Electronic Presentation by Douglas Cloud Pepperdine University

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Survey of Accounting
Electronic Presentation by Douglas Cloud
Pepperdine University
Carl S.Warren
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Task Force Clip Art included in this electronic
presentation is used with the permission of New
Vision Technology of Nepean Ontario, Canada.
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Chapter 1
The Role of Accounting in Business
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Learning Objectives
1. Describe the types and forms of businesses,
business strategies, value chains, and
stakeholders. 2. Describe the three business
activities of financing, investing, and
operating. 3. Define accounting and explain its
role in business. 4. Describe and illustrate the
basic financial statements and how they
interrelate. 5. Describe eight basic accounting
concepts underlying financial reporting. 6. Descri
be and illustrate the use of horizontal analysis
to analyze and evaluate a companys performance.
After studying this chapter, you should be able
to
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Learning Objective
1
Describe the types and forms of businesses,
business strategies, value chains, and
stakeholders.
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Types of Businesses
Manufacturing Business

Product
General Motors Automobiles, trucks, vans General
Mills Breakfast cereals Boeing Jet
aircraft Nike Athletic shoes Coca-Cola Beverages S
ony Stereos, televisions, radios
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Types of Businesses
Merchandising Business
Product
Wal-Mart General merchandise ToysRUs Toys Barnes
Noble Books Best Buy Consumer
electronics Amazon. Com Books
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Types of Businesses
Service Business

Product
Disney Entertainment Delta Air Lines Transportatio
n Marriott Hotels Hospitality and lodging Merrill
Lynch Financial advice Sprint Telecommunication
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There are three forms of business organizations

• Proprietorship
• Partnership
• Corporation

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A proprietorship is owned by one individual.

• Advantages
• Ease in organizing
• Low cost of organizing

• Disadvantage
• Limited source of financial resources
• Unlimited liability

Dougs
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A partnership is owned two or more individuals.

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

• Disadvantage
• Unlimited liability.

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

• Advantage
• The ability to obtain large amounts of resources
  issuing stocks.

• Disadvantage
• Double taxation.

D M Inc.
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Business Ownership in America
Total Companies
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Business Strategy
A business strategy is an integrated set of plans
and actions designed to enable the business to
gain an advantage over its competitors, and to
maximize profits.
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Differentiation Strategy
Under a differentiation strategy, a business
designs and produces a product or service that
possess unique attributes or characteristics for
which customers are willing to pay a premium
price.
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Business Stakeholders
A business stakeholder is a person or entity that
has an interest in the economic performance and
well-being of a business.
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Business Stakeholders
STAKEHOLDERS
External Suppliers Customers Stockholders
Internal Stockholders Managers Employees
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Business Stakeholders
Interest in the Business
Business Stakeholders
Examples
Capital market Providers of major Banks, owners,
stakeholder financing for the stockholders busi
ness
Product or service Buyers of products Customers
and market stakeholders or services and
vendors suppliers to the business
Government Collectors of taxes and Federal,
state, and stakeholder fees from the business
city governments and its employees
Internal stakeholders Individuals employed
Employees and by the business managers
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Learning Objective
2
Describe the three business activities of
financing, investing, and operating.
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Financing Activities
Financing activities involve obtaining funds to
begin and operate a business.
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Financing Activities
Businesses seek financing by

• borrowing
• issuing shares of ownership

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Financing Activities
A liability is a legal obligation to repay the
amount borrowed according to the terms of the
borrowing agreement.
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Financing Activities
Samples of Liabilities

• Accounts payable When a business buys a service
  or product on service.
• Bonds payable When a business borrows money by
  issuing bonds.
• Interest payable Any interest that is due on a
  note or a bond.
• Note payable When a business issues commercial
  paper or borrows on a line of credit.

