Hha09g Ch01 PP

Chapter 1
Copyright 2012 Pearson Education
Define accounting vocabulary

Define the users of financial information
Describe the accounting profession and the
organizations that govern it
Identify the different types of business
organizations
Delineate the distinguishing characteristics
and organization of a proprietorship
Apply accounting concepts and principles

Describe the accounting equation, and define
assets, liabilities, and equity
Use the accounting equation to analyze
transactions
Prepare financial statements
Use financial statements to evaluate business
performance
1
Define accounting vocabulary
The information system that:

Measures business activity
Processes the data into reports
Communicates the results to decision makers
Presents information in monetary terms
2
Define the users of
financial information
Financial Accounting
Managerial Accounting
Provides information for

external decision makers
Focuses on information for

internal decision makers
Investors
Creditors
Taxing Authorities
Managers
Business Owners
Competition
Suppliers
S1-2: USERS OF FINANCIAL INFORMATION
Suppose you are the manager of Gregs Tunes. The

company needs a bank loan in order to purchase music
equipment. In evaluating the loan request, the banker
asks about the assets and liabilities of the business. In
particular, the banker wants to know the amount of the
businesss stockholders equity.
Requirements:
1.Is the banker considered an internal or external user of
financial information?
The banker is an external user.
2.Which financial statement would provide the best
information to answer the bankers questions?
The balance sheet would include assets,
liabilities and equity.
9
3
Describe the accounting
profession and the organizations
that govern it
10
Lucrative career with many opportunities

Certified Public Accountants (CPAs)
Pass qualifying exam
Meet education and/or experience requirements
11
12
Conflict of Interest
13
SEC requires companies to have financial statements

examined by independent accountants
Auditors will provide an opinion on financial
statements, if possible
Recent accounting scandals hurt investor confidence
U.S. Government passed the Sarbanes-Oxley Act
(SOX)
Criminal offense to falsify financial statements
Also created the Public Companies Accounting
Oversight Board (PCAOB)
Watchdog of accounting profession
14
15
4
Identify the different types
of business organizations
16
17
Proprietorship
Partners
Corporation
LLC, LLP
Not-forProfit
Owners
Proprietor:
One Owner
Partners:
Two or
more
Stockholders:
usually many
Members
None
Life of
Organization
Limited by
owner's
choice or
death
Limited by
owners
choice or
death
Indefinite
Indefinite
Indefinite
Liability of
owners for
business
debts
Proprietor:
Owner is
personally
liable
Partners are
personally
liable
Stockholders
not personally
liable
Members
are not
personally
liable
Fiduciary
liability
of board
members
18
5
Delineate the distinguishing
characteristics and organization
of a proprietorship
19
20
21
Incorporators obtain charter from the state

Charter authorizes corporation to:
Issue stock
Conduct business in accordance with state law
Incorporators agreed to a set of bylaws

Bylaws are the rule book that guides the
corporation.
Corporations begins to exist when stock is

issued
Stockholders vote on who will serve on Board of
Directors
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S1-4: TYPES OF BUSINESS ORGANIZATION
Chloe Michaels plans on opening Chloe Michaels

Floral Designs. She is considering the various types
of business organizations and wishes to organize
her business with unlimited life and limited liability
features. Additionally, Chloe wants the option to
raise additional equity easily in the future. Which
type of business organization will meet Chloes
needs best?
A corporation has all the requirements of Chloes
request. A corporation has an unlimited life,
shareholders have limited liability and additional
stock can be sold to raise additional equity.
24
6
Apply accounting concepts and
principles
25
Generally Accepted Accounting Principles

Guidelines that govern accounting
Based on a conceptual framework
Goals include:
Provide useful information for investment and lending
decisions
Must be relevant, reliable, and comparable
26
27
28
29
7
Describe the accounting equation,
and define assets, liabilities, and
equity
30
ASSETS
Economic
Resources
31
LIABILITIES
EQUITY
Claims to Economic
Resources
Economic resources
Benefit the business in the future
Examples:
Cash
Accounts receivable
Merchandise inventory
Furniture
Land
32
Liabilities
Debts payable to outsiders
Examples:
Accounts payable
Bank loans
Mortgages
33
Equity
Owners claims to the
assets of the business
In a proprietorship,
owners equity
Assets
Liabilities
Equity
Liabilities
Assets
34
Owners
Equity
+ Net income
(loss)
+ Revenues
Capital
- Drawing
35
Amounts earned by delivering goods or services

to customers
Sales revenue
Service revenue
Interest revenue
Dividend revenue
36
Outflows of assets or increasing liabilities in the

course of delivering goods or services to
customers
Store or rent expense
Salary expense
Advertising expense
Utilities expense
Interest expense
Property tax expense
37
E1-16: CHARACTERISTICS OF A CORPORATION,

