Chap 01

Power Notes
Introduction to Accounting and Business
Learning Objectives
1. Nature of a Business
2. The Role of Accounting in Business
3. Business Ethics
4. Profession of Accounting
5. Generally Accepted Accounting Principles
6. Assets, Liabilities, and Owner’s Equity
7. Business Transactions
8. Financial Statements
9. Financial Analysis and Interpretation
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Data
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Commentary Facts
Access
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Communication News
Timeliness
Independence
Freedom-of-
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Access
Nature of Business and Accounting
 A business is an organization in which basic
resources (inputs), such as materials and labor, are
assembled and processed to provide goods or
services (outputs) to customers.
 The objective of most businesses is to earn a profit.
 Profit is the difference between the amounts received

from customers for goods or services and the
amounts paid for the inputs used to provide the
goods or services.
©2016 Cengage Learning. All
Rights Reserved. May not be
scanned, copied or duplicated,
Business and Investment
Goal
Profit
Products
Business
Sells
Profit
Services
Business Profit
Amounts earned from selling
products or services
Sales
- Expenses Costs incurred with sales
Profit
Amounts earned
from sales less
expenses
incurred
1
Types of Businesses
Service Business Service

Delta Air Lines Transportation
services
The Walt Disney Company Entertainment
services
7
1
Types of Businesses
Merchandising Business Product

Wal-Mart General merchandise
Amazon.com Internet books, music,
videos
8
1
Types of Businesses
Manufacturing Business Product

General Motors Corp. Cars, trucks, vans
Dell Inc. Personal computers
9
Accounting Information
Factors of
production are the
means businesses
use to make profit.
Land and Building
Accounting Information Labor and Equipment

Exh.
1.4
Forms of Organization
Business
Law Offices
Sally’s
Grocery
Proprietorship Partnership Corporation

1-1
A proprietorship is owned by one

individual and—
 Comprises 70% of business
organizations in the United States.
 Requires low cost of organizing.
 Is limited to financial resources of the
owner.
 Is used by small businesses.
12
1-1
A proprietorship is owned by one

individual and—
 Requires low cost of organizing.
 Is limited to financial resources of the
owner.
 Is used by small businesses.
13
1-1
A partnership is similar to a
proprietorship except that it is owned by
two or more individuals and—
 Combines the skills and resources of
more than one person.
14
1-1
A corporation is organized under state

or federal statues as a separate legal
taxable entity and—
 Generates 90% of the total dollars of

business receipts received.
 Comprises 20% of the businesses.
Continued
15
1-1
 Includes ownership divided into shares

of stock, sold to shareholders
(stockholders).
 Is able to obtain large amounts of
resources by issuing stock.
 Is used by large businesses.
16
Corporation
Owners of a corporation are called

shareholders (or stockholders).
When a corporation issues only

one class of stock, we call it
common stock (or capital stock).
1-1
A limited liability company (LLC)

combines attributes of a partnership
and a corporation in that it is organized
as a corporation. However, a limited
liability corporation can elect to be
taxed as a partnership and—
 Is a popular alternative to a partnership.
 Has tax and liability advantages to the
owners.
18
Forms of Business Entities

Exh.
1.4
Forms of Organization
Nonbusiness
Government Nonprofit Private

Nonbusiness Organization
Libraries Army Museums Hospitals
Colleges Schools
Airports Cities Prisons Shelters
Accounting for these organizations is usually a fund-

based system, but the basic principles are similar to
accounting for business organizations.
1
The Role of Accounting in Business
Accounting can be defined as an

information system that provides
reports to users about the economic
activities and condition of a business.
22
Focus of Accounting
 Identifying  Recording
Economic Economic
Events Events
 Reporting
and
Analyzing
Economic
Events
Influence of Accounting
is a
Accounting Identifies
system that
Records
information
Relevant Communicates
that is
Reliable
to help users make
Comparable better decisions.
1
The process by which accounting provides

