McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 1
Business Decisions and Financial
Accounting

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA
 Learning Objective 1

Describe various
organizational forms and
business decision makers.

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 Organizational Forms
Business organization owned by
Sole one person. The owner is
personally liable for all debts of
Proprietorship the business.

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 Organizational Forms
Percentage of Organizational Forms in
the U.S.

5% 3% Sole Proprietorships

20% Corporations

72% Partnerships

Limited Liability
Companies

1-5 Source: BizStats.com

 The Accounting System
Business and
Financing Activities

Accounting
System

Accounting Reports
External users Financial Managerial Internal users
(creditors, investors, etc.) (managers, etc.)

Accounting is a system of analyzing, recording,

summarizing and reporting the results of a
business’s activities.
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 Learning Objective 2

Describe the purpose,

structure, and content of the
four basic financial
statements.

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 The Basic Accounting Equation
Resources Owned . . . Resources Owed . . .
by the company to creditors to stockholders

Assets = Liabilities + Stockholders’ Equity

Separate Entity
Assumption
Requires that a business’s
financial reports include
only the activities of the
business and not those of
its stockholders.

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 Assets
Resources controlled by the
company that have
measurable value and are
expected to provide future
benefits to the company.

Cash Equipment

Supplies Furniture

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 Liabilities

Amounts owed by
the business to
creditors.

Notes Accounts
Payable Payable

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 Stockholders’ Equity

Owners’ claim to the

business resources.

Contributed Retained
Capital Earnings

Stock Certificate

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 Revenues, Expenses and Net Income

Revenues – Expenses = Net Income

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 Dividends
Distributions of a
company’s earnings to its
stockholders as a return
on their investment.

Dividends are not an expense.

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 Financial Statements
Financial
Income
Statement statements are
typically prepared in
Statement this order.
of Retained
Earnings
Balance
Sheet

Statement
of Cash
Flows
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 The Income Statement
PIZZA AROMA, INC.
Income Statement The unit of
For the Month Ended September 30, 2010 measurethe
Reports
Revenues
Pizza Revenue $ 11,000
assumption
amount of
Total Revenue 11,000 states that
revenues
Expenses results of
Supplies Expense 4,000 less
business
Wages Expense 2,000 expenses
activities
Rent Expense 1,500
Utilities Expense 600 forshould
a period
be
Insurance Expense 300 of time.
reported in an
Advertising Expense 100
Income Tax Expense 500
appropriate
Total Expenses 9,000 monetary unit.
Net Income $ 2,000

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 The Statement of Retained Earnings
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2010
Retained Earnings, Sept. 1, 2010 $ -
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, Sept. 30, 2010 $ 1,000

Reports the way that net income and the

distribution of dividends affected the financial
position of the company during the period.

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 The Balance Sheet PIZZA AROMA, INC.
Balance Sheet
Reports at a point in time: At September 30, 2010
Assets
1. What a business owns Cash $ 14,000
Accounts Receivable 1,000
(assets). Supplies 3,000
Equipment 40,000
2. What it owes to Total Assets $ 58,000

creditors (liabilities). Liabilities

Accounts Payable $ 7,000
Notes Payable 20,000
3. What is left over for the Total Liabilities 27,000
owners of the Stockholders' Equity
company’s stock Contributed Capital 30,000
Retained Earnings 1,000
(stockholders’ equity). Total Stockholders' Equity 31,000
Total Liabilities and Stockholders' Equity $ 58,000

BASIC ACCOUNTING EQUATION

Assets = Liabilities + Stockholders’ Equity
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 The Statement of Cash Flows
PIZZA AROMA, INC. Summarizes
Statement of Cash Flows
For the Month Ended September 30, 2010
how a
Cash Flows from Operating Activities business’s
Cash collected from customers $ 10,000
Cash paid to suppliers and employees (5,000) operating,
Cash Provided by Operating Activities
Cash Flows from Investing Activities
5,000
investing, and
Cash paid to buy equipment (40,000) financing
Cash Used in Investing Activities (40,000)
Cash Flows from Financing Activities activities
Capital contributed by stockholders
Cash dividends paid to stockholders
30,000
(1,000)
caused its
Cash borrowed from the bank 20,000 cash balance
Cash Provided by Financing Activities 49,000
Change in Cash 14,000 to change over
Beginning Cash Balance, Sept. 1, 2010 - a particular
Ending Cash Balance, Sept. 30, 2010 $ 14,000
period of time.
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 Notes to the Financial Statements

Notes help financial statement users

understand how the amounts were
derived and what other information
may affect their decisions.