ACCOUNTING CONCEPTS, AND USING THE
ACCOUNTING EQUATION
Select financial information for three corporations follows:
Assets
Liabilities
Equity
New Rock Gas
$74,000
$?
$24,000
$50,000
DJ Video Rentals
$75,000
$32,000
Corner Grocery
$100,000
$43,000
$?
$53,000
$47,000
$?
Requirements:
1. Compute the missing amount in the accounting equation
for each entity.
38
2. List the five main characteristics of a corporation.

Business Taxation
Government Regulation
Separate Entity with No Continuous Life
Unification of Ownership and Management
Unlimited Liability of Owner
3. Which accounting concept tells us that the previous
three companies will cease to exist if the owners die?
Going Concern Concept
39
8
Use the accounting equation to
analyze transactions
40
An event that affects the financial position of

the business
Can be measured reliably
Every transaction impacts at least two items
The accounting equation balances before
and after each transaction
41
Caren Smith opened a medical practice. During July, the first

month of operation, the business, titled Caren Smith, M.D.
experienced the following events:
1.Analyze the effects of these events on the accounting equation
of the medical practice of Caren Smith, M.D.
Assets
Dat
e
Cash
Jul
6
$
55,000
Bal
$
55,000
42
Liabiliti
es
Medical
supplies
Account
s
payable
Land
Owner
s
Equity
Smith,
capital
$
55,000
$
55,000
Assets
Date
Cash
Jul 12
Bal
Medical
supplies
Liabilitie Owners
s
Equity
Land
$1,800
Accounts
payable
Smith,
capital
$1,800
$9,000
$1,800
$46,000
$1,800
$55,000
Bal
$9,000
$1,800
$46,000
$1,800
$55,000
15-31
8,000
Bal
$17,00
0
29
(1,600)
(900)
(100)
15
43
8,000
$1,800
$46,000
$1,800
$63,000
(1,600)
(900)
(100)
Liabiliti
es
Assets
Date
Cash
$14,40
0
Bal
30
Bal
Medical
supplies
$1,800
Land
$46,00
0
(700)
$14,40
0
$1,100
44
$13,30
0
Retaine
Accounts Commo
d
payable n stock earning
s
$1,800
$55,00
0
$5,400
$55,00
0
$5,400
$55,00
0
$5,400
(700)
$46,00
0
31 (1,100)
Bal
Stockholders
Equity
$1,100
(1,100)
$1,100
$46,00
0
9
Prepare financial statements
45
Income
Statement
Balance
Sheet
Statement of
Owners Equity
Statement of
Cash Flows
46
47
48
49
The statement of cash flows reports the cash

coming in (positive amounts) and the cash going
out (negative amounts) during a period.
Business activities result in a net cash inflow or
a net cash outflow.
The statement of cash flows reports the net
increase or decrease in cash during the period
and the ending cash balance
50
Studio Photography works weddings and prom-type parties. The balance

of Ansel, capital was $16,000 at December 31, 2011. At December 31,
2012, the businesss accounting records show these balances:
Insurance expense
$ 8,000 Accounts receivable
$ 8,000
Cash
37,000 Note payable
12,000
Accounts payable
7,000 Ansel, capital, Dec 31, 2012
Advertising expense
3,000 Salary expense
?
25,000
Service revenue
80,000 Equipment
50,000
Ansel, drawing
31,000 Owners investment, 2012
29,000
Prepare the following financial statements for Studio Photography, Inc.

for the year ended December 31, 2012:
a. Income statement
b. Statement of owners equity
c. Balance sheet
51
Studio Photography
Income Statement
Year Ended December 31, 2012
Revenue:
Service revenue
$ 80,000
Expenses:
Salary expense
Insurance expense
8,000
Advertising expense
3,000
Total expenses
Net income
52
$ 25,000
36,000
$ 44,000
Studio Photography
Statement of Owners Equity
Year Ended December 31, 2012
Ansel, capital, December 31, 2011
$ 16,000
Owner investment
29,000
Net income
44,000
Subtotal
$ 89,000
Less: Drawings
(13,000)
Ansel, capital, December 31, 2012
$ 76,000
53
Studio Photography, Inc.