information to users is as follows:
• Identify users.
• Assess users’ informational needs.
• Design the accounting information system
to meet users’ needs.
• Record economic data about business
activities and events.
• Prepare accounting reports for users.
25
Accounting — An Information Process
Identification
of Users
Users of Accounting Information
 investors
Financial Accounting  creditors
 regulators
EXTERNAL USERS
 customers
 competitors
Users of Accounting Information
• investors
Financial Accounting • creditors
EXTERNAL USERS • regulators
• customers
• competitors
Managerial Accounting
INTERNAL USERS  owners
 managers
 employees
1
Managerial Accounting
The area of accounting that provides
internal users with information is called
managerial accounting.
The objective of managerial accounting
is to provide relevant and timely
information for managers’ and
employees’ decision-making needs.
1-29
1-29
29
1
Financial Accounting
The area of accounting that provides
external users with information is
called financial accounting.
The objective of financial accounting is
to provide relevant and timely
information for the decision-making
needs of users outside of the business.
1-30
1-30
30
Identification
of Users
User
Information
Needs
Accounting
System
Identification
of Users
User
Information
Needs
Economic Data Accounting

and Activities System
Identification
of Users
User
Information
Needs

Reports
Identification
of Users
User
Information
Needs

User
Reports
Decisions
1
Exhibit 1 Users of Accounting Information
35
1
Role of Ethics in Accounting

and Business
Ethics are moral principles
that guide the conduct of
individuals.
36
Ethics and Social Responsibility
Ethics
Beliefs that
Often coincide
separate right
with laws
from wrong Accepted
standards of
good and
bad
behavior
Guidelines for Ethical Decision
Making
 Identify  Analyze  Make Ethical
Ethical Issues Options Decision
Use personal Consider both Choose the best

ethics to the good and bad option after
recognize ethical consequences weighing all
issues. for all affected. consequences.
Role of Ethics in Accounting and
Business
(slide 3 of 3)
 Guidelines for behaving ethically follow:
1. Identify an ethical decision by using your personal
ethical standards of honesty and fairness.
2. Identify the consequences of the decision and its
effect on others.
3. Consider your obligations and responsibilities to
those who will be affected by your decision.
4. Make a decision that is ethical and fair to those
affected by it.

Generally Accepted Accounting
Principles
 Financial accountants follow generally accepted accounting
principles (GAAP) in preparing reports.
 Within the U.S., the Financial Accounting Standards Board
(FASB) has the primary responsibility for developing accounting
principles.
 The Securities and Exchange Commission (SEC), an agency
of the U.S. government, has authority over the accounting and
financial disclosures for companies whose shares of ownership
(stock) are traded and sold to the public.
 Many countries outside the U.S. use generally accepted
accounting principles adopted by the International Accounting
Standards Board (IASB).

2
Business Entity Concept

Under the business entity
concept, the activities of a
business are recorded
separately from the activities
of its owners, creditors, or
other businesses.
41
2
Cost Concept
Under the cost concept,
amounts are initially recorded
in the accounting records at
their cost or purchase price.
42
Cost Concept
(slide 2 of 3)
Under the cost concept, Aaron Publishers records the purchase of the building on
February 20, 2014, at the purchase price of
$150,000.
The other amounts listed above have no effect on the accounting records.

2
Example Exercise 1-1
Cost Concept
On August 25, Gallatin Repair Service extended an offer of
$125,000 for land that had been priced for sale at
$150,000. On September 3, Gallatin Repair Service
accepted the seller’s counteroffer of $137,000. On October
20, the land was assessed at a value of $98,000 for
property tax purposes. On December 4, Gallatin Repair
Service was offered $160,000 for the land by a national
retail chain. At what value should the land be recorded in
Gallatin Repair Service’s records?
1-28
44
Example Exercise 1-1 (continued)
2
Follow My Example 1-1
$137,000. Under the cost concept, the land should be

recorded at the cost to Gallatin Repair Service.
For Practice: PE 1-1A, PE 1-1B
1-29
45
2
Objectivity Concept
The objectivity concept requires
that the amounts recorded in the
accounting records be based on
objective evidence.
46
2
Unit of Measure Concept

The unit of measure concept
requires that economic data
be recorded in dollars.
47
Fundamental Principles of
Accounting
Business Entity A business is accounted for separately
Principle from its owner or owners.
Objectivity Financial statement information is

supported by independent, unbiased
Principle evidence.
Financial statements are based on actual
Cost Principle costs incurred in business transactions.
Going-Concern A business continues operating instead of

Principle being closed or sold.
Monetary Unit Express transactions and events in

Principle monetary units.
The Accounting Equation
Resources
What are an organization’s resources called?

