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PART ONE:INTRODUCTION

Chapter 1: Business and Accounting

Chapter 2: Business Operations and Cycles

Chapter 3: Accounting and Its Role in Business

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Usefulness of accounting

YOU ARE HERE!

Historical perspective

Basic accounting concepts

and income measurement

Chapter 1

Business and

Accounting

Basic elements of accountingStandardization of accountingand conceptual framework

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Chapters 1-3: foundation for how accounting is used by businesses and individuals.

Chapter 1: the evolution of accounting as needs of users changed.

Chapter 2: business activities and the role of internal control.

Chapter 3: users of and information in accounting subsystems.

Chapter 3

Chapter 2

Chapter 3The Role of Accounting

THE ROAD AHEAD

Business Operations and Cycles

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PART ONE:INTRODUCTION

Chapter 1 - Business and Accounting

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CHAPTER 1 LEARNING OBJECTIVES

L.O.1: Describe the functional areas of business and how each uses accounting information.

L.O.2: Describe the development of business and accounting and the basic concepts of accounting.

L.O.3: Explain the differences among the basic types of businesses and business organizational structures.

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We use accounting information every day to make informed decisions about the things we want to do such as going out to lunch, putting money away for a trip, buying a car or house…...

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The exchange of goods, services, and money on an arm’s length basis that results in mutual benefit or profit for both parties involved.

WHAT IS BUSINESS?

What are the risks (possible future

sacrifices?)

What are the rewards (possible future

benefits?)

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Marketing

Human Resources

Production and Operations

BU

SIN

ES

S F

UN

CT

ION

S Customer focused: governed by the four P’s:product, price, promotionand physical distribution.

Employee focused:ensures capableemployees are givenopportunities in safe work environment.

Operation focused: planning, organizing,directing and controllingdaily production.

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BU

SIN

ES

S F

UN

CT

ION

SFinance

Accounting and Information Systems

Financial resourcefocused: when and how to raise and invest capitaland maximize investmentreturns

User focused: provides user information to otherfunctional areas and external parties.

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Accounting is the information infrastructure of the firm/economy that permits it to achieve its objectives.

The objective of business is to provide goods and services at a price that customers are willing to pay and to provide a return to owners.

WHAT IS ACCOUNTING?

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Accounting:The Language of Business

BusinessEvents

BusinessDecisions

Accounting

Information

Acc

ount

ing

Info

rmat

ion

Accounting

Information

Accounting is the link between business events and business decisions

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Acco

un

ting

Ro

ots

Babylonia - sole proprietorships and basic merchandising.

Ancient Greece - coining of money.

Manorial England -demand for accounting records intensifies.

Commerce in Old Italy - Arabic numbers, international banking system and use of credit developed, resources and obligations take on business meaning, and business partnerships form.

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Acco

un

ting

Ro

ots

Pacioli and the Method of Venice - introduces double-entry bookkeeping, the accounting equation and accounting based on economic events.

Assets = Liabilities + Owners’ Equity.

Pacioli defines successful rules for business - sufficient cash, good accounting system.

Industrial Revolution - advent of the corporation and the standardization of accounting.

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Pacioli equation still applies today!

Did you know that Pacioli 15th century accounting equation still forms the

underlying structure of accounting today?

=

Assets: rights to use resources with expected future benefits.

Liabilities: obligations to transfer economic resources to suppliers of goods and services in the future.

Owners’ Equity: obligation to transfer the residual interest (net assets) to owners when the business ceases.

PLUS

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PAUSE AND REFLECT

If a loan from the bank is a liability, how would the cash received be treated by a business?

The cash received is an asset.

The partnership has the right to use money.

The cash received is an asset.

The partnership has the right to use money.

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PAUSE AND REFLECT

Who are the owners of a business like Intel? What are Intel’s probable assets and liabilities?

The owners of Intel are the stockholders. Intel has assets such as cash, inventory, property, plant, and equipment. Intel has liabilities

such as amounts owners to suppliers and creditors.

The owners of Intel are the stockholders. Intel has assets such as cash, inventory, property, plant, and equipment. Intel has liabilities

such as amounts owners to suppliers and creditors.

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PAUSE AND REFLECT

If a business has $200,000 in assets and $50,000 in liabilities, what is the total of its owners equity?

If the business borrows $20,000 and uses it to purchase a piece of equipment, how does owners’ equity change?

Owners’ equity is $150,000. When the

business borrows $20,000 to buy the equipment, liabilities

also go up by $20,000. Owners’ equity is unchanged.

