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Transparency Master 1-1

Institute of Management
Accountants
Standards of Ethical Conduct
1. Maintain an appropriate level of
professional competence.
2. Refrain from disclosing confidential
information.
3. Avoid conflicts of interest.
4. Communicate information fairly and
objectively.

Transparency Master 1-2

American Institute of Certified Public


Accountants
Codes of Professional Conduct
1. Exercise sensitive professional and moral
judgment.
2. Act in a way that will serve the public interest,
honor the public trust, and demonstrate
commitment to professionalism.
3. Perform all professional responsibilities with
the highest sense of integrity.
4. Maintain objectivity and be free of conflicts of
interest.
5. Observe the profession's technical and ethical
standards and continually improve competency
and quality of services.
6. Use ethical standards when determining the
scope and nature of services to be provided.

Transparency Master 1-3

ETHICS CASE
Lauren Smith is the controller for Sports
Central, a chain of sporting goods stores.
She has been asked to recommend a site
for a new store. Lauren has an uncle who
owns a shopping plaza in the area of town
where the new store is to be located, so
she decides to contact her uncle about
leasing space in his plaza. Lauren also
contacted several other shopping plazas
and malls, but her uncle's store turned out
to be the most economical place to lease.
Therefore, Lauren recommended locating
the new store in her uncle's shopping
plaza. In making her recommendation to
management, she did not disclose that her
uncle owned the shopping plaza.

Transparency Master 1-4

ETHICS CASE
John Jones is the chief accountant for the
Southwest district office of Security Life Insurance
Company. While preparing the fourth-quarter sales
report, John overheard the company president say
that he would close Security's Phoenix office if it
did not meet its fourth-quarter sales quota. John's
best friend from college works at the Phoenix office.
Anxious to find out whether the office was in
jeopardy, John immediately finished the Phoenix
office's report, only to find that it showed sales 25%
below the quota. Later that afternoon, the company
president called John for Phoenix's sales results.
John told the president that he had not finished
preparing the sales report for the Phoenix office.
John wanted time to compile data that might
convince the president to continue operations in
Phoenix, despite lagging sales.

Transparency Master 1-5

ETHICS CASE
Tech-Smart Computer Company recently discovered a
defect in the hard disks installed in its model R24
computer. The hard disk head in these units retracts too
violently whenever the computers are turned off. As a
result, the hard disks are destroyed after the computer is
turned on and off approximately 500 times. Tech-Smart
has sold 4,000 model R24 computers nationwide.
The marketing department at Tech-Smart contacted most
of the 4,000 owners of the model R24 computer and
discovered that 20% (or 800) used their computers in
businesses that operated 24 hours per day. These
customers never turn their computers off; therefore, the
defect should not damage their hard disk units.
Judy Govan, Tech-Smart's controller, has been asked to
determine the cost to correct the hard disk problem and
to recommend a course of action. After studying the
marketing department's report, Judy decides to
recommend that Tech-Smart replace the hard drives only
in the 3,200 units used by customers who actually turn
their computers off.

Transparency Master 1-6

ETHICS CASE
Tom Brown, the controller for MicroTech
Software Company, is responsible for
preparing the company's financial
statements. He learns that sales for the
first quarter of the year have dropped so
dramatically that the company is in danger
of bankruptcy. As a result, he applies for
an accounting position with another
software company that competes with
MicroTech. During his job interview, Tom is
asked why he wants to leave MicroTech.
He replies truthfully, "The company's sales
are down another 10% this quarter. I fear
they will go out of business." At that time,
MicroTech had not released its sales
results to the public.