Resources = Sources
Assets
Cost of What are the

resources used sources of the
in the business assets?
Resources = Sources
Liabilities
Assets
Owner’s
Equity
Cost of Resources
resources used supplied by
in the business creditors and
owners
3
Accounting Equation
John Joos is the owner and operator of You’re A Star, a
motivational consulting business. At the end of its accounting
period, December 31, 2009, You’re A Star has assets of
$800,000 and liabilities of $350,000. Using the accounting
equation, determine the following amounts:
a. Owner’s equity, as of December 31, 2009.

b. Owner’s equity, as of December 31, 2010, assuming
that assets increased by $130,000 and liabilities
decreased by $25,000 during 2010.
1-34
52
3
a. Assets = Liabilities + Owner’s Equity

$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
b. First, determine the change in Owner’s Equity during 2010 as follows:
Assets = Liabilities + Owner’s Equity
$130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
Next, add the change in Owner’s Equity on December 31, 2009 to
arrive at Owner’s Equity on December 31, 2010, as shown below:
$605,000 = $450,000 + $155,000
1-35
Example Exercise1-2 continued For Practice: PE 1-2A, PE 1-2B
53
4
Business Transaction
A business transaction is an
economic event or condition that
directly changes an entity’s
financial condition or its results
of operations.
54
4
Transaction A
On November 1, 2009, Chris Clark

deposits $25,000 in a bank account
in the name of NetSolutions.
55
Business Transactions
a. Chris Clark deposits $25,000 in a bank account

for NetSolutions.
ASSETS LIABILITIES
= OWNER’S EQUITY
a. Chris Clark deposits $25,000 in a bank account

for NetSolutions.
ASSETS LIABILITIES
Cash
25,000
= OWNER’S EQUITY
Chris Clark,
Capital
25,000
Transaction Analysis
Chris Clark deposits $25,000 in a bank
account for NetSolutions.
The accounts involved are:
(1) Cash (asset)
(2) Chris Clark, Capital (equity)
Owners'
Assets = Liabilities + Equity
Chris
Accounts Clark
Cash Supplies Land Payable capital
a. $ 25,000 $ 25,000 Investment
$ 25,000 $ - $ - $ - $ 25,000
$ 25,000 = $ 25,000
4
Transaction B
On November 5, 2009, NetSolutions
paid $20,000 for the purchase of land
as a future building site.
60
b. NetSolutions buys land for $20,000.
ASSETS LIABILITIES
= OWNER’S EQUITY
b. NetSolutions buys land for $20,000.
ASSETS LIABILITIES
Cash
(20,000)
= OWNER’S EQUITY
Land
20,000
NetSolutions buys land for $20,000.

(1) Cash (asset)
(2) Land (asset)
Owners'
Chris
Accounts Clark
a. $ 25,000 $ 25,000
b. (20,000) $20,000
$ 5,000 $ - $ 20,000 $ - $ - $ 25,000
$ 25,000 = $ 25,000
4
Transaction C
On November 10, 2009,
NetSolutions purchased supplies
for $1,350 and agreed to pay the
supplier in the near future.
65
c. NetSolutions buys supplies for $1,350, agreeing to

pay the supplier in the near future.
ASSETS LIABILITIES
= OWNER’S EQUITY
c. NetSolutions buys supplies for $1,350, agreeing to

pay the supplier in the near future.
ASSETS LIABILITIES
Accounts Payable
1,350
Supplies
1,350 = OWNER’S EQUITY
NetSolutions buys supplies for
$1,350, agreeing to pay the supplier in
the near future.
(1) Supplies (asset)
(2) Accounts Payable (liability)
Owners'
Chris
Accounts Clark
a. $ 25,000 $ 25,000
b. (20,000) $20,000
c. $1,350 $1,350
$ 5,000 $ 1,350 $ 20,000 $ 1,350 $ - $ 25,000
$ 26,350 = $ 26,350
4
Transaction D
received cash of $7,500 for providing
services to customers. A business
earns money by selling goods or
services to its customers. This amount
is called Revenue.
70
d. NetSolutions earns fees of $7,500, receiving cash.
ASSETS LIABILITIES
= OWNER’S EQUITY
d. NetSolutions earns fees of $7,500, receiving cash.
ASSETS LIABILITIES
Cash =
7,500 OWNER’S EQUITY
Fees Earned
7,500
NetSolutions earns fees of $7,500,
receiving cash.

