:1. Does the business get the profit or loss? How

2. What the total assets of the business?

3. How much cash flow in and out?

4. What is balance of the cash?

5. How to do the financial reports?

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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary

ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000

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ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000

Accts. PayableAccts. Payable 400400

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ASSETS

= OWNER’S EQUITY

LIABILITIES

CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000 26,450 26,450

Accts. PayableAccts. Payable 400400

C. Clark, CapitalC. Clark, Capital 25,00025,000C. Clark, DrawingC. Clark, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500Wages ExpenseWages Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Supplies ExpenseSupplies Expense (800)(800)Utilities ExpenseUtilities Expense (450)(450)Misc. ExpenseMisc. Expense (275)(275)

26,05026,050

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OWNER’S EQUITY

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

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OWNER’S EQUITY

decreased bydecreased by

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OWNER’S EQUITY

Owner’s withdrawals

Expenses

decreased bydecreased by

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OWNER’S EQUITY

increased byincreased by

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OWNER’S EQUITY

Owner’s investments

Revenues

increased byincreased by

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OWNER’S EQUITY

Expenses

Revenues

decreased bydecreased by increased byincreased by

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OWNER’S EQUITY

Expenses

Revenues

decreased bydecreased by increased byincreased by

NET INCOME

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10. Financial Statements10. Financial Statements10. Financial Statements10. Financial Statements

NetSolutionsIncome Statement

For the Month Ended November 30, 2002

Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050

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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

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NetSolutionsStatement of Owner’s Equity

Chris Clark, capital, November 1, 2002 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2002 $26,050

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NetSolutionsBalance Sheet

November 30, 2002

AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450

LiabilitiesAccounts payable $ 400

Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450

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November 30, 2002

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November 30, 2002

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November 30, 2002

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NetSolutionsStatement of Cash Flows

Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900

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Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900

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Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900

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Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900

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11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity11. Ratio of Liabilities to Owner’s Equity

Ratio of liabilitiesto owner’s equity =

FormulaFormula

Objective: Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions and to pay its creditors.

Total liabilities

Total owner’s equity

NetSolutions =

ExampleExample

$26,0500.015 or 1.5%

The lower the ratio of liabilities to owner’s equity, The better the financial position of the business.

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HOME WORK

READING:1. Illustrative problem2. Self- examination questions3. Multiple choice

Writing:1. Exercise 1-132. Problem 1-2A3. Problem 1-5A

Discussion:1. Activity 1-3 Forty-Love

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The end of Chapter 1. The end of Chapter 1.

C1--1 Learning Objectives 1.Nature of a Business 2.The Role of Accounting in Business 3.Profession...

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