Lecture Principles of financial accouting - Chapter 1: Accounting in business

After completing this chapter you should be able to: Explain the purpose and importance of accounting; identify users and uses of, and opportunities in, accounting; explain why ethics are crucial to accounting; explain generally accepted accounting principles and define and apply several accounting principles.

PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA

Accounting in Business

McGraw­Hill/Irwin         Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.

IdentifyingSelect transactions and events

Identifying

Select transactions and events

RecordingInput, measure and classify

Recording

Input, measure and classify

CommunicatingPrepare, analyze and interpret

Communicating

Prepare, analyze and interpret

Accounting

Users of Accounting Information

External Users

Financial accounting

provides external users

with financial statements

Opportunities in Accounting

C 2

Ethics - A Key Concept

Financial accounting practice is governed by concepts

and rules known as generally accepted accounting

principles (GAAP)

Financial accounting practice is governed by concepts

Principles

Relevant Information Affects the decision of its users.

Reliable Information Is trusted by users.

Comparable Information

Comparable Information Is helpful in contrasting organizations.

Is helpful in contrasting

organizations.

The Securities and Exchange Commission is the government agency that establishes reporting requirements for companies that issue stock or shares to the public.

The Securities and Exchange Commission is the government agency that establishes reporting requirements for companies that issue stock or shares to the public

Setting Accounting Principles

Financial Accounting Standards Board

is the private group that sets both

broad and specific principles

Financial Accounting Standards Board

is the private group that sets both

broad and specific principles

The International Accounting Standards Board (IASB)

issues International Financial Reporting Standards that

identify preferred accounting practices to create harmony

among accounting practices of different countries

C 4

International Standards

The International Accounting Standards Board (IASB), an

independent group (consisting of 16 individuals from many countries), issues International Financial Reporting Standards

(IFRS) that identify preferred accounting practices

IASB

Principles and Assumptions

of Accounting

Cost Principle

Accounting information is based on

actual cost Actual cost is considered objective.

Revenue Recognition Principle

1 Recognize revenue when it is earned.

2 Proceeds need not be in cash.

3 Measure revenue by cash received

plus cash value of items received

Matching Principle

A company must record its expenses

incurred to generate the revenue reported.

Full Disclosure Principle

A company is required to report the details behind financial statements that would impact users’ decisions.

C 4

Accounting Assumptions

Monetary Unit Assumption

Express transactions and events in monetary, or money, units.

Business Entity Assumption

A business is accounted for

separately from other business

entities, including its owner.

Time Period Assumption

Presumes that the life of a company can

be divided into time periods, such as

months and years.

Now Future

Going-Concern Assumption

Reflects assumption that the business

will continue operating instead of being

closed or sold.

Forms of Business Entities

Sole Proprietorship

Sole

C 4

* Proprietorships and partnerships that are

set up as LLCs provide limited liability

* Proprietorships and partnerships that are

set up as LLCs provide limited liability

Characteristics of Businesses

Characteristic Proprietorship Partnership Corporation

*

*

Owners of a corporation are called shareholders (or stockholders) Shareholders are not personally liable for corporate acts When a corporation issues only one class of shares, we

call it ordinary shares (or share capital)

Corporation

C 4

Accounting Equation

Accounting Equation

Store Supplies

Notes Receivable

Notes Receivable

a company

Resources owned or controlled by

a company

Taxes Payable

Taxes

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Liabilities

Creditors’

claims on assets

Creditors’

claims on assets

Owner’s Claims on Assets

Owner’s Claims on Assets

A 1

The accounting equation MUST remain in

balance after each transaction.

Transaction 1: Investment by Owners

The accounts involved are:

(1) Cash (asset)

(2) Owner Capital (equity)

On December 1, Chas Taylor invests

P 1

Supplies for Cash

The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

Chas Taylor’s company, FastForward purchases supplies paying $2,500 cash.

Transaction 3: Purchase

Equipment for Cash

The accounts involved are:

Supplies on Credit

The accounts involved are:

(1) Supplies (asset)

(2) Accounts Payable (liability)

FastForward purchases Supplies of $7,100 on

account.

Transaction 5: Provide

Services for Cash

The accounts involved are:

Summary of Transactions

Other transactions were executed during December and the summary of all transactions is shown below:

P 1

Let’s prepare the financial statements reflecting the

transactions we have recorded.

The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a

period of time due to earnings activities

The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a

period of time due to earnings activities

Income Statement

P 2

The Balance Sheet describes a company’s financial

position at a point in time

The Balance Sheet describes a company’s financial

position at a point in time

Balance Sheet

P 2

Decision Analysis

Return on assets (ROA) is stated in ratio form as

income divided by assets invested

Return on assets (ROA) is stated in ratio form as

income divided by assets invested

Net income Average total assets Return on assets =

A 2

1A Return and Risk Analysis

Many different 

returns may be 

reported.

ROA Interest return on savings accounts.

Interest return on corporate bonds.

Risk is the  uncertainty about  the return we will 

earn.

The lower the risk, the lower our expected return.

1B - Business Activities and the

Accounting Equation

There are three major types of activities in any organization:1.Financing Activities – Provide the means organizations

use to pay for resources such as land, buildings, and

equipment to carry out plans

2.Investing Activities - Are the acquiring and disposing of

resources (assets) that an organization uses to acquire and sell its products or services

3.Operating Activities – Involve using resources to research, develop, and purchase, produce, distribute, and market

products and services

C 5

Framework for Financial

Reporting

END OF CHAPTER 1