(1) Cash (asset)
(2) Revenues (equity)
Assets = Liabilities Owners' Equity
Accounts Chris Clark

a. $ 25,000 $ 25,000
b. (20,000) $20,000
c. $1,350 $1,350
d. 7,500 $ 7,500 Fees earned
Bal. $ 12,500 $ 1,350 $ 20,000 $ 1,350 $ 32,500
$ 33,850 = $ 33,850
4
Expenses
During the month, NetSolutions
spent cash or used up other assets
in earning revenue. Assets used in
this process of earning revenue
are called expenses.
75
4
Transaction E
paid the following expenses during
the month: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous,
$275.
76
e. NetSolutions paid: wages, $2,125; rent, $800;

utilities, $450; and miscellaneous, $275.
ASSETS LIABILITIES
= OWNER’S EQUITY
e. NetSolutions paid: wages, $2,125; rent, $800;

ASSETS LIABILITIES
Cash =
(3,650) OWNER’S EQUITY
Expenses
(3,650)
NetSolutions paid: wages, $2,125; rent, $800;

(1) Cash (asset)
(2) Expenses (equity)
Owners'
Assets = Liabilities Equity
a. $ 25,000 $ 25,000
b. (20,000) $20,000
c. $1,350 $1,350
d. 7,500 7,500 Fees earned
e. (3,650) (2,125) Wages expense
(800) Rent expense
(450) Utilities expense
(275) Misc. expense
Bal. $ 8,850 $ 1,350 $ 20,000 $ 1,350 $ 28,850
$ 30,200 = $ 30,200
4
Transaction F
On November 30, 2009,
NetSolutions paid creditors on
account, $950.
81
f. NetSolutions pays $950 to creditors on account.
ASSETS LIABILITIES
= OWNER’S EQUITY
f. NetSolutions pays $950 to creditors on account.
ASSETS LIABILITIES
Accounts Payable
(950)
Cash =
(950) OWNER’S EQUITY
NetSolutions pays $950 to creditors
on account
(1) Cash (asset)
(2) Accounts payable (liability)
Owners'
a. $ 25,000 $ 25,000
b. (20,000) $20,000
c. $1,350 $1,350
(800) Rent expense
(275) Misc. expense
f. (950) (950)
Bal. $ 7,900 $ 1,350 $ 20,000 $ 400 $ 28,850
$ 29,250 = $ 29,250
4
Transaction G
determined that the cost of supplies
on hand at the end of the period was
$550.
86
g. At the end of the month, the cost of supplies on

hand is $550.
ASSETS LIABILITIES
= OWNER’S EQUITY
g. At the end of the month, the cost of supplies on

hand is $550.
ASSETS LIABILITIES
Supplies =
(800) OWNER’S EQUITY
Supplies Expense
(800)
At the end of the month, the cost of supplies on
hand is $550.

(1) Supplies (asset)
(2) Supplies expense (equity)
Owners'
a. $ 25,000 $ 25,000
b. (20,000) $20,000
c. $1,350 $1,350
(800) Rent expense
(275) Misc. expense
f. (950) (950)
g. (800) (800) Supplies expense
Bal. $ 7,900 $ 550 $ 20,000 $ 400 $ 28,050
$ 28,450 = $ 28,450
4
Transaction H

withdrew $2,000 from NetSolutions
for personal use.
91
h. Chris Clark withdraws $2,000 in cash.
ASSETS LIABILITIES
= OWNER’S EQUITY
h. Chris Clark withdraws $2,000 in cash.
ASSETS LIABILITIES
Cash =
(2,000) OWNER’S EQUITY
Chris Clark,
Drawing
(2,000)
Chris Clark withdraws $2,000 in cash