Owners’ equity is $150,000. When the

business borrows $20,000 to buy the equipment, liabilities

also go up by $20,000. Owners’ equity is unchanged.

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Basic Business Forms Through History

Types of Ownership Structure

Sole proprietorship - one person unlimited liability.

Partnership - two more persons unlimited liability.

Corporation - one or more persons, limited liability and legally distinct from owners.

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Basic Business Forms Through History

Type of Operations

Merchandising - a business that sells ready made merchandise (typical retailer).

Manufacturing - a business that converts raw materials to finished goods to sell to customers.

Service - a business that provides a service to customers.

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PAUSE AND REFLECT

Can you think of a business that fits into each of these categories?

Wal-Mart is a merchandiser; General

Motors is a manufacturer; American Express is a

service business.

Wal-Mart is a merchandiser; General

Motors is a manufacturer; American Express is a

service business.

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PAUSE AND REFLECT

Is Intel a corporation, partnership, or sole proprietorship? Is Intel a service, merchandising, or manufacturing company?

Intel is a corporation involved in manufacturing and

service.

Intel is a corporation involved in manufacturing and

service.

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Basic Accounting Concepts Developed Through History

of Accounting

Business entity concept Going concern concept Periodicity concept Monetary unit concept Accrual basis of accounting

These concepts are now part of

GAAP

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An accounting system reflects informationthat records and summarizes only those

economic amounts that pertain to aparticular entity. That is, business records

should be separate and distinct from personal records of business owners.

Business

Business

AssetsAssets

YesYes

BUSINESS ENTITY CONCEPT

Personal

Personal

Assets

Assets

NoNo

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Absent any information to the contrary, it is assumed that a business will continue into the foreseeable future. This concept is

crucial because it allows businesses to recognize assets and continue from one venture and time period to another.

GOING CONCERN CONCEPT

0

5

10

15

20

25

30

35

Food Gas Motel

J an

Feb

Mar

Apr

May

J un

The foreseeable futureThe foreseeable future

The business at work today

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Business profits are determined at regular intervals throughoutthe life of the business. Thus, a business does not have to cease before profits of the business can be determined.

PERIODICITY CONCEPT

Going concern concept

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Money is the commonmeasurement unit of economic activity. This concept is crucial because it allows activity in the business to be measured in a common denominator.

German marks

French francs

MONETARY UNIT CONCEPT

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Income equals the difference between sales (revenues earned) and the expenses incurred or consumed during the period, regardless of when cash is received or paid.

ACCRUAL BASIS OF ACCOUNTING

Developed in

the 15th century;

now widely

adopted

Economic

events

Revenue is the amount earned from providing services or transferring resources (goods) to customers.

Expenses are the amounts incurredor consumed in using resources or services in the effort to generate revenues.

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PAUSE AND REFLECT

If a company provided $50,000 of services but received only $40,000 in cash from customers, is its accrual basis revenue $50,000 or $40,000?

Because the company

provided services of $50,000, its revenue

is $50,000.

Because the company

provided services of $50,000, its revenue

is $50,000.

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PAUSE AND REFLECT

If a company used $40,000 of services but paid for only $30,000 this period, is its accrual basis expense $40,000 or $30,000?

What is the company’s accrual basis income?

Because the company used services

of $40,000, its expenses are $40,000. Its accrual basis net

income is $10,000 ($50,000 -$40,000).

Because the company used services

of $40,000, its expenses are $40,000. Its accrual basis net

income is $10,000 ($50,000 -$40,000).

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The stock market The stock market crash of 1929 lead to crash of 1929 lead to federal regulation of federal regulation of the securities market.the securities market.

The Securities and The Securities and Exchange Exchange Commission (SEC) Commission (SEC) adopted strict adopted strict regulations for regulations for companies issuing companies issuing stock.stock.

Companies are Companies are required to file and required to file and disclose extensive disclose extensive financial information financial information to protect investors.to protect investors.

October 29, 1929October 29, 1929The Dow Jones IndustrialThe Dow Jones Industrial

AverageAverage

The Dow Jones The Dow Jones

Industrial AverageIndustrial Average

October 29, 1929October 29, 1929

Unregulated marketplace

Unregulated marketplace

Down the tubes!