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 Relationships Among the Financial Statements
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2010
Revenues
Pizza Revenue $ 11,000
Total Revenue
Expenses
11,000
1 Net income
Supplies Expense
Wages Expense
4,000
2,000
flows from the
Rent Expense
Utilities Expense
1,500
600 Income
Insurance Expense 300
Advertising Expense
Income Tax Expense
100
500
Statement to
Total Expenses
Net Income $
9,000
2,000
the Statement
of Retained
PIZZA AROMA, INC.
Statement of Retained Earnings Earnings.
For the Month Ended September 30, 2010
Retained Earnings, Sept. 1, 2010 $ -
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, Sept. 30, 2010 $ 1,000

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 Relationships Among the Financial Statements
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2010
Assets
2 Ending Retained Cash
Accounts Receivable
$ 14,000
1,000
Supplies 3,000
Earnings flows from Equipment 40,000
Total Assets $ 58,000
the Statement of Liabilities

Retained Earnings to Accounts Payable

Notes Payable
$ 7,000
20,000
Total Liabilities 27,000
the Balance Sheet. Stockholders' Equity
Contributed Capital 30,000
Retained Earnings 1,000
Total Stockholders' Equity 31,000
PIZZA AROMA, INC.
Total Liabilities and Stockholders' Equity $ 58,000
Statement of Retained Earnings
For the Month Ended September 30, 2010
Retained Earnings, Sept. 1, 2010 $ -
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, Sept. 30, 2010 $ 1,000

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 Relationships Among the Financial Statements
PIZZA AROMA, INC. PIZZA AROMA, INC.
Statement of Cash Flows Balance Sheet
For the Month Ended September 30, 2010 At September 30, 2010
Cash Flows from Operating Activities Assets
Cash collected from customers $ 10,000 Cash $ 14,000
Cash paid to suppliers and employees (5,000) Accounts Receivable 1,000
Cash Provided by Operating Activities 5,000 Supplies 3,000
Cash Flows from Investing Activities Equipment 40,000
Total Assets $ 58,000
Cash paid to buy equipment (40,000)
Cash Used in Investing Activities (40,000) Liabilities
Cash Flows from Financing Activities Accounts Payable $ 7,000
Capital contributed by stockholders 30,000 Notes Payable 20,000
Cash dividends paid to stockholders (1,000) Total Liabilities 27,000
Cash borrowed from the bank 20,000 Stockholders' Equity
Cash Provided by Financing Activities 49,000 Contributed Capital 30,000
Change in Cash 14,000 Retained Earnings 1,000
Beginning Cash Balance, Sept. 1, 2010 - Total Stockholders' Equity 31,000
Ending Cash Balance, Sept. 30, 2010 $ 14,000 Total Liabilities and Stockholders' Equity $ 58,000

3 Cash on the Balance Sheet and Cash at End

of Year on the Statement of Cash Flows agree.
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 Learning Objective 3

Explain how financial

statements are used by
decision makers.

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 Using Financial Statements

Creditors Investors
(1)Is the company (1)What immediate
generating enough return (through
cash to make dividends) on my
payments on its contributions? … SRE
loans? … SCF
(2)What is the long-
(2)Does the company term return (through
have enough stock price increases
assets to cover its resulting from the
liabilities? … B/S company’s profits)?.. I/S

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 Learning Objective 4

Describe factors that

contribute to useful financial
information.

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 External Financial Reporting
Main Goal: Provide useful financial information to
external users for decision making.

Useful
Useful

Faithful
Faithful
Relevant
Relevant Representation
Representation

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 Accounting Standards

World
World
United
United
States
States Where?
Where?

FASB
FASB Who?
Who? IASB
IASB

GAAP
GAAP What?
What? IFRS
IFRS

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 Ethical Conduct
When faced with an ethical dilemma:
Identify who will
benefit from the
situation and how
others will be
harmed.

Identify the
alternative courses
of action.

Choose the
alternative that is the
most ethical.

