Introduction%20to%20Accounting%20and%20Business

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Chapter 1
Introduction to Accounting and Business
Financial and Managerial Accounting 8th
Edition Warren Reeve Fess
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Objectives
1. Describe the nature of a business. 2. Describe
the role of accounting in business. 3. Describe
the importance of business ethics and the basic
principles of proper ethical conduct. 4. Describe
the profession of accounting. 5. Summarize the
development of accounting principles and relate
them to practice. 6. State the accounting
equation and define each element of the equation.
After studying this chapter, you should be able
to
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Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
corporation and explain how they
interrelate. 9. Use the ratio of liabilities to
stockholders equity to analyze the ability of a
business to withstand poor business conditions.
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Types of Businesses
Manufacturing Business
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Types of Businesses
Merchandising Business
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Types of Businesses
Service Business
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There are three types 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

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

A partnership is owned by two or more
individuals.

• Disadvantage
• Unlimited liability.

Joe and Martys
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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
  by issuing stocks.

• Disadvantage
• Double taxation.

J M, Inc.
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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.
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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.
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Business Stakeholders
A business stakeholder is a person or entity
having an interest in the economic performance of
the business.
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The Process of Providing Information
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The Process of Providing Information
Accounting Information System
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The Process of Providing Information
Accounting Information System
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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.
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Generally Accepted Accounting Principles (GAAP)
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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.
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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.
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The Accounting Equation
Assets Liabilities Owners Equity
The resources owned by a business
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The Accounting Equation
Assets Liabilities Owners Equity
The rights of the creditors, which represent
debts of the business
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The Accounting Equation
Assets Liabilities Owners Equity
The rights of the owners
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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.
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On November 1, 2005, Chris Clark organized a
corporation that will be known as NetSolutions.
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a. Chris Clark deposits 25,000 in a bank
account in the name of NetSolutions in return for
shares of stock in the corporation.
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b. NetSolutions exchanged 20,000 for land.
Assets
Owners Equity

Capital Stock 25,000
Cash Land 25,000
Bal.

b. 20,000 20,000
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c. During the month, NetSolutions purchased
supplies for 1,350 and agreed to pay the
supplier in the near future (on account).
Owners Liabilities
Equity
Assets


Accounts Capital Cash
Supplies Land Payable
Stock
Bal. 5,000 20,000 25,000
c. 1,350 1,350
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d. NetSolutions provided services to customers,
earning fees of 7,500 and received the amount in
cash.
Owners Liab .
Equity
Assets


Accounts Capital Retained Cash
Supplies Land Payable Stock
Earnings
Bal. 5,000 1,350 20,000 1,350 25,000

d. 7,500 7,500
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e. NetSolutions paid the following expenses
wages, 2,125 rent, 800 utilities, 450 and
miscellaneous, 275.
Owners Liab .
Equity
Assets


Accounts Capital Retained Cash
Supplies Land Payable Stock
Earnings
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
e. 3,650 2,125 800
450 275
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f. NetSolutions paid 950 to creditors during
the month.
Owners Liab .
Equity
Assets


Accounts Capital Retained Cash
Supplies Land Payable Stock
Earnings

Bal. 8,850 1,350 20,000 1,350 25,000 3,850
f. 950 950
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g. At the end of the month, the cost of supplies
on hand is 550, so 800 of supplies were used.
Owners Liab .
Equity
Assets


Accounts Capital Retained Cash
Supplies Land Payable Stock
Earnings

Bal. 7,900 1,350 20,000 400 25,000 3,850
Supplies Expense
g. 800 800
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h. At the end of the month, NetSolutions pays
2,000 to stockholders.
Owners Liab .
Equity
Assets


Accounts Capital Retained Cash
Supplies Land Payable Stock
Earnings

Bal. 7,900 550 20,000 400 25,000 3,050

h. 2,000 2,000
Dividends
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Effects of Transactions on Owners Equity
Capital Stock
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Effects of Transactions on Owners Equity
Retained Earnings
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Accounting reports, called financial statements,
provide summarized information to the users.
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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.

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NetSolutions Income Statement For the Month Ended
November 30, 2005
Fees earned
7 500 00
Operating expenses
2 125 00
Wages expense
Rent expense
800 00
Supplies expense
800 00
450 00
Utilities expense
275 00
Miscellaneous expense
Transfer this amount to the retained earnings
statement.
Total operating expenses
4 450 00
Net income 3 050 00


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From the income statement
Transferred to the balance sheet
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NetSolutions Balance Sheet November 30, 2005
From the retained earnings statement
Assets
Liabilities
Cash 5 900 00 Accounts Payable 400
00 Supplies 550 00 Stockholders Equity Land 20
000 00 Capital Stock 25,000 Ret. Earnings
l,050 26 050 00 Total liabilities
and Total assets 26 450 00 stockholders
equity 26 450 00
This balance sheet presented using the account
form
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NetSolutions Statement of Cash Flows For the
Month Ended November 30, 2005
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 Nov. 30,
2005 cash bal. 5 900 00
)
Should match Cash on the balance sheet
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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.