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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.
Chapter Accounting in Business 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 McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved 1 2 C 1 Importance of Accounting Accounting Identifying Select transactions and events Recording Input, measure and classify Communicating Prepare, analyze and interpret 1 3 C 2 Users of Accounting Information External Users •Lenders •Consumer Groups •Shareholders •External Auditors •Governments •Customers Internal Users •Managers •Officers/Directors •Internal Auditors •Sales Staff •Budget Officers •Controllers 1 4 C 2 Users of Accounting Information External Users Financial accounting provides external users with financial statements Internal Users Managerial accounting provides information needs for internal decision-makers 1 5 C 2 Opportunities in Accounting 1 6 C 3 Ethics - A Key Concept Beliefs that distinguish right from wrong Accepted standards of good and bad behavior 1 7 C 3 Ethics - A Key Concept 1 8 C 4 Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP) Relevant Information Affects Affects the decision of its its users Reliable Information Is trusted by by users users Comparable Information Is helpful in in contrasting organizations 1 9 C 4 Setting Accounting Principles Financial Financial Accounting Accounting Standards Standards Board Board is is the the private private group group that that sets sets both both broad broad and and specific specific principles principles The Securities and Exchange Commission is the government agency that establishes reporting requirements for companies that issue stock or shares to the public 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 1 10 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 1 23 P 1 Transaction 3: Purchase Equipment for Cash FastForward purchases equipment for $26,000 cash The accounts involved are: (1) Cash (asset) (2) Equipment (asset) 1 24 P 1 Transaction 4: Purchase Supplies on Credit FastForward purchases Supplies of $7,100 on account The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) 1 25 P 1 Transaction 5: Provide Services for Cash The company provides consulting services receiving $4,200 cash The accounts involved are: (1) Cash (asset) (2) Revenues (equity) 1 26 P 1 Transaction and 7: Payment of Expenses in Cash The company pays $1,000 rent and $700 in salary to the company’s only employee The accounts involved are: (1) Cash (asset) (2) Expenses (equity) 1 27 P 1 Summary of Transactions Other transactions were executed during December and the summary of all transactions is shown below: 1 28 P 2 Financial Statements Let’s prepare the financial statements reflecting the transactions we have recorded • Income statement (Statement of comprehensive income) • Statement of changes in equity • Balance sheet (Statement of financial position) • Statement of cash flows 1 29 P 2 Income Statement 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 1 30 P 2 STATEMENT OF CHANGES IN EQUITY 1 31 P 2 Balance Sheet The Balance Sheet describes a company’s financial position at a point in time 1 32 P 2 Statement of Cash Flows 1 33 A 2 Decision Analysis Return on assets (ROA) is stated in ratio form as income divided by assets invested Return on assets = Net income Average total assets 1 34 A 3 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 1 35 C 5 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 1 36 C 6 1C - IASB’s Conceptual Framework for Financial Reporting 1 37 END OF CHAPTER ... Importance of Accounting Accounting Identifying Select transactions and events Recording Input, measure and classify Communicating Prepare, analyze and interpret 1 3 C 2 Users of Accounting Information... Comparable Information Is helpful in in contrasting organizations 1 9 C 4 Setting Accounting Principles Financial Financial Accounting Accounting Standards Standards Board Board is is the the... users with financial statements Internal Users Managerial accounting provides information needs for internal decision-makers 1 5 C 2 Opportunities in Accounting 1 6 C 3 Ethics - A Key Concept