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Chapter 1
Supplement

Accounting Careers
 Overview of Career Choices in Accounting
Private Accounting
Public company
Private company
Nonprofit organization
Multinational
Mid-sized
Small
General accounting
Budgeting
Cost accounting
Taxation
Internal auditing
Others (e.g., finance, information
systems, forecasting)
$32,000-$47,500*
depending on type, size,
geographic location, and
functional area
Chief Financial Officer (CFO),
Controller, Treasurer,
Director of Accounting
1-30 *Source: 2008 Robert Half Salary Guide. www.collegegrad.com/careers/all.shtml
Public Accounting
Type of Organization CPA firm
"Big 4" (international partnerships):
Deloitte & Touche, Ernst & Young,
Size of Organization KPMG, PricewaterhouseCoopers
Regional
Local (partnership or proprietorship)
Auditing (assurance services)
Taxation
Consulting such as forensic
(fraud) accounting, computer
systems security, outsourcing,
Functions and Specializations
bookkeeping services, and
industry specialization
(e.g., high tech, banking,
mergers and acquisitions,
and communications)
$40,800-$57,500*
depending on size, geographic
Starting Salaries
location, and functional area or
specialization
Senior Accountant,
Typical Senior Positions Manager,
Partner
Chapter 1
Solved Exercises

M1-13, E1-3, E1-6, E1-8, S1-6 (Req. 1)

 M1-13 Preparing a Statement of Retained Earnings
Stone Culture Corporation was organized on January 1, 2009.
For its first two years of operations, it reported the following:

Net Income for 2009 $ 36,000

Net Income for 2010 45,000
Dividends for 2009 15,000
Dividends for 2010 20,000
Total assets at the end of 2009 125,000
Total assets at the end of 2010 242,000

On the basis of the data given, prepare a statement of retained

earnings for 2009 (its first year of operations) and 2010. Show
computations.

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 M1-13 Preparing a Statement of Retained Earnings

STONE CULTURE CORPORATION

Statement of Retained Earnings
For the Year Ended December 31, 2009
Retained Earnings, January 1, 2009 $ -
Add: Net Income 36,000
Subtract: Dividends (15,000)
Retained Earnings, December 31, 2009 $ 21,000

STONE CULTURE CORPORATION

Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained Earnings, January 1, 2010 $ 21,000
Add: Net Income 45,000
Subtract: Dividends (20,000)
Retained Earnings, December 31, 2010 $ 46,000
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 E1-3 Preparing a Balance Sheet
DSW is a designer shoe warehouse, selling some of the most
luxurious and fashionable shoes at prices that people can actually
afford. Its balance sheet, at November 1, 2008, contained the
following items (in thousands).
Accounts Receivable 11,888
Cash 45,570
Contributed Capital 291,248
Notes Payable 99,044
Other Assets 494,294
Other Liabilities 79,148
Property, Plant and Equipment 233,631
Retained Earnings 179,538
Total Assets 785,383
Total Liabilities & Stockholders' Equity ?
Required:
1.Prepare the balance sheet as of November 1, solving for the
missing amount.
2.As of November 1, did most of the financing for assets come from
creditors or stockholders?

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 E1-3 Preparing a Balance Sheet

DSW, Inc.
Balance Sheet
At November 1, 2008
(in thousands) Most of the financing
Assets
Cash $45,570
as of November 1
Accounts Receivable 11,888 came from
Property, Plant, and Equipment   233,631 stockholders. The
Other Assets 494,294
Total Assets $785,383
stockholders have
financed $470,786 of
Liabilities
Accounts Payable $136,405
the total assets and
Notes Payable 99,044 creditors have
Other Liabilities 79,148
financed only
Total Liabilities 314,597
Stockholders’ Equity $314,597 of the total
Contributed Capital 291,248 assets of the
Retained Earnings   179,538
Total Stockholders’ Equity  470,786
company.
Total Liabilities and Stockholders’ $785,383
Equity

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 E1-6 Preparing an Income Statement and Inferring Missing
Values
Regal Entertainment Group operates movie theaters and food
concession counters throughout the United States. Its income
statement for the quarter ended June 26, 2008, reported the
following amounts (in thousands):
Admissions Revenues $ 455,700 Net Income ?
Concessions Expenses 25,500 Other Expenses 233,800
Concessions Revenues 188,900 Other Revenues 31,200
Film Rental Expenses 247,000 Rent Expense 90,000
Gen. & Admin. Expenses 65,700 Total Expenses ?

Required:
1. Solve for the missing amounts and prepare an Income Statement
for the quarter ended June 26, 2008. TIP: First put the items in the
order they would appear on the Income Statement and then solve
for the missing values.
2. What is Regal’s main source of revenue and biggest expense?