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Financing Activities
A business may also finance its operations by
issuing shares of stock. The basic type of stock
is called common stock.
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Investing Activities
Investing activities involve the selection and
management of long-term resources that will be
used to develop, produce, and sell goods and
services.
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Investing Activities
What are assets?
Assets are resources that the business owns or
are otherwise under its legal control and
available for use in the future.
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Investing Activities
When the business sells merchandise or services
to a customer, the right to collect is an account
receivable.
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Operating Activities
What is revenue?
Revenue is the increase in assets from selling
products or services. Revenue is often
identified according to its source, such as Rent
Revenue.
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Operating Activities
An expense is a decrease in assets or an
increase in liabilities from producing and
delivering goods or providing services that
constitute the primary operating activities of an
organization.
What is an expense?
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Operating Activities
Revenues - Expenses Net Income
Net Loss
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Learning Objective
3
Define accounting and its role in business.
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What is accounting?
Accounting is an information system that provides
reports to stakeholders about the economic
activities and condition of a business.
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Major objectives of financial accounting
1. To report the financial condition of a
business at a point in time.
2. To report changes in the financial condition
of a business over a period of time.
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Learning Objective
4
Describe and illustrate the basic financial
statements and how they interrelate.
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Income Statement
An income statement is a summary of the revenue
and the expenses for a specific period of time.
Objective
Reports change in financial condition
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Income Statement
Hershey Foods Corporation Income Statement For
the Year Ended December 31, 2001 (in thousands)
Note that the time period for the statement is in
the heading.
Revenues Sales 4,557,241 Expenses Cost of
sales 2,665,566 Selling and administrative 1,269
,964 Other expenses 209,077 Interest 69,093 Inc
ome taxes 136,385 4,350,085 Net income
207,156
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Retained Earnings Statement
The retained earnings statement reports changes
in financial condition due to changes in retained
earnings.
Objective
Reports change in financial condition
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Retained Earnings Statement
Hershey Foods Corporation Retained Earnings
Statement For the Year Ended December 31,
2001 (in thousands)
Again, note the time period
Retained earnings, January 1, 2001 2,702,927 Add
net income 207,156 Less dividends
154,750 Increase in retained earnings
52,406 Retained earnings, December 31,
2001 2,755,333
From the income statement
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Balance Sheet
The balance sheet reports the financial condition
as of a point in time.
Objective
Reports financial condition
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Balance Sheet
(Claims) Rights to the Assets
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Balance Sheet
The Accounting Equation
The rights of creditors
The rights of the stockholders
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Balance Sheet
Hershey Foods Corporation Balance Sheet December
31, 2001 (in thousands)
Note that the date is a specific point in time
Assets Cash 134,147 Accounts
receivable 361,726 Inventories 512,134 Prepaid
expenses 62,595 Property, plant, and
equipment 1,534,901 Intangibles 429,128 Other
assets 212,799 Total assets 3,247,430
Continued
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Liabilities Accounts payable 133,049 Accrued
liabilities 462,901 Notes and other
debt 1,245,939 Income taxes 258,337 Total
liabilities 2,100,226 Stockholders
Equity Capital stock 183,213 Retained
earnings 2,755,333 Repurchased stock and other
equity items (1,791,342) Total stockholders
equity 1,147,204 Total liabilities and
stockholders equity 3,247,430
Matches total assets
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Statement of Cash Flows
The statement of cash flows reports the changes
in financial condition due to the changes in cash
during a period.
Objective
Reports change in financial condition
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Statement of Cash Flows
Three categories on the statement of cash flow
are

1. Operating activities
2. Investing activities
3. Financing activities

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Hershey Foods Corporation Statement of Cash
Flows For the Year Ended December 31, 2001 (in
thousands)
Note the time period
Net cash flows from operating activities
706,405 Cash flows from investing
activities Investments in property, plant, and
equipment (187,029) Proceeds from sale of
property, plant, and equipment 63,042 Net
cash flows used in investing activities (123,987)
Cash flows from financing activities Cash
receipts from financing activities, including
debt 30,589 Dividends paid to
stockholders (154,750) Repurchase of
stock (40,322) Other, including repayment of
debt (315,757) Net cash flows used in financing
activities (480,240) Net increase in cash during
2001 102,178 Cash as of January 1, 2001
31,969 Cash as of December 31, 2001 134,147
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Learning Objective
5
Describe eight basic accounting concepts
underlying financial reporting.
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Accounting Concepts
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 determines the amount initially
entered into the accounting records for purchases.
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Accounting Concepts
A business normally expects to continue operating
for an indefinite period of time. This is known
as the going concern concept.
Under the matching concept, revenues for a period
are matched with the expenses incurred in
generating the revenue.
The objectivity concept requires that entries in
the accounting records and the data reported on
financial statements be based on objective
evidence.
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Accounting Concepts
The unit of measure concept requires that all
economic data be recorded in dollars.
Financial statements should contain all relevant
data a reader needs to understand the financial
condition and performance of a business. This is
the adequate disclosure concept.
The accounting period concept is the process in
which accounting data are recorded and summarized
in financial statements.
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Financial History of a Business
Next slide
Income statement for the year ended December 31,
2003
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Financial History of a Business
Next slide
Income statement for the year ended December 31,
2004
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Financial History of a Business
Income statement for the year ended December 31,
2005
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Learning Objective
6
Describe and illustrate the use of horizontal
analysis to analyze and evaluate a companys
performance.
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Horizontal Analysis
Hershey Foods Corporation Income Statement For
the Year Ended December 31, 2001 and 2000 (in
thousands)
2001 2000 Amount
Percent
8.0
Sales 4,557,241 4,220,976 336,265 Cost of
sales 2,665,566 2,471,151 194,415 Gross
profit 1,891,675 1,749,825 141,850 Selling and
admin. expenses 1,269,964 1,127,175
142,789 Operating income before taxes
621,711 622,650 (939)
336,265
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Horizontal Analysis
Hershey Foods Corporation Income Statement For
the Year Ended December 31, 2001 and 2000 (in
thousands)
2001 2000 Amount
Percent
8.0
Sales 4,557,241 4,220,976 336,265 Cost of
sales 2,665,566 2,471,151 194,415 Gross
profit 1,891,675 1,749,825 141,850 Selling and
admin. expenses 1,269,964 1,127,175
142,789 Operating income before taxes
621,711 622,650 (939)
7.9
194,415
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Horizontal Analysis
Hershey Foods Corporation Income Statement For
the Year Ended December 31, 2001 and 2000 (in
thousands)
2001 2000 Amount
Percent
8.0
Sales 4,557,241 4,220,976 336,265 Cost of
sales 2,665,566 2,471,151 194,415 Gross
profit 1,891,675 1,749,825 141,850 Selling and
admin. expenses 1,269,964 1,127,175
142,789 Operating income before taxes
621,711 622,650 (939)
7.9 8.1 12.7 (0.2)
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Chapter 1
The End
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