Chapter 1Accounting and Business

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What are the Basic Functions of Business?

Marketing Human resources Production and operations Finance

Accounting and information systems

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How do the Functions Use Accounting

Information? Marketing

– Pricing, distribution costs Human resources

– Pay and fringe benefits, hiring costs Production and operations

– Production costs—actual and budgeted Finance

– Cost of borrowing, benefits expected

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How has Business Evolved?

Sole proprietorship– One owner

Partnership– Two or more

owners Corporation

– Many owners

Merchandising– Buy and sell

products Service

– Provide service Manufacturing

– Make and sell products

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How has Accounting Evolved?

Determination of wealth– What am I worth today

Determination of income– How has my wealth changed

On-going success– How is the business doing

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What are the Characteristics of Business Today?

Customer-focused operations Global markets Advanced manufacturing and

communications eBusiness Hybrid organizational structures

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What are the Basic Concepts of Accounting?

Business entity– Keep business and personal records separate

Monetary unit– Maintain business records in currency

Going concern– Business will continue past the current period

Periodicity– Profits/losses must be determined periodically

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What are the 5 Basic Elements of Accounting?

Asset– Right to use resources with future benefit

Liability– Obligation to transfer resources in the

future to suppliers of goods and services Owners’ equity

– Net assets belong to owners

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5 Basic Elements Continued

Revenues (accrual basis)– Amounts earned from providing goods

and services Expenses (accrual basis)

– Amounts incurred in an attempt to generate revenues

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What is GAAP? Generally accepted accounting

principles Financial Accounting Standards Board

– Current rule-making body– Standards– Concepts

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What are the Concepts Statements?

Concepts Statement #1– Useful information for decision making

Concepts Statement #2– Characteristics of accounting information

Concepts Statement #3 (superceded) Concepts Statement #4

– Objectives for nonbusiness organizations

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Concepts Continued Concepts Statement #5

– Financial statements Concepts Statement #6

– Elements of financial statements Concepts Statement #7

– Estimating value of future cash flows

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What Makes Information Useful?

Relevance– Capable of making a difference

Reliability– Dependable

Benefits > Costs– Benefits derived must be greater than cost

Materiality– Large enough to have an impact on a

decision

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What are the 4 Basic Financial Statements and

Auditors’ Report? Income statement

– Indicates revenues less expenses = net income for a period of time

Statement of cash flows– Indicates cash inflows and outflows from

operating, investing, and financing activities for a period of time

Statement of owners’ equity– Indicates changes in owners’ equity for a period of

time

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Financial Statements Continued

Balance sheet– Indicates the ending balances of assets,

liabilities, and owners’ equity at a point in time

Auditor’s report– Indicates whether the company followed

GAAP when preparing its financial statements

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What are the Purposes of the Ratios?

Current ratio– Relationship between current assets and

current liabilities Debt to equity ratio

– Relationship between liabilities and owners’ equity

Return on sales– Relationship between net income and

sales