Transparency Master 1-7

SPECIALIZED FIELDS IN
ACCOUNTING
Financial Accounting preparing reports
that show the profits and financial health of
the company using the rules of accounting,
known as generally accepted accounting
principles (GAAP)
Auditing evaluating financial records
and reports to determine whether they
present the results of a company's
operations fairly
Management Accounting providing
data to management to assist in running
day-to-day operations

Transparency Master 1-8

SPECIALIZED FIELDS IN
ACCOUNTING
Cost Accounting tracking costs,
particularly those to manufacture a product
Tax Accounting preparing tax returns
and helping companies and individuals
reduce the amount of taxes paid by
carefully planning their business activities
Accounting Systems designing
accounting systems that collect accurate
data and protect a company's assets (cash,
inventory, etc.) from misuse or theft; since
most accounting systems today are
maintained on a computer, this area
requires computer hardware and software
knowledge

Transparency Master 1-9

SPECIALIZED FIELDS IN
ACCOUNTING
International Accounting focusing on
issues related to international trade; for
example, buying or selling goods in a
foreign currency
Not-for-Profit Accounting reporting on
the operations of nonprofit organizations
(such as churches, charities, educational
institutions, and governmental agencies)
Social Accounting measuring the
social costs and benefits of various
actions
Accounting Instruction teaching
accounting to students

Transparency Master 1-10

WRITING EXERCISE
1. Sally Vertrees purchased a personal
computer for use at home. Sally owns a
dental practice. She occasionally uses
the computer for a task related to her
dental practice; however, the computer
is used primarily by Sally's children. Can
the computer be recorded as an asset in
the accounting records of Sally's dental
office? Why or why not?
2. Jason Thompson purchased an office
building 10 years ago for $780,000. The
building was just appraised at $1.25
million. What value should be used for
the building in Jason's accounting
records? Support your answer.

Transparency Master 1-11

THE ACCOUNTING EQUATION


Assets
= Liabilities +
Owner's(Stockholders) Equity
OR
The Cost of the
Items Used in
=
Running a Business

Where the Funds to


Buy Those Items
Came From, Either
Creditors or the
Owner

Example: A business buys a $20,000 delivery


van by exchanging $5,000 of capital stock as a
down payment and financing the rest.
Assets = Liabilities + Stockholder's Equity
$20,000 = $15,000 +
$5,000

Transparency Master 1-12

EVENTS/CONDITIONS
RECORDED IN
ACCOUNTING RECORDS
1. Receipt of cash
2. Payment of cash
3. Events that create a legal obligation to
pay out cash (or other assets) in the future
4. Events that obligate another party to pay
you cash (or other assets) in the future
5. Sale of a product or completion of a
service for a customerthis is known as
earning revenue
6. The use of products or services in running
your businessthis is known as incurring
an expense

Transparency Master 1-13

RECORDING BUSINESS
TRANSACTIONS
Jim's Lawn Care
1.

Jim Hamilton began a lawn care business in May by


depositing $800 in a business bank account in
exchange for Capital Stock.
2. Purchased lawnmowers and other lawn equipment on
account, $1,000.
3. Paid cash for supplies, $50.
4. Performed lawn care services for credit customers
and billed them $700.
5. Received $700 cash from the customers billed in #4.
6. Paid $1,000 cash for the lawn equipment purchased
in #2.
7. Paid for an advertisement in a local newspaper,
$150.
8. Performed lawn care services for cash customers
and immediately received $420.
9. Paid wages to a part-time assistant, $85.
10. Performed lawn care services for credit customers
and billed them $600.
11. Received an invoice from Gas-n-Go for gasoline
purchased on account during May, $110. The invoice
will not be paid until next month.
12. At the end of May, Jim paid dividends of $100 to the
stockholder.

Transparency Master 1-14

RECORDING BUSINESS TRANSACTIONS


Jims Lawn Care Solution

1.
Bal.
2.
Bal.
3.
Bal.
4.
Bal.
5.
Bal.
6.
Bal.
7.
Bal.
8.
Bal.
9.
Bal.
10.
Bal.
11.
Bal.
12.
Bal.

Cash
+800
800

Accounts
Receivable

800
50
750
750
+700
1,450
1,000
450
150
300
+420
720
85
635
635
635
100
535

+700
700
700
0

Lawn
Equipment

Accounts
Payable

+1,000
1,000

+1,000
1,000

+50
50

1,000

1,000

50

1,000

1,000

50

1,000

50

1,000

1.000
1,000
0

Supplies

50

1,000

50

1,000

50

1,000

+600
600

50

1,000

600

50

1,000

600

50

1,000

+110
110
110

Capital
Stock
+800 Investment
800
800
800
+700 Revenue
1,500
1,500
1,500
150
1,350
+420
1,770
85
1,685
+600
2,285
110
2,175
100
2,075

