Chapter 0ne Page 2
Accounting in Business
Objective: To have students demonstrate their knowledge in the use of the Accounting Equation by recording transactions. Then using the equation they will prepare basic financial statements.
Topics to be covered:
Accounting in Business
- Importance of accounting
o Information users
o Career opportunities
- Fundamentals of Accounting
- Transaction Analysis
o Accounting Equation
o Analyze Transaction
o Risk vs. Return
- Financial Statements
o Income Statements (I/S)
o Statement of Changes in Owners Equity (SOCOE)
o Balance Sheet (B/S)
o Statement of Cash Flows
Importance of Accounting
- An information and measurement system that identifies records and communicates relevant reliable and comparable information.
- An information system that involves the collection, processing, and reporting of information to decision makers.
Identify – Select transactions relevant to the organization
Recording – Keeping a chronological log of transactions measured in dollars
Communicating – Preparing, Interpreting, and analyzing reports
-Bookkeeping – The recording of transaction and events
- Also communicates and identifies information on transactions and events. It also identifies key factors and analyzes their implications.
Identify > Recording > Communicating
Users of Accounting Information
- Not directly involved in the direct running of the organization
- Lawyers, Lenders, Suppliers, Investors, Shareholders, Auditors, Creditors, Board of Directors, voters, officials
- Auditors- to insure that the company is following GAAP
Financial Accounting – Aimed at serving external users with general purpose financial statements.
Regulators such as the IRS and SEC require timely reporting.
- Those directly involved in managing and operating an organization
- Product Mgrs., Purchasing, Human Resources, R&D
- Not subject to the same rules as external reports
Managerial Accounting – Serves internal users and reports special needs information.
Both internal and external users rely on internal controls to monitor and control company activities.
Opportunities in Accounting
Education – Four year degree (now five year program), Masters, CPA
- Public vs. Private
- 2012 Public Accountant – 65k to partner 242K plus bonus
- 2012 Private Accountant – 62K to CFO 296K plus bonus
Ethics - are beliefs that distinguish right from wrong
- are accepted standards of good and bad behavior
Ethical rules are pre set: auditors can’t invest in their clients; they have an impact on society.
*** Good Ethics are good business***
Generally Accepted Accounting Principles
- Provide reliable relevant information to decision makers
- For use in interpreting financial statements effectively
- Keeps information comparable
Two groups establish the principles
- FASB – Financial Accounting Standards Board- Private group – Both broad and specific principles
- SEC – Securities and Exchange Commission – Government group – Requirements and standards for companies issuing stock.
- New Third group – IASB – International Accounting Standards Board; they issue IFRS – International Financial Reporting Standards.
Many types of Accounting Principles
- General Principle – Are basic assumptions, concepts, and guidelines for preparing financial statements. Stem from long used accounting practices and consist of at least four basic principles, four assumptions, and certain constraints.
- Specific Principle – Detailed rules used in reporting business transactions and events.
- Objectivity Principle – Accounting information is supported by independent unbiased evidence. It is more than a person’s opinion.
- Cost Principle – Accounting information is based on actual cost (cash or cash value) used.
- Full Disclosure Principle – Requires a company to report the details behind their financial statements that would impact decisions.
- Revenue Recognition Principle – Recognizes or records revenue when it happens or is earned. Cash need not be received.
- Matching Principle – You record expenses incurred that were used in generating revenue recorded in that period.
- Going concern Assumption - Business will continue to operate
- Monetary Unit Assumption – Express transactions and events in a monetary unit.
- Time Period Assumption – A company’s life can be divided into time periods.
- Business Entity Assumption – A business is accounted for separately from other businesses and the owner.
o Sole Proprietorship – one owner, unlimited liability
o Partnership – more than one sole proprietor
o Corporation – an individual legal entity liable up to its assets
(Sarbanes-Oxile Act passed by congress to curb financial abuses by Corps who issue stock. Truth in reporting. Penalties include $ and or jail time)
Accounting System reflects two basic aspects of a company:
What it owns (assets) and what it owes (liabilities) & (owners equity)
This relationship is represented by the Accounting Equation:
Assets = Liabilities + Equity
Assets – Resources owned by the company (cash, receivables, equipment)
Liabilities – Creditors claim on the assets, your company’s obligations (accounts payable)
Equity – Owner’s claim on assets, Assets-Liabilities, (capital, withdrawal)
Equity section – Revenues increase, Expenses decrease
Events – Happenings that effect the accounting equation.
Net Income – When revenue exceed expenses
Net Loss – When expenses exceed revenues
Review Transactions and their effect on the Accounting Equation.
Financial Statements (in order of preparation)
1. Income Statement – (I/S) - Shows Revenue less Expenses with results of N/I or N/L
2. Statement of Changes in Owners Equity – (SOCOE) – Explains changes in equity from N/I or N/L, owners investment or withdrawals, or new investments.
3. Balance Sheet – (B/S) – Shows a companies financial position at a point in time.
4. Statement of Cash Flows – Identifies cash inflows (receipts) and cash outflows (payments) over a period of time usually one year.
Profitability Measure – Return on Assets (or Investment) ROI= N/I
Average Total Assets
(average = current year plus last year divided by two)
This is compared year to year and company to company and to industry average. Look for trends and going up is good.
Return is tied to net income (what you get – profit)
Risk is the uncertainty about the return; Degree of risk – Bonds low, Stock high
See Demonstration Problem pages 21-23.