Chapter 1: Accounting The Language of Business

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Chapter 1 Accounting The Language of Business

• An information system that...
• measures business activities
• processes data into reports
• communicates results to decision makers

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Who Uses Accounting Information?
Government regulatory Agencies Financial /
External
IndividualsFinancial / External
BusinessesManagerial / Internal
Taxing Authorities Financial / External
Investors and Creditors Financial / External
Nonprofit Organizations Managerial / Internal
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Ethics in Accounting and Business

• Standards of professional conduct for accountants
• AICPAs Code of Professional Conduct

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Business Organizations

• Proprietorships
• Partnerships
• Corporations

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AccountingPrinciples and Concepts

• GAAP
• Generally Accepted Accounting Principles
• Rules that govern accounting

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The Entity Concept

• An accounting entity is an organization that
  stands apart as a separate economic unit.

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The Reliability Principle

• Data is reliable if
• It is verifiable
• It can be confirmed by an independent observer

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The Cost Principle

• Assets and services acquired should be recorded
  at their actual (historical) cost.

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The Going-Concern Concept

• The entity will continue remain in operation for
  the foreseeable future.

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The Stable-Monetary-Unit Concept

• The dollars purchasing power is stable

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The Accounting Equation
Assets

Liabilities Owners Equity
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• ASSETS - Economic resources that are expected to
  produce a benefit in the future
• LIABILITIES - Economic obligations (debt) of a
  business

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Owners Equity

• The owners claim on the entitys assets
• Capital (sole proprietorship/partnership)
• Stockholders equity (corporation)
• Net assets
• Assets Liabilities Owners Equity

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Stockholders Equity

• Paid-in capital - amount invested by its owners
  (Contributed Capital)
• Retained earnings - amount earned by
  income-producing activities and kept for use in
  the business (Earned Capital)

Assets Liabilities Paid-in capital Retained
earnings
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Dividends distributions to stockholders (owners
of the corporation)

• Revenues - increases in retained earnings from
  delivering goods or services to customers
• Expenses - decreases in retained earnings that
  result from operations

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Components of Retained Earnings
Revenues for the period

Expenses for the period
Start of the period

Net income (or Net loss) for the period
Dividends for the period


Beginning balance of retained earnings
or
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Stockholders Equity

• Common Stock
• Retained Earnings
• Stockholders Equity

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Income Statement (P L)

• How well did the company perform during the
  month?
• Revenues
• Expenses
• Net Income (Loss)

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Statement of Retained Earnings

• Beginning retained earnings
• Net income (-Net loss)
• -Dividends
• Ending retained earnings1/1/2003 - 12/31/2003
  , 1/1/2004 - 12/31/2004, 1/1/2005,

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Balance Sheet

• What is the companys financial position at the
  end of a period?
• Assets Liabilities Owners Equity

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Statement of Cash Flows

• How much cash did the company generate and spend
  during the year?
• Operating cash flows
• Investing cash flows
• Financing cash flows
• Increase (decrease) in cash

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Relationships Amongthe Financial Statements
ABC Company Income Statement Year Ended
December 31, 2006 Revenues 700,000 Expenses
670,000 Net income 30,000
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Relationships Amongthe Financial Statements
ABC Company Statement of Retained Earnings Year
Ended December 31, 2006 Beginning retained
earnings 180,000 Net income 30,000 Cash
dividends (10,000) Ending retained
earnings 200,000
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Relationships Amongthe Financial Statements
ABC Company Balance Sheet December 31,
2006 Assets Cash 25,000 All other
assets 275,000 Total
assets 300,000 Liabilities Total
liabilities 120,000 Stockholders
equity Common stock (Paid in Capital)
40,000 Retained earnings (Earned
Capital) 200,000 Other equity
(60,000) Total liabilities and
stockholders equity 300,000
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Relationships Amongthe Financial Statements
ABC Company
Statement of Cash Flows
Year Ended December 31, 2006 Net cash
provided by operating activities 90,000 Net
cash used for investing activities (110,000) Net
cash provided by financing activities
40,000 Net increase in cash 20,000 Beginning
cash balance 5,000 Ending cash balance
25,000