Adv. Exp.
Revenue
Wage Exp.
Revenue
Gas Exp.
Dividend

Transparency Master 1-15

FINANCIAL STATEMENTS
Jim's Lawn Care
Income Statement
For the Month Ended May 31, 20-____________________________________________________________
Fees earned
$
Operating expenses:
Advertising expense
$
Gasoline expense
$
Wages expense
$
Total operating expenses
$
Net income
$
Jim's Lawn Care
Retained Earnings Statement
For the Month Ended May 31, 20-____________________________________________________________
Retained Earnings, May 1
$
Investment
$
Net income for May
$
Less dividends
$
Increase in stockholder's equity
Retained Earnings, May 31

$
$

Jim's Lawn Care


Balance Sheet
May 31, 20-____________________________________________________________
Assets
Liabilities
Cash
$
Accounts payable
$
Accounts receivable
$
Supplies
$
Stockholders Equity
Lawn equipment
$
Capital Stock
$
Retained Earnings
$
Total assets
$
Total liabilities and
Stockholders equity $

Transparency Master 1-16

FINANCIAL STATEMENTSSOLUTIONS
Jim's Lawn Care
Income Statement
For the Month Ended May 31, 20-____________________________________________________________
Fees earned
$1,720
Operating expenses:
Advertising expense
$150
Gasoline expense
110
Wages expense
85
Total operating expenses
345
Net income
$1,375
Jim's Lawn Care
Retained Earnings Statement
For the Month Ended May 31, 20-____________________________________________________________
Retained Earnings May 1
$
0
Net income for May
1,375
Less dividends
100
Increase in retained earnings
1,275
Retained Earnings, May 31
$1,275
Jim's Lawn Care
Balance Sheet
May 31, 20-____________________________________________________________
Assets
Liabilities
Cash
$ 535
Accounts payable
$ 110
Accounts receivable
600
Supplies
50
Stockholders equity
Lawn equipment
1,000
Capital stock
800
Retained Earnings
1275
Total Stockholders Equity
$2,075
Total assets
$2,185
Total liabilities and
stockholders equity
$2,185

Transparency Master 1-17

STATEMENT OF CASH FLOWS


PURPOSE: Report cash received and cash paid
in the course of doing business.
Cash flows are divided into the following
categories:
1. Cash flows from operating activities
OPERATING ACTIVITIES: Cash received or
paid in
* Providing services to a customer
* Buying and selling a product
2. Cash flows from investing activities
INVESTING ACTIVITIES: Cash received or
paid in
* Buying or selling long-term assets
3. Cash flows from financing activities
FINANCING ACTIVITIES: Cash received or
paid due to
* Investments received and dividends paid
* Borrowing and repaying cash

Transparency Master 1-18

Relationship Between
Liabilities and Stockholders Equity
Stockholders
Assets = Liabilities + Equity
Company A
Company B

100,000 =
100,000 =

95,000
90,000

+
+

5,000
10,000

Transparency Master 1-19

RATIO OF LIABILITIES TO STOCKHOLDERS EQUITY


Ratio of Liabilities
to Stockholders Equity

Total Liabilities
-----------------------------------------Total Owners Equity (or Total
Stockholders Equity)

RATIO OF LIABILITIES TO STOCKHOLDERS EQUITY


Jim's Lawn Care
May 31, 20-Ratio of Liabilities
to Stockholders
Equity

$110
----------$2075

.053

Transparency Master 1-20

Types of Businesses
Service
Provide services rather than products

Merchandising
Sell products they purchase from other
businesses to customers

Manufacturing
Change basic inputs into products that are
sold to customers

Transparency Master 1-21

Types of Business Organizations


Proprietorship
Owned by one individual

Partnership
Owned by two or more individuals

Corporation
Organized under state or federal statutes
as a separate legal taxable entity

Limited Liability Entity (LLC)


Combines the attributes of a partnership
and a corporation