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Reporting standards applicable to publicly traded companies

G A PA

GENERALLY ACCEPTED ACCCOUNTING PRINCIPLES

U.S standards determined by the FinancialU.S standards determined by the FinancialAccounting Standards Board (FASB); international Accounting Standards Board (FASB); international accounting standards under development by theaccounting standards under development by theInternational Accounting Standards Committee (IASC).International Accounting Standards Committee (IASC).

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Statement 4: Objectives of Financial Reporting by Nonbusiness Organizations

Statement 5: Recognition and Measurement in Financial Statements

of Business Enterprise

Statement 6: Elements of Financial Statements

GAAP

STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS

Statement 1: Objectives of Financial Reporting by Business Enterprise

Statement 2: Qualitative Characteristics of Accounting Information

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Financial reporting should:Financial reporting should:

provide information that is provide information that is useful for making useful for making investment, credit and investment, credit and similar decisions.similar decisions.

help assess the amounts, help assess the amounts, timing and uncertainty of timing and uncertainty of cash flows.cash flows.

indicate the company’s indicate the company’s economic resourceseconomic resources

and claims to those and claims to those resources.resources.

Concept Statement 1

Concept Statement 111

Co

nce

pt

Sta

tem

ent

1

Statement 1: Objectives of Financial Reporting by Business Enterprise

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Financial reporting should provide:Financial reporting should provide:

benefits from accounting benefits from accounting information that exceed theinformation that exceed thecost of providing such cost of providing such information.information.

information should be relevant: information should be relevant: predictive value, feedback predictive value, feedback value and timeliness.value and timeliness.

information should be reliable: information should be reliable: verifiability, representational verifiability, representational faithfulness and neutrality.faithfulness and neutrality.

Concept Statement 2

Concept Statement 222

Co

nce

pt

Sta

tem

ent

2

Statement 2: Qualitative Characteristics of Accounting Information

Exhibit 1.1

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Financial reporting should Financial reporting should provide useful information to provide useful information to external decision makers who external decision makers who rely on financial reporting of rely on financial reporting of nonbusiness organizations.nonbusiness organizations.

Concept Statement 4

Concept Statement 444

Co

nce

pt

Sta

tem

ent

4

Statement 4: Objectives of Financial Reporting by Nonbusiness Organizations

The United Way

The Red Cross

Religious Groups

Nonprofitoriented

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Financial reporting for a period Financial reporting for a period should include:should include:

financial position at the end of financial position at the end of the period.the period.

earnings for the period.earnings for the period.

comprehensive income for the comprehensive income for the period.period.

cash flows during the period.cash flows during the period.

investment by and distributions investment by and distributions to owners during the period.to owners during the period.

Concept Statement 5

Concept Statement 555

Co

nce

pt

Sta

tem

ent

5

Statement 5: Recognition and Measurement of Financial Statements of Business Enterprise

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Financial reporting shouldFinancial reporting shouldinclude 10 interrelated include 10 interrelated elements that measure the elements that measure the performance and financial performance and financial position of the company: position of the company: assets, liabilities, equity (net assets, liabilities, equity (net assets), investments, assets), investments, distributions, comprehensive distributions, comprehensive income, revenues, expenses, income, revenues, expenses, gains and losses.gains and losses.Concept Statement 6

Concept Statement 666

Co

nce

pt

Sta

tem

ent

6

Statement 6: Elements of Financial Statements

Replaced Statement 3

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A HIERARCHY OF ACCOUNTING QUALITIES

User ofaccountinginformation

Pervasiveconstraint

User-specificqualities

Primary decision-specific qualities

Ingredients ofprimary qualities

Secondary andinteractive qualities

Threshold recognition

Benefits > Costs

Materiality

Decision makers andtheir characteristics

Understandability

Decision Usefulness

Relevance Reliability

Timeliness Verifiability RepresentationalFaithfulness

Predictivevalue

Feedbackvalue

NeutralityComparability(including

consistency)

Exhibit 1.1

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Business Today and Tomorrow

Accounting information will be increasingly critical in the global market of tomorrow.

Global

markets

Manufacturing & communication

advances

Cusomer

focused

operationsCustomer

focused

operations

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Businesses today have many choices

in business form to meet both personal and business objectives, but how business

is conducted is equally important

What business form is best to limit liability?

What is the best form to conductthe business?

What best practices should we adopt?

Everyday a business isfaced with ethical challenges,

tradeoffs between the obligation to the business versus

obligations to customers,employees, creditors

and society as a whole

What arethe consequences

of my actions?

LEGAL AND ETHICAL CONSIDERATIONS IN BUSINESS