(1) Cash (asset)
(2) Chris Clark, Drawing (equity)
Owners'
a. $ 25,000 $ 25,000 Investment
b. (20,000) $20,000
c. $1,350 $1,350
(800) Rent expense
(275) Misc. expense
f. (950) (950)
h. (2,000) (2,000) Withdrawal
Bal. $ 5,900 $ 550 $ 20,000 $ 400 $ 26,050
$ 26,450 = $ 26,450
Transaction Summary
ASSETS LIABILITIES
Cash 5,900 OWNER’S EQUITY

Supplies
Land
550
20,000
=
Transaction Summary
ASSETS LIABILITIES
Accts. Payable 400

Supplies
Land
550
20,000
=
Transaction Summary
ASSETS LIABILITIES
Accts. Payable 400

Supplies
Land
550
20,000
= C. Clark, Capital 25,000
C. Clark, Drawing (2,000)
Fees Earned 7,500
Wages Expense (2,125)
Rent Expense (800)
Supplies Expense (800)
Utilities Expense (450)
Misc. Expense (275)
Effects of Transactions on Owner’s Equity
OWNER’S EQUITY
decreased by
Owner’s withdrawals
Expenses
OWNER’S EQUITY
increased by
Owner’s investments
Revenues
OWNER’S EQUITY
decreased by increased by
Owner’s withdrawals Owner’s investments
Expenses Revenues
OWNER’S EQUITY
decreased by increased by
Owner’s withdrawals Owner’s investments
Expenses Revenues
NET INCOME
4
Exhibit 5 Effects of Transactions on Owner’s Equity
103
4
Transactions
Salvo Delivery Service is owned and operated by Joel
Salvo. The following selected transactions were completed
by Salvo Delivery Service during February:
1. Received cash from owner as additional investment,
$35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owner for personal use, $1,000.
1-63 (Continued)
104
4
Indicate the effect of each transaction on the accounting

equation elements (Assets, Liabilities, Owner’s Equity,
Drawing, Revenue, and Expense) by listing the numbers
identifying the transactions, (1) through (5). Also, indicate
the specific item within the accounting equation element
that is affected. To illustrate, the answer to (1) is shown
below.
(1) Asset (Cash) increases by $35,000; Owner’s Equity
(Joel Salvo, Capital) increases by $35,000.
1-64
105
4
(2) Asset (Cash) decreases by $1,800; Liability (Accounts

Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250;
Revenue (Delivery Service Fees) increases by
$11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts
Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Drawing (Joel
Salvo, Drawing) increases by $1,000.
1-65
106
5
Financial Statements
After transactions have been recorded

and summarized, reports are prepared for
users. The accounting reports providing
this information are called financial
statements.
107
5
Income Statement
The income statement reports

the revenues and expenses for
a period of time, based on the
matching concept.
108
5
Matching Concept
The matching concept is
applied by matching the
expenses with the revenue
generated during a period
by those expenses.
109
5
The excess of revenue over the

expenses is called net income
or net profit. If the expenses
exceed the revenue, the excess
is a net loss.
110
5
Exhibit 6 Financial Statements for NetSolutions
Net income is carried

to the statement of
owner’s equity.
111
NetSolutions
Income Statement
For the Month Ended November 30, 2009
Fees earned $7,500

Operating expenses:
Wages expense $2,125
Rent expense 800
Supplies expense 800
Utilities expense 450
Miscellaneous expense 275
Total operating expenses 4,450
Net income $3,050
NetSolutions
Income Statement
Fees earned $7,500

Operating expenses:
Rent expense 800
Net income $3,050
NetSolutions
Income Statement
Fees earned $7,500

Operating expenses:
Rent expense 800
Net income $3,050
5
Income Statement
The assets and liabilities of Chickadee Travel Service at April 30,
2010, the end of the current year, and its revenue and expenses
for the year are listed below. The capital of the owner, Adam
Cellini, was $80,000 at May 1, 2009, the beginning of the current
year.
Accounts payable $ 12,200 Miscellaneous expense $ 12,950
Accounts receivable 31,350 Office expense 63,000
Cash 53,050 Supplies 3,350
Fees earned 263,200 Wages expense 131,700
Land 80,000
Prepare an income statement for the current year ended April
30, 2010.
1-72
115
5
CHICKADEE TRAVEL SERVICE

INCOME STATEMENT
For the Year Ended April 30, 2010
Fees earned $263,200
Expenses:
Office expense 63,000
Miscellaneous expense 12,950
Total expenses 207,650
Net income $ 55,550
1-73
116
5
Statement of Owner’s Equity

