Accounting Principles: A Business Perspective, 8e Chapter 1: Accounting and Its Use in Business Decisions

Transcription

1 Accounting Principles: A Business Perspective, 8e Chapter 1: Accounting and Its Use in Business Decisions

2 Forms of Business Organizations A business entity is any business organization that exists as an economic unit. Single or sole proprietorship a business owned by an individual and often managed by that same individual. Partnership a business owned by two or more persons associated as partners.

3 Forms of Business Organizations Corporation A business owned by a few persons or by thousands of persons and is incorporated under the laws of one of the 50 states.

4 Activities Performed by Business Organizations Service companies Provide services for a fee. Merchandising companies Purchase goods that are ready for sale and then resell them to customers. Manufacturing companies Buy materials, convert them into products, and then sell the products to other companies or to final customers.

5 Primary Objectives of Every Business Solvency The ability to pay debts as they become due. Profitability The ability to generate income.

6 Financial Statements The income statement Reports the profitability of a business organization for a stated period of time. Revenues are defined as the inflow of assets resulting from the sale of products or the rendering of services to customers. Expenses are the costs incurred to produce revenues.

7 Financial Statements The statement of retained earnings Reports the changes in retained earnings that occurred between two balance sheet dates. Net income increases retained earnings. Net loss decreases retained earnings Dividends (distributions of income to owners) reduce retained earnings.

8 Financial Statements The balance sheet Reflects a firm s solvency as of a specific moment in time. Assets are things of value, which are owned by a business. Liabilities are the debts owed by a firm. Stockholders equity is the share of the business that the stockholders (shareholders) own outright equal to assets minus liabilities.

9 Financial Statements The statement of cash flows Shows the cash inflows and cash outflows from operating activities, investing activities, and financing activities. Operating activities generally include the cash effects of transactions and other events that enter into the determination of net income.

10 Financial Statements Investing activities generally include transactions involving the acquisition or disposal of long-term (noncurrent) assets such as land, buildings, and equipment. Financing activities generally include the cash effects of transactions and other events involving creditors and owners (stockholders).

11 The Financial Accounting Process The accounting equation: ASSETS = LIABILITIES + STOCKHOLDERS EQUITY As a business engages in economic activity, the dollar amounts and the composition of its assets, liabilities, and stockholder s equity change, but the equality of the basic equation always holds.

12 The Financial Accounting Process Transactions provide much of the raw data entered in the accounting process. Some underlying assumptions or concepts used by the accountant in recording business transactions include: Business entity the business is assumed to have an existence separate from its owners, creditors, employees, and other interested parties.

13 The Financial Accounting Process Money measurement economic activity is initially recorded and reported in terms of a common unit of measurement, such as the dollar. Cost most assets are recorded at their acquisition cost measured in terms of money paid. Continuity (going-concern) unless strong evidence exists to the contrary, the accountant assumes the entity will continue operations into the indefinite future.

14 The Financial Accounting Process Periodicity an entity s life can be subdivided into time periods for purposes of reporting its economic activities. Transaction analysis A summary of transactions format is used to summarize activity and provide a basis for preparation of the income statement and balance sheet

15 The Equity Ratio The equity ratio: stockholders equity total equities or total assets The higher the ratio, the more solvent is the company. If the ratio is very high, profitability may suffer because borrowed funds usually earn more than the interest cost.