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Chapter 01 ACCOUNTING IN BUSINESS

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Accounting in BusinessImportance of AccountingUsers of Accounting InformationUsers of Accounting InformationOpportunities in AccountingAccounting Jobs by AreaEthics - A Key ConceptEthics - A Key ConceptGenerally Accepted Accounting PrinciplesSetting Accounting PrinciplesInternational StandardsInternational StandardsPrinciples and Assumptions of AccountingAccounting AssumptionsForms of Business EntitiesCharacteristics of BusinessesCorporationSarbanes-Oxley (SOX)Transaction Analysis and the Accounting EquationAssetsLiabilitiesEquityTransaction Analysis EquationTransaction 1: Investment by OwnersTransaction 2: Purchase Supplies for CashTransaction 3: Purchase Equipment for CashTransaction 4: Purchase Supplies on CreditTransaction 5: Provide Services for CashTransaction 6 and 7: Payment of Expenses in CashSummary of TransactionsFinancial StatementsIncome StatementSTATEMENT OF OWNER’S EQUITYBalance SheetStatement of Cash FlowsDecision Analysis1A Return and Risk Analysis1B - Business Activities and the Accounting EquationEND OF CHAPTER 01PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPAChapter 01ACCOUNTING IN BUSINESSMcGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.1 - 2IdentifyingSelect transactions and eventsRecordingInput, measure and classifyCommunicatingPrepare, analyze and interpretIMPORTANCE OF ACCOUNTINGAccountingC 11 - 3USERS OF ACCOUNTINGINFORMATIONExternal Users•Lenders•Shareholders•Governments•Consumer Groups•External Auditors•CustomersInternal Users•Managers•Officers/Directors•Internal Auditors•Sales Staff•Budget Officers•ControllersC 21 - 4External UsersFinancial accountingprovides external users with financial statements.Internal UsersManagerial accountingprovides information needs for internal decision-makers.C 2USERS OF ACCOUNTINGINFORMATION1 - 5OPPORTUNITIES IN ACCOUNTINGC 21 - 6ACCOUNTING JOBS BY AREAC 21 - 7Beliefs that distinguish right from wrongAccepted standards of good and bad behaviorEthicsETHICS -A KEY CONCEPTC 31 - 8C 3ETHICS -A KEY CONCEPT1 - 9Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).GENERALLY ACCEPTEDACCOUNTING PRINCIPLESRelevant Information Affects the decision of its users.Reliable Information Is trusted by users.Comparable InformationIs helpful in contrasting organizations.C 41 - 10The Securities and Exchange Commission is the government agency that establishes reporting requirements for companies that issue stock to the public.SETTING ACCOUNTING PRINCIPLESFinancial 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 41 - 11INTERNATIONAL STANDARDSThe 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.IASBC 41 - 12INTERNATIONAL STANDARDSC 41 - 13PRINCIPLES AND ASSUMPTIONSOF ACCOUNTINGCost PrincipleAccounting information is based on actual cost. Actual cost is considered objective.Revenue Recognition Principle1. 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 PrincipleA company must record its expenses incurred to generate the revenue reported.Full Disclosure PrincipleA company is required to report the details behind financial statements that would impact users’ decisions.C 41 - 14ACCOUNTING ASSUMPTIONSMonetary Unit AssumptionExpress transactions and events in monetary, or money, units.Business Entity AssumptionA business is accounted for separately from other business entities, including its owner.Time Period AssumptionPresumes that the life of a company can be divided into time periods, such as months and years.NowFutureGoing-Concern AssumptionReflects assumption that the business will continue operating instead of being closed or sold.C 41 - 15FORMS OF BUSINESS ENTITIESSole ProprietorshipPartnership CorporationC 41 - 16* Proprietorships and partnerships that are set up as LLCs provide limited liability. CHARACTERISTICS OF BUSINESSESCharacteristic Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes**C 41 - 17Owners of a corporation are called shareholders (or stockholders). Shareholders are not personally liable for corporate acts. When a corporation issues only one class of stock, wecall it common stock (or capital stock).CORPORATIONC 41 - 18SARBANES-OXLEY (SOX)Congress passed the Sarbanes-Oxley Act to help curb financial abuses at companies that issue their stock to the public. Management must issue a report stating that its internal controls are effective. Auditors must verify the effectiveness of internal controls.C 41 - 19TRANSACTION ANALYSIS AND THEACCOUNTING EQUATIONAssets=Liabilities+EquityAccounting EquationA 11 - 20LandEquipmentBuildingsCashVehiclesStore SuppliesNotes ReceivableAccounts ReceivableASSETSA 1Resources owned or controlled by a company1 - 21Taxes PayableWages PayableNotes PayableAccounts PayableLIABILITIESCreditors’ claims on assetsA 11 - 22EQUITYOwner’s Claims on AssetsA 11 - 23TRANSACTION ANALYSIS EQUATIONThe accounting equation MUST remain in balance after each transaction.Liabilities EquityAssets= +P 11 - 24TRANSACTION 1: INVESTMENT BY OWNERSThe accounts involved are:(1) Cash (asset)(2) Owner Capital (equity)On December 1, Chas Taylor invests $30,000 cash to start a consulting business.P 11 - 25TRANSACTION 2: PURCHASESUPPLIES FOR CASHThe accounts involved are:(1) Cash (asset)(2) Supplies (asset)Chas Taylor’s company, FastForward purchases supplies paying $2,500 cash.P 11 - 26TRANSACTION 3: PURCHASEEQUIPMENT FOR CASHThe accounts involved are:(1) Cash (asset)(2) Equipment (asset)FastForward purchases equipment for $26,000 cash.P 11 - 27TRANSACTION 4: PURCHASESUPPLIES ON CREDITThe accounts involved are:(1) Supplies (asset)(2) Accounts Payable (liability)FastForward purchases Supplies of $7,100 on account.P 11 -


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