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 E1-6 Preparing an Income Statement and Inferring Missing Values
REGAL ENTERTAINMENT GROUP
Income Statement
For the Quarter Ended June 26, 2008
(in thousands)
Revenues
Admissions Revenues $ 455,700
Concessions Revenues 188,900
Other Revenues 31,200
Total Revenues $ 675,800

Expenses
Concessions Expenses 25,500
Film Rental Expenses 247,000
General and Administrative Expenses 65,700
Rent Expense 90,000
Other Expenses 233,800
Total Expenses ?
662,000
Net Income $ 13,800
?

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 E1-6 Preparing an Income Statement and Inferring Missing Values
REGAL ENTERTAINMENT GROUP
Income Statement
For the Quarter Ended June 26, 2008
(in thousands)
Revenues
Admissions Revenues $ 455,700
Concessions Revenues 188,900
Other Revenues 31,200
Total Revenues $ 675,800

Expenses
Concessions Expenses 25,500
Film Rental Expenses 247,000
General and Administrative Expenses 65,700
Rent Expense 90,000
Other Expenses 233,800
Total Expenses 662,000
Net Income $ 13,800

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 E1-8 Inferring Values Using the Income Statement and Balance
Sheet Equations
Review the chapter explanations of the income statement and the
balance sheet equations. Apply these equations in each of the
following independent cases to compute the two missing amounts
for each case. Assume that it is the end of the first full year of
operations for the company.

TIP: First identify the numerical relations among the columns

using the balance sheet and income statement equations. Then
compute the missing amounts.
Independent Total Total Net Income Total Stockholders'
Cases Revenues Expenses (Loss) Total Assets Liabilities Equity
A $ 100,000 $ 82,000 $ $ 150,000 $ 70,000 $
B 80,000 12,000 112,000 60,000
C 80,000 86,000 104,000 26,000
D 50,000 13,000 22,000 77,000
E 81,000 (6,000) 73,000 28,000

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 E1-8 Inferring Values Using the Income Statement and Balance
Sheet Equations

Independent
R – E = NI
Total Total Net Income
A = L + SE Total Stockholders'
Cases Revenues Expenses (Loss) Total Assets Liabilities Equity
A $ 100,000 $ 82,000 $ 18,000 $ 150,000 $ 70,000 $ 80,000
B 92,000 80,000 12,000 112,000 52,000 60,000
C 80,000 86,000 (6,000) 104,000 26,000 78,000
D 50,000 37,000 13,000 99,000 22,000 77,000
E 75,000 81,000 (6,000) 101,000 73,000 28,000

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 E1-8 Inferring Values Using the Income Statement and Balance
Sheet Equations

Independent
R – E = NI
Total Total Net Income
A = L + SE Total Stockholders'
Cases Revenues Expenses (Loss) Total Assets Liabilities Equity
A $ 100,000 $ 82,000 $ 18,000 $ 150,000 $ 70,000 $ 80,000
B 92,000 80,000 12,000 112,000 52,000 60,000
C 80,000 86,000 (6,000) 104,000 26,000 78,000
D 50,000 37,000 13,000 99,000 22,000 77,000
E 75,000 81,000 (6,000) 101,000 73,000 28,000

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 S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet
On September 30, Ashley and Jason started arguing about who is
better off. Jason said he was better off because he owned a
PlayStation console that he bought last year for $350. He figures
that, if needed, he could sell it to a friend for $280. Ashley argued
that she was better off because she had $1,000 cash in her bank
account and a vintage car that she bought two years ago for $800
but could now sell for $1,400. Jason countered that Ashley still owed
$250 on her car loan and that Jason’s dad promised to buy him a
Porsche if he does really well in his accounting class. Jason said he
had $6,000 cash in his bank account right now because he just
received a $4,800 student loan. Ashley knows that Jason also owes
a tuition installment of $800 for this term.
Required:
1. Prepare a financial report that compares what Ashley and Jason
each own and owe on September 30. Make a list of any decisions
you had to make when preparing your report.

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 S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet

Balance Sheet
Ashley Jason
ASSETS
What is owned
Cash $1,000 $6,000
Console -0- 350
Car 800 -0-
TOTAL $1,800 $6,350
What is owed
LIABILITIES
Car loan $ 250 $ -0-
Tuition Payable -0- 800
Student Loan -0- 4,800
TOTAL 250 5,600
“Net worth”
EQUITY 1,550 750
TOTAL $1,800 $6,350
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End of Chapter 1