Chapter 1

Introduction to Accounting and Business

Financial and Managerial Accounting
8th Edition

Warren Reeve Fess

REVISED BY JESUS ALARCON AUG 2011

Types of Businesses
Manufacturing Business
Product

General Motors Intel Boeing Nike Coca-Cola Sony

Cars, trucks, vans Computer chips Jet aircraft Athletic shoes and apparel Beverages Stereos and television

Types of Businesses
Merchandising Business
Product

Wal-Mart Toys R Us Circuit City Lands End Amazon.com

General merchandise Toys Consumer electronics Apparel Internet books, music, video retailer

Types of Businesses
Service Business
Product

Disney Delta Air Lines Marriott Hotels Merrill Lynch Sprint

Entertainment Transportation Hospitality and lodging Financial advice Telecommunication

There are three types of business organizations

Proprietorship Partnership
Corporation

A proprietorship is owned by one individual.

Advantages
Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability

Joes

A partnership is owned by two or more individuals.

Advantages More financial resources than a proprietorship. Additional management skills.

Disadvantage Unlimited liability.

Joe and Martys

A corporation is organized under state or federal statutes as a separate legal entity.

Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation.

J & M, Inc.

Business Strategies

A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

Business Strategies
Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.

Business Stakeholders
A business stakeholder is a person or entity having an interest in the economic performance of the business.

THE PROCESS OF PROVIDING INFORMATION

STAKEHOLDERS External: Internal: Customers, Owners, creditors, managers, government employees

Identify stakeholders.

Assess stakeholders informational needs.

THE PROCESS OF PROVIDING INFORMATION

Record economic data about business activities and events.

Accounting Information System

Design the accounting information system to meet stakeholders needs.

The Process of Providing Information

STAKEHOLDERS

Internal: Owners, managers, employees

External: Customers, creditors, government

Prepare accounting reports for stakeholders.

Accounting Information System

Profession of Accounting
Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

Generally Accepted Accounting Principles (GAAP)

The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

The objectivity concept requires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.

The Accounting Equation

Assets = Liabilities + Owners Equity The resources owned by a business

The Accounting Equation

Assets = Liabilities + Owners Equity The rights of the creditors, which represent debts of the business

The Accounting Equation

Assets = Liabilities + Owners Equity The rights of the owners

What is a business transaction?

A business transaction is an economic event or

condition that directly changes an entitys financial condition or directly affects its results of operations.

On JULY 1st, 2011, Chris Clark organized a corporation that will be known as NetSolutions.

a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.
Assets = = Owners Equity Capital Stock 25,000 Investment by stockholder

a.

Cash 25,000

b. NetSolutions exchanged $20,000 for land.

Owners Equity Capital Stock 25,000 25,000

Assets
Cash + Land Bal. 25,000 b. 20,000 +20,000 Bal. 5,000 20,000

=
=

c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).
Assets Cash + Supplies + Land Bal. 5,000 c. Bal. 5,000 20,000 =

Owners Liabilities + Equity Accounts Capital Payable Stock

25,000

= + 1,350 1,350

+ 1,350 1,350

20,000

25,000

d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.
Assets Cash + Supplies + Land Bal. 5,000 1,350 20,000 d. + 7,500 Bal. 12,500 1,350 20,000 =

Owners Liab . + Equity Accounts Capital Retained Payable + Stock + Earnings 1,350 25,000 + 7,500
1,350 25,000 7,500 Fees earned

e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Assets Cash + Supplies + Land Bal. 12,500 1,350 20,000 e. 3,650

Bal. 8,850

1,350

20,000

Owners = Liab . + Equity Accounts Capital Retained Payable + Stock + Earnings 1,350 25,000 7,500 2,125 = 800 Expenses 450 275 1,350 25,000 3,850

f. NetSolutions paid $950 to creditors during the month.

Assets Cash + Supplies + Land Bal. 8,850 1,350 20,000 f. 950 Bal. 7,900 1,350 20,000 =

Owners Liab . + Equity Accounts Capital Retained Payable + Stock + Earnings 1,350 25,000 3,850 950 400 25,000 3,850

g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.
Assets Cash + Supplies + Land Bal. 7,900 1,350 20,000 g. 800 Bal. 7,900 550 20,000 =

Owners Liab . + Equity Accounts Capital Retained Payable + Stock + Earnings 400 25,000 3,850 Supplies 800 Expense 400 25,000 3,050

h. At the end of the month, NetSolutions pays $2,000 to stockholders.

Assets Cash + Supplies + Land Bal. 7,900 550 20,000 h. 2,000 Bal. 5,900 550 20,000 =

Owners Liab . + Equity Accounts Capital Retained Payable + Stock + Earnings 400 25,000 3,050 2,000 Dividends 400 25,000 1,050

Effects of Transactions on Owners Equity

Capital Stock
Increased by

Stockholders investments

Effects of Transactions on Owners Equity

Retained Earnings Increased by

Decreased by Decreased by

Revenues

Expenses

Dividends

Accounting reports, called financial statements, provide summarized information to the users.

FINANCIAL STATEMENTS

Income statementA summary of the revenue and expenses for a specific period of time. Retained earnings statementA summary of the earnings retained in the corporation for a specific period of time. Balance sheetA list of the assets, liabilities, and stockholders equity as of a specific date. Statement of cash flowsA summary of the cash receipts and disbursements for a specific period of time.

NetSolutions Income Statement For the Month from JULY 1st to JULY 30th, 2011 Fees earned Operating expenses: Wages expense Rent expense Supplies expense $2 125 00 $7 500 00

Utilities expense Miscellaneous expense Total operating expenses

Net income

800 00 800 00 450 00 275 00

4 450 00 $3 050 00

NetSolutions Retained Earnings Statement For the Month Ended JULY 30th, 2011 Net income for JULY $3 050 00

Less dividends Retained earnings, JULY 30, 2011

2 000 00 $1 050 00

NetSolutions Balance Sheet JULY 30th, 2011 Assets Liabilities

From the retained earnings statement

Cash Supplies Land

Total assets

$ 5 900 00 Accounts Payable $ 400 00 550 00 Stockholders Equity 20 000 00 Capital Stock $25,000 Ret. Earnings l,050 26 050 00 Total liabilities and $26 450 00 stockholders equity $26 450 00

This balance sheet presented using the account form

NetSolutions Statement of Cash Flows For the Month Ended JULY 30th, 2011
Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 ) Cash flows from financing activities: Cash received as owners investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and JUL 30, 2011 cash bal. $ 5 900 00 Should match Cash on the balance sheet

Statement of Cash Flows

Cash Flows from Operating ActivitiesThis section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing ActivitiesThis section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing ActivitiesThis section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.