Chapter Introduction to Accounting and Business Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lighting lighting bolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere Like right on screen Like right now now on the the screen Objectives Objectives Describe the nature of a business After studying After studying this this Describe the chapter, role of accounting in business you should chapter, you should Describe the importance of to: business ethics and the be able be able to: basic principles of proper ethical conduct Describe the profession of accounting Summarize the development of accounting principles and relate them to practice State the accounting equation and define each element of the equation Objectives Objectives Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation Describe the financial statements of a proprietorship and explain how they interrelate Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions Types of Businesses Manufacturing Manufacturing Business Business Product Product General General Motors Motors Intel Intel Boeing Boeing Nike Nike Coca-Cola Coca-Cola Sony Sony Cars, Cars, trucks, trucks, vans vans Computer Computer chips chips Jet Jet aircraft aircraft Athletic Athletic shoes shoesand and apparel apparel Beverages Beverages Stereos Stereosand and television television Types of Businesses Merchandising Merchandising Business Business Product Product Wal-Mart Wal-Mart Toys Toys“R” “R” Us Us Circuit Circuit City City Lands’ Lands’ End End Amazon.com Amazon.com General General merchandise merchandise Toys Toys Consumer Consumer electronics electronics Apparel Apparel Internet Internet books, books, music, music, video video retailer retailer Types of Businesses Service Service Business Business Product Product Disney Disney Delta Delta Air Air Lines Lines Marriott Marriott Hotels Hotels Merrill Merrill Lynch Lynch Sprint Sprint Entertainment Entertainment Transportation Transportation Hospitality Hospitalityand and lodging lodging Financial Financial advice advice Telecommunication Telecommunication There There are are three three types types of of business business organizations organizations Proprietorship Partnership Corporation A A proprietorship proprietorship isis owned owned by by one one individual individual Joe’s Advantages • Ease in organizing • Low cost of organizing Disadvantage • Limited source of financial resources • Unlimited liability A A partnership partnership isis owned owned by by two two or or more more individuals individuals Joe and Marty’s Advantages • More financial resources than a proprietorship • Additional management skills Disadvantage • Unlimited liability NetSolutions paid paid $950 $950 to to f.f NetSolutions creditors during during the the month month creditors Owner’s Assets = Liabilities + Equity Accounts Chris Clark, Cash + Supplies + Land Payable Capital Bal 8,850 1,350 20,000 1,350 28,850 = f – 950 – 950 Bal 7,900 1,350 20,000 400 28,850 g At At the the end end of of the the month, month, the the cost cost g of supplies supplies on on hand hand isis $550, $550, so so of $800 of of supplies supplies were were used used $800 Owner’s Assets = Liabilities + Equity Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal 7,900 1,350 20,000 400 28,850 g – 800 –Supplies expense 800 Bal 7,900 550 20,000 400 28,050 h At At the the end end of of the the month, month, Chris Chris h withdrew $2,000 $2,000 in in cash cash from from the the withdrew business for for personal personal use use business Owner’s Assets = Liabilities + Equity Accounts Chris Clark, Cash + Supplies + Land Payable Capital = Bal 7,900 550 20,000 400 28,050 h –2,000 –Withdrawal 2,000 Bal 5,900 550 20,000 400 26,050 Effects Effects of of Transactions Transactions on on Owner’s Owner’s Equity Equity Owner’s Equity Decreased by Increased by Owner’s withdrawals Owner’s investments Expenses Revenues Net income Accounting Accounting reports, reports, called called financial financial statements, statements, provide provide summarized summarized information information to to the the owner owner Financial Financial Statements Statements • Income statement—A summary of the revenue and expenses for a specific period of time • Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time • Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date • Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time NetSolutions Income Statement For the Month Ended November 30, 2005 Fees earned $7 500 00 Operating expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net income $3 050 00 $2 125 00 800 00 800 00 450 00 To To the the statement statement of of owner’s owner’s equity equity 275 00 135 00 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2005 Chris Clark, capital, November 1, 2005 Investment on November From the income $25 000 00 From the income statement statement Net income for November Less withdrawals 050 00 Increase in owner’s equity To To the the 26 $28050 0500000 balance sheet Chris Clark, capital, November 30,balance 2005 sheet $26 050 00 $ 000 00 NetSolutions Balance Sheet November 30, 2005 Assets From From the the statement statement of of Liabilities owner’s owner’s equity equity Cash Accounts Payable $ 900 00 $ 400 00 Supplies Owner’s Equity 550 00 Land Chris Clark, cap 20 000 00 26 050 00 Total liabilities and Total assets This owner’s equity $26 450 00 balance sheet presented $26 450 00 using the account form When When the the balance balance sheet sheet displays displays the the liabilities liabilities and and owner’s owner’s equity equity below below the the assets, assets, the the report report form form isis being being used used NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Cash flows from operating activities: Cash received from customers Deduct cash payments for expenses and payments to creditors Net cash flow from operating activities 900 00 Cash flows from investing activities: Cash payment for acquisition of land 000 00 Cash flows from financing activities: Cash received as owner’s investment DeductShould cash withdrawal by owner Shouldmatch matchCash Cashon onthe thebalance balancesheet sheet Net cash flow from financing activities $ 500 00 600 00 ) (20 $25 000 00 000 00 23 Statement Statement of of Cash Cash Flows Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner Tools Tools for for Financial Financial Analysis Analysis and and Interpretation Interpretation The The ratio ratio of of liabilities liabilities to to owner’s owner’s equity equity allows allows owners owners like like Chris Chris Clark Clark to to analyze analyze the the firm’s firm’s ability ability to to withstand withstand poor poor business business conditions conditions Total Liabilities Ratio of liabilities = to owner’s equity Total owner’s equity (or total stockholders’ equity) Tools Tools for for Financial Financial Analysis Analysis and and Interpretation Interpretation Ratio of $400 liabilities to = $26,050 owner’s equity Ratio of = 0.015 liabilities to owner’s equity Chapter The The End End ... of proper ethical conduct Describe the profession of accounting Summarize the development of accounting principles and relate them to practice State the accounting equation and define each element... to suffer adverse personal consequences for holding to an ethical position Profession Profession of of Accounting Accounting Accountants Accountants employed employed by by aa business business... said said to to be be employed employed in in public public accounting accounting Generally Generally Accepted Accepted Accounting Accounting Principles Principles (GAAP) (GAAP) The The 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