Slide 1Ch. 1: Stakeholders: Entities with an interest in a businessCh. 1: The role of Accounting in BusinessCh. 1: Accounts and Financial StatementsCh. 1: Accounts and Financial StatementsCh. 1: Accounts and Financial StatementsCh. 1: Business TypesCh. 1: Business FormsCh. 1: Business FormsCh. 1: How do businesses make a profit?Ch. 1: Business ActivitiesCh. 1: Business ActivitiesCh. 1: Accounting PracticeSlide 14Slide 15Slide 16Slide 17Ch. 1: Ethics and Responsible Reporting1The Role of Accounting in BusinessChapter 1 A200 - Survey of AccountingUniversity of TennesseeFall 20152Ch. 1: Stakeholders: Entities with an interest in a businessExternal Stakeholders: Capital Market stakeholders: Lenders/Creditors: lend money to the business (want it paid back with interest) Owners/Stockholders: invest money in the business (want a return on investment) Product/Service Market stakeholders:Suppliers: sell goods or services to the business Customers: buy goods or services from the business Government stakeholders (Federal, State, Local, or Foreign): collect taxes from the business and regulate business activities Internal Stakeholders: Business managers and employees: operate the business to earn profit3Ch. 1: The role of Accounting in BusinessAccounting is the language of business. It provides information to both external andinternal stakeholders so they can:1. evaluate the company’s current health2. evaluate the company’s future prospects Financial Accounting gives historical information to external stakeholders about:1. changes in financial condition during a period (three financial statements):Income Statement Statement of Retained EarningsStatement of Cash Flows 2. financial condition at a single point in time (one financial statement): Balance SheetManagerial Accounting gives forward-focused information to internal stakeholders so they can make decisions about the future: 1. projected financial statements 2. daily progress reports4 Ch. 1: Accounts and Financial StatementsAccounts summarize the effects of business transactions Six account categories: Assets, Liabilities, Equity, Revenues, Expenses, DividendsEach category can have many individual accounts. All appear accounts on one of the four financial statements required by Generally Accepted Accounting Principles (GAAP) 1. Income Statement (a flow statement): Revenues (amount the business earned this period) Matching - Expenses (costs the business incurred this period in earning revenue) Concept = Net Income (profit of this period) or Net Loss if expenses exceed revenue2. Statement of Retained Earnings (a flow statement): Beginning RE (equity on Balance Sheet at the end of last period) + Net Income (from the Income Statement) - Dividends (portion of net income to be distributed to owners) = Ending RE (equity on Balance Sheet at the end of this period)5Ch. 1: Accounts and Financial Statements 3. Balance Sheet (a position statement): Assets = Liabilities + EquityResources owned Creditors’ claims Owners’ claimsby the business = on the assets of + on the assets of the business the businessthe “accounting equation”reports financial condition of the business on the last day of each accounting period (first day of the next accounting period)final result of the integrated financial statements. Net income from the Income Statement increases retained earnings on the Statement of Retained Earnings, which increases equity on the Balance Sheet.6Ch. 1: Accounts and Financial Statements4. Statement of Cash Flows (a change statement) reconciles the Cash account (beginning of period to end of period), showing cash inflows and cash outflows in three categories:Operating Activities: + Cash received from customers (inflow) - Cash paid for expenses (outflow) = Net cash from Operating ActivitiesInvesting Activities: + Cash received from sales of long-term assets (inflow) - Cash paid for purchases of long-term assets (outflow) = Net cash from Investing ActivitiesFinancing Activities: + Cash received from the sale of capital stock or bonds (inflow)- Cash paid for dividends, bond payback, and treasury stock (outflow) = Net cash from Financing Activities The sum of all three categories equals the change in Cash for the period7Ch. 1: Business TypesA Business is an organization that sells goods or services to customers.A200 focuses on businesses that are operated to earn a profit. Many of the same Accounting rules apply to not-for-profit businesses.Service business: Provides services to customers (human knowledge, talent, or strength).Does not sell goods .Merchandising business: Buys finished goods from manufacturers and sells them tocustomers. Also called a “middleman.” Manufacturing business: Buys basic inputs (materials, labor, and overhead) fromsuppliers. Converts them into finished goods for sale to customers (usually merchandisers) All three business types can operate in any of four business forms8 Ch. 1: Business FormsProprietorship: Owned by one individual (owner) Organization: easy and inexpensive Resources: limited to cash or other assets the owner can contribute or borrowEntity: not a separate legal entity from owner - owner is liable for all business debt (no limited liability)Income Tax: one level of taxation - owner pays tax individually on business incomePartnership: Owned by more than one individual or entity (partners) Organization: fairly easy and inexpensiveResources: partnerships can generally raise more than proprietorships, but a P/S faces difficulties raising a lot if business grows too large - cannot issue stockEntity: separate legal entity from partners, but each general partner is legally liable for the actions of other partners (no limited liability) Income Tax: one level of taxation - partners pay tax individually on business income9 Ch. 1: Business FormsCorporation: Owned by more than one individual or entity (stockholders)Organization: relatively difficult and expensive Resources: can generally raise large amounts by issuing stock Entity: separate legal entity from stockholders, who are at risk for only the amount they invested (limited liability) Income Tax: two levels of taxation - corporation