The statement of owner’s equity
reports the changes in the
owner’s equity for a period of
time.
1-1-
117
117
117
5
Exhibit 6 Financial Statements for NetSolutions (continued)
From the income statement
To the balance sheet

1-1-
118
118
118
NetSolutions
Chris Clark, capital, November 1, 2009 $ 0

Investment on November 1, 2009 $25,000
Net income for November 3,050
$28,050
Less withdrawals 2,000
Increase in owner’s equity 26,050
Chris Clark, capital, November 30, 2009 $26,050
NetSolutions

$28,050
NetSolutions

$28,050
NetSolutions

$28,050
5

Using the data for Chickadee Travel Service shown in Example Exercise
1-4, prepare a statement of owner’s equity for the current year ended
April 30, 2010. Adam Cellini invested an additional $50,000 in the
business during the year and withdrew cash of $30,000 for personal use.
1-76
123
Example Exercise 1-5 continued
5

STATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2010
Adam Cellini, capital, May 1, 2009 $ 80,000
Additional investment by owner during year $ 50,000
Net income for the year 55,550
$105,550
Adam Cellini, capital, April 30, 2010 $155,550

1-77
124
5
Balance Sheet
A balance sheet is a list of
the assets, liabilities, and
owner’s equity as of a
specific date.
125
5
Account Form
The account form of a balance
sheet lists the assets on the left and
the liabilities and owner’s equity on
the right—similar to the design of
an account.
126
5
Exhibit 6 Financial Statements for NetSolutions (continued)
This amount is compared to From the statement

the net cash flow on the of owner’s equity
statement of cash flows.
127
5
Balance Sheet
Using the data for Chickadee Travel Service shown in Example Exercises 1-4
and 1-5, prepare the balance sheet as of April 30, 2010.
1-81
128
5

BALANCE SHEET
April 30, 2010
Assets Liabilities
Cash $ 53,050 Accounts payable $ 12,200
Accounts receivable 31,350
Supplies 3,350 Owner’s Equity
Land 80,000 Adam Cellini, capital 155,550
Total assets $167,750 Total liab. & owner’s eq. $167,750

1-82
129
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Total assets $26,450
Liabilities
Accounts payable $ 400
Owner’s Equity
Chris Clark, capital 26,050
Total liabilities and
owner’s equity $26,450
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Liabilities
Owner’s Equity
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Liabilities
Owner’s Equity
NetSolutions
Balance Sheet
November 30, 2009
Assets
Cash $5,900
Supplies 550
Land 20,000
Liabilities
Owner’s Equity
5
Statement of Cash Flows

A statement of cash flows is a
summary of the cash receipts and
payments for a specific period of time.
It consists of three sections: (1)
operating activities, (2) investing
activities, and (3) financing activities.
134
5
Operating Activities
The cash flows from operating

activities section reports a
summary of cash receipts and
cash payments from operations.
135
5
Investing Activities
The cash flows from investing activities

section reports the cash transactions for
the acquisition and sale of relatively
permanent assets.
136
5
Financing Activities
The cash flows from financing
activities section reports the cash
transactions related to cash
investments by the owner,
borrowings, and withdrawals by the
owner.
137
Owners'
a. $ 25,000 $ 25,000 Investment
b. (20,000) $20,000
c. $1,350 $1,350
(800) Rent expense
(275) Misc. expense
f. (950) (950)
h. (2,000) (2,000) Withdrawal
Bal. $ 5,900 $ 550 $ 20,000 $ 400 $ 26,050
$ 26,450 = $ 26,450
NetSolutions
Cash flows from operating activities:

Cash received from customers $ 7,500
Deduct cash payments for expenses
and payments to creditors 4,600
Net cash flow from operating activities $ 2,900
Cash flows from investing activities:
Cash payments for acquisition of land (20,000)
Cash flows from financing activities:
Cash received as owner’s investment $25,000
Deduct cash withdrawal by owner 2,000
Net cash flow from financing activities 23,000
Net cash flow and Nov. 30, 2002 cash balance $5,900
NetSolutions

Cash payments for acquisition of land (20,000 )
NetSolutions

Cash payments for acquisition of land (20,000))
NetSolutions

Cash payments for acquisition of land (20,000 )
5

A summary of cash flows for Chickadee Travel Service for the year
ended April 30, 2010, is shown below.
Cash receipts:
Cash received from customers $251,000
Cash received from additional
investment of owner 50,000
Cash payments:
Cash paid for expenses 210,000
Cash paid for land 80,000
Cash paid to owner for personal use 30,000
The cash balance as of May 1, 2009, was $72,050.

