Académique Documents
Professionnel Documents
Culture Documents
Accounting and
the Business
Environment
Learning Objectives
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Learning Objectives
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Learning Objective 1
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Why Is Accounting Important?
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Decision Makers: The Users of
Accounting Information
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Decision Makers: The Users of
Accounting Information
• Financial accounting provides information
for external decision makers, such as:
– Investors who own a portion of the business
– Creditors to whom the business owes money
– Taxing authorities, to whom the business owes
taxes
• Managerial accounting provides
information to internal decision makers.
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The Accounting Profession
• Types of accountants:
– Certified Public Accountants (CPA) serve the
general public.
– Certified Management Accountants (CMA)
specialize in accounting and financial
management knowledge and work for a single
company.
• Accounting positions:
– Public
– Private
– Governmental
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Learning Objective 2
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What Are the Organizations and
Rules That Govern Accounting?
• Governing organizations:
– Financial Accounting Standards Board (FASB)
oversees creation and governance of
accounting standards.
– Securities and Exchange Commission (SEC)
oversees the U.S. financial markets.
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What Are the Organizations and
Rules That Govern Accounting?
• Accounting guidelines are called Generally
Accepted Accounting Principles (GAAP).
Useful accounting information must be:
– Relevant
– Faithfully representative
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The Economic Entity Assumption
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The Economic Entity Assumption
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Rules That Govern Accounting
Economic entity
Cost principle
assumption
GAAP
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Rules That Govern Accounting
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Learning Objective 3
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The Accounting Equation
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Assets
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Liabilities
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Equity
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Equity
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Equity
• Net income
Revenues > Expenses
• Net loss
Revenues < Expenses
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Learning Objective 4
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How Do You Analyze a Transaction?
A transaction is any
event that affects the Is it a transaction?
financial position of the
business and can be Buying a
measured with faithful computer for the
representation. office for $2,000
cash
x Hiring a new
employee
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Transaction Analysis for Smart Touch
Learning
Transaction 1—Owner Contribution
Sheena Bright contributes $30,000 cash to Smart Touch
Learning, a corporation, in exchange for stock. The effect
of this transaction on the accounting equation is:
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Transaction Analysis for Smart Touch
Learning
Transaction 2—Purchase of Land for Cash
Smart Touch Learning purchases land for an office
location, paying cash of $20,000.
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Transaction Analysis for Smart Touch
Learning
Transaction 3—Purchase of Office Supplies on Account
Smart Touch Learning buys office supplies on account,
which is a liability called Accounts Payable, agreeing to pay
$500 within 30 days.
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Transaction Analysis for Smart Touch
Learning
Transaction 4—Earning of Service Revenue for Cash
Smart Touch Learning earns service revenue by providing training
services for clients. The business collects $5,500 in cash.
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Transaction Analysis for Smart Touch
Learning
Transaction 5—Earning of Service Revenue on Account
Smart Touch Learning performs a service for clients who do not
pay immediately. The clients promise to pay $3,000 within one
month. This promise is an asset called accounts receivable.
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Transaction Analysis for Smart Touch
Learning
Transaction 6—Payment of Expenses with Cash
Smart Touch Learning pays $3,200 in cash expenses:
$2,000 for office rent and $1,200 for employee
salaries.
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Transaction Analysis for Smart Touch
Learning
Transaction 7—Payment on Account (Accounts Payable)
Smart Touch Learning pays $300 to the store from which it
purchased office supplies in Transaction 3.
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Transaction Analysis for Smart Touch
Learning
Transaction 8—Collection on Account (Accounts
Receivable)
Smart Touch Learning now collects $2,000 from the
client from Transaction 5.
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Transaction Analysis for Smart Touch
Learning
Transaction 9—Payment of Cash Dividend
Smart Touch Learning distributes a $5,000 cash
dividend to the stockholder, Sheena Bright.
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Learning Objective 5
Prepare financial
statements
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How Do You Prepare Financial
Statements
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How Do You Prepare Financial
Statements?
• Financial statements are business
documents that are used to communicate
information for decision making.
Statement
Statement
Income of Balance
of Cash
Statement Retained Sheet
Flows
Earnings
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The income statement reports the
net income or net loss of the
business for a specific period.
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The statement of retained earnings reports
how the company’s retained earnings
balance changed from the beginning to the
end of the period.
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The balance sheet reports on the assets,
liabilities, and stockholders’ equity of the
business as of a specific date.
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Learning Objective 6
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Return on Assets
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