Slide 1Ch. 1: The role of Accounting in BusinessCh. 1: Business TypesCh. 1: Business FormsCh. 1: Business FormsCh. 1: How do businesses make a profit?Ch. 1: Stakeholders: Entities with an interest in a businessCh. 1: Business ActivitiesCh. 1: Business ActivitiesCh. 1: Accounts and Financial StatementsCh. 1: Accounts and Financial StatementsFinancial Statement ComponentsFinancial Statement ComponentsCh. 1: Accounts and Financial StatementsCh. 1: Accounting PracticeSlide 16Slide 17Slide 18Slide 191The Role of Accounting in BusinessChapter 1 A200 - Survey of AccountingUniversity of Tennessee2Ch. 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 reports3Ch. 1: Business TypesBusiness: An organization that sells goods or services to customersA200 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 forms4 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 income5 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 pays tax on business income and stockholders pay tax on dividends received from the corporation (double taxation of business income)Limited Liability Company (LLC): Owned by more than one individual or entity (members)Organization: fairly easy and inexpensive Resources: can generally raise more than proprietorships, but an LLC faces difficulties raising a lot if business grows too large - cannot issue stockEntity: separate legal entity from members, who are at risk for only the amount they invested (limited liability)Income Tax: one level of taxation - treated as a partnership for tax purposes - members pay tax individually on business income6 Ch. 1: How do businesses make a profit? Revenues (amount the business earned this period) - Expenses (costs the business incurred this period in earning revenue)= Net Income (profit of this period) or Net Loss if expenses exceed revenuesThis is a basic Income Statement. Businesses maximize profit by increasing revenue and/or decreasing expenses.Business Strategy: Gaining a Competitive AdvantageLow-cost emphasis: Business produces products or services of acceptable quality at a cost lower than its competitors’ cost. Premium-price emphasis: Business produces products or services that have uniquequalities for which customers are willing to pay a premiumprice.7Ch. 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 profit8 Ch. 1: Business Activities The Business Cycle:Financing: The business acquires cash to organize and operateDebt Financing: Cash is acquired by borrowing. This creates an asset (cash) and an equal liability (a payable: obligation to repay the borrowed amount)Equity Financing: Cash is acquired by selling pieces of ownership in the company to investors. This creates an asset (cash) and an equal equity (stock)Acquire Cash (Financing)Acquire Operating Assets (Investing)Make and sell goods or services (Operating)9 Ch. 1: Business Activities Investing: The business uses cash to acquire other Assets (resources needed to start operating)Tangible assets: Physical resources Intangible assets: Non-physical resourcesOperating: The business engages in day-to-day activities that generate revenues and expensesRevenues: Increases in assets from selling goods or servicesExpenses: Costs of earning revenueNet Income = Revenue > Expenses Net Loss = Revenue < Expenses10 Ch. 1: Accounts and Financial StatementsAccounts