Prepare a statement of cash flows for Chickadee Travel Service for
1-88 the year ended April 30, 2010.
143
5

Cash received from customers $251,000
Deduct cash payments for expenses 210,000
Net cash flows from operating activities $ 41,000
Cash payments for purchase of land (80,000)
Cash received from owner as investment $ 50,000
Deduct cash withdrawals by owner 30,000
Net cash flows from financing activities 20,000
Net decrease in cash during year $(19,000)
Cash as of May 1, 2009 72,050
Cash as of April 30, 2010 $ 53,050

1-89
144
5
Interrelationships Among
• The income statement and the statement of
owner’s equity are interrelated.
Net income or net loss
appears on both
statements.
145
5
• The statement of owner’s equity and the
balance sheet are interrelated.
The owner’s capital at the end of the
period on the statement of owner’s
equity also appears on the balance
sheet as owner’s capital.
146
5
• The balance sheet and the statement of
cash flows are interrelated.
The cash reported on the balance
sheet is also reported as the end-
of-period cash on the statement of
cash flows.
147
5
Financial Analysis and

Interpretation
Ratio of Liabilities to Total Liabilities
Owner’s Equity = Total Owner’s Equity (or
Total Stockholders’ Equity)
For NetSolutions:
Ratio of Liabilities to $400

Owner’s Equity = = 0.015
$26,050
148
149

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Power Notes

Introduction to Accounting and Business

 The objective of most businesses is to earn a profit.

 Profit is the difference between the amounts received

Service Business Service

Merchandising Business Product

Manufacturing Business Product

Accounting Information Labor and Equipment

Proprietorship Partnership Corporation

A proprietorship is owned by one

A proprietorship is owned by one

A corporation is organized under state

 Generates 90% of the total dollars of

 Includes ownership divided into shares

Owners of a corporation are called

When a corporation issues only

A limited liability company (LLC)

©2016 Cengage Learning. All

Government Nonprofit Private

Libraries Army Museums Hospitals

Airports Cities Prisons Shelters

Accounting for these organizations is usually a fund-

The Role of Accounting in Business

Accounting can be defined as an

The process by which accounting provides

Economic Data Accounting

Economic Data Accounting

Economic Data Accounting

Role of Ethics in Accounting

Use personal Consider both Choose the best

©2016 Cengage Learning. All

©2016 Cengage Learning. All

Business Entity Concept

©2016 Cengage Learning. All

$137,000. Under the cost concept, the land should be

For Practice: PE 1-1A, PE 1-1B

Unit of Measure Concept

Objectivity Financial statement information is

Going-Concern A business continues operating instead of

Monetary Unit Express transactions and events in

What are an organization’s resources called?

Cost of What are the

a. Owner’s equity, as of December 31, 2009.

a. Assets = Liabilities + Owner’s Equity

$605,000 = $450,000 + $155,000

On November 1, 2009, Chris Clark

a. Chris Clark deposits $25,000 in a bank account

a. Chris Clark deposits $25,000 in a bank account

b. NetSolutions buys land for $20,000.

b. NetSolutions buys land for $20,000.

The accounts involved are:

$ 5,000 $ - $ 20,000 $ - $ - $ 25,000

c. NetSolutions buys supplies for $1,350, agreeing to

c. NetSolutions buys supplies for $1,350, agreeing to

$ 5,000 $ 1,350 $ 20,000 $ 1,350 $ - $ 25,000

d. NetSolutions earns fees of $7,500, receiving cash.

d. NetSolutions earns fees of $7,500, receiving cash.

The accounts involved are:

Accounts Chris Clark

e. NetSolutions paid: wages, $2,125; rent, $800;

e. NetSolutions paid: wages, $2,125; rent, $800;

The accounts involved are:

f. NetSolutions pays $950 to creditors on account.