Balance Sheet
December 31, 2012
Assets
Cash
Accounts receivable
Equipment
Liabilities
$37,000
8,000
50,000
Accounts payable
$ 7,000
Note payable
12,000
Total liabilities
19,000
Owners Equity
Ansel, capital
Total assets
54
$95,000
Total liabilities and

owners equity
76,000
$95,000
1
0
Use financial statements to evaluate business
performance
55
56
Accounting is the language of business. Financial

statements report a companys activities in monetary
terms.
Different usersincluding individuals, business
owners, managers, investors, creditors, and tax
authoritiesreview a companys financial statements
for different reasons. Each users goal will determine
which pieces of the financial statements he or she
will find most useful.
57
Most U.S. businesses follow generally accepted

accounting principles (GAAP). If the company is
publicly traded, then it must also follow SEC
guidelines. If the company operates internationally,
then international financial reporting standards (IFRS)
will apply. The goal is that, eventually, all public U.S.
companies will report using IFRS rules.
There are five main forms of business organizations:
proprietorships, partnerships, corporations,
LLPs/LLCs, and not-for-profits. Each is unique in its
formation, ownership, life, and liability exposure.
58
Proprietorships are formed when one person creates a

business. One person owns the proprietorship.
Although the proprietorship is a separate entity, it has
no continuous life, and the owner has unlimited
liability for the businesss debts. Proprietorships have
a more difficult time raising capital, but have the
advantage of reduced regulation and less taxes than
the corporate form of business.
The accounting concepts are the underlying
assumptions used when recording financial
information for a business. Think of the concepts like
rules of a game. You have to play by the rules.
59
The accounting equation must always equal. That is,

Assets (what you own) must equal Liabilities (what
you owe) + Equity (net worth).
The accounting equation is Assets = Liabilities +
Equity. Every business transaction affects various
parts of the equation, but after each transaction is
recorded, the equation must ALWAYS balance
(equal).
Financial statements are prepared from the ending
balances of each account. Each financial statement
shows a different view of the companys overall
results
60
Financial statements are prepared from the

transaction analyses (summary of events) reported
in each account (Exhibit 1-6) in the order shown in
Exhibit 1-7. No one financial statement shows
everything about a company. It is the financial
statements AND the relationships the statements
show that give users the overall picture for a
specific company.
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Copyright
All rights reserved. No part of this publication may be reproduced, stored

in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise, without the
prior written permission of the publisher. Printed in the United States of
America.
63

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Chapter 1

Copyright 2012 Pearson Education

Define accounting vocabulary

Copyright 2012 Pearson Education

Apply accounting concepts and principles

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

The information system that:

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Provides information for

Focuses on information for

Copyright 2012 Pearson Education

S1-2: USERS OF FINANCIAL INFORMATION

Suppose you are the manager of Gregs Tunes. The

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Lucrative career with many opportunities

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

SEC requires companies to have financial statements

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Incorporators obtain charter from the state

Incorporators agreed to a set of bylaws

Corporations begins to exist when stock is

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

S1-4: TYPES OF BUSINESS ORGANIZATION

Chloe Michaels plans on opening Chloe Michaels

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Generally Accepted Accounting Principles

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

Amounts earned by delivering goods or services

Copyright 2012 Pearson Education

Outflows of assets or increasing liabilities in the

Copyright 2012 Pearson Education

E1-16: CHARACTERISTICS OF A CORPORATION,

New Rock Gas

Copyright 2012 Pearson Education

2. List the five main characteristics of a corporation.

Copyright 2012 Pearson Education

Copyright 2012 Pearson Education

An event that affects the financial position of

Copyright 2012 Pearson Education

Caren Smith opened a medical practice. During July, the first