Nobles Acctg10 PPT 01

Accounting and the
Business
Environment
Chapter 1
©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-1

Learning Objectives
1. Explain why accounting is
important and list the users
of accounting information
2. Describe the organizations
and rules that govern
accounting
3. Describe the accounting
equation, and define assets,
liabilities, and equity

Learning Objectives
4. Use the accounting
equation to analyze
transactions
5. Prepare financial
statements
6. Use financial statements
and return on assets
(ROA) to evaluate
business performance

Learning Objective 1
Explain why
accounting is
important and list the
users of accounting
information

Why Is Accounting Important?
Accounting is the
information system
Financial
that measures
Accounting
business activities,
processes the
information into
reports, and
communicates the Managerial
Accounting
results to decision
makers.
Users of Financial Information

Match the accounting terminology to the definition
Benefit Definition
1. Certified management a. The information system that measures business activities, processes that
accountants information into reports, and communicates the results to decision makers.
2. Accounting b. Licensed professional accountants who serve the general public.
3. Managerial accounting c. Any person or business to whom a business owes money.

4. Certified public d. The field of accounting that focuses on providing information for internal
accountants decision makers.
5. Financial accounting e. Certified professionals who work for a single company.

f. The field of accounting that focuses on providing information for external
6. Creditor decision makers.

Benefit Definition
1. Certified management
accountants e. Certified professionals who work for a single company.
2. Accounting
3. Managerial accounting
4. Certified public
accountants
5. Financial accounting
6. Creditor

Benefit Definition
a. The information system that measures business activities, processes that
2. Accounting information into reports, and communicates the results to decision makers.
3. Managerial accounting
4. Certified public
accountants
6. Creditor

Benefit Definition
d. The field of accounting that focuses on providing information for internal
3. Managerial accounting decision makers.
4. Certified public
accountants
6. Creditor

Benefit Definition
4. Certified public
accountants b. Licensed professional accountants who serve the general public.
6. Creditor

Benefit Definition
4. Certified public
5. Financial accounting decision makers.
6. Creditor

Benefit Definition
4. Certified public
5. Financial accounting decision makers.
6. Creditor c. Any person or business to whom a business owes money.

Describe the
organizations and
rules that govern
accounting

The Organizations That Govern
Accounting
FASB SEC
•Financial Accounting •Securities and
Standards Board Exchange Commission
•Privately funded •Oversees the US
•Creates the rules and financial markets
standards that govern
financial accounting

Generally Accepted Accounting
Principles (GAAP)
• Issued by the FASB.
• Establishes the rules for Relevant = The info
recording transactions and allows users to make
preparing financial a decision.
statements.
• Published online as part of Faithfully
the Accounting Standards Representative =
Codification. The info is complete,
• Requires that information neutral, and free
be useful.
useful from material error.

Accounting Assumptions
Economic
Entity Cost
Assumption Principle
Monetary Going
Unit Concern
Assumption Assumption

Benefit Definition
a. Oversees the creation and governance of accounting standards in the United
7. Cost principle States.
8. GAAP b. Requires an organization to be a separate economic unit.
9. Faithful representation c. Oversees US financial markets.

d. States that acquired assets and services should be recorded at their actual
10. SEC cost.
11. FASB e. Creates International Financial Reporting Standards.

12. Monetary unit
assumption f. The main US accounting rule book.
13. Economic entiry
assumption g. Assumes that an entity will remain in operation for the foreseeable future.
14. Going concern
assumption h. Assumes that the financial statements are recorded in a monetary unit.
15. IASB i. Requires information to be complete, neutral, and free from material error.
Benefit Definition
7. Cost principle cost.
8. GAAP
9. Faithful representation
10. SEC
11. FASB
12. Monetary unit
assumption
13. Economic entiry
assumption
14. Going concern
assumption
15. IASB
Benefit Definition
8. GAAP f. The main US accounting rule book.
9. Faithful representation
10. SEC
11. FASB
12. Monetary unit
assumption
13. Economic entiry
assumption
14. Going concern
assumption
15. IASB
Benefit Definition
9. Faithful representation i. Requires information to be complete, neutral, and free from material error.
10. SEC
11. FASB
12. Monetary unit
assumption
13. Economic entiry
assumption
14. Going concern
assumption
15. IASB
Benefit Definition
10. SEC c. Oversees US financial markets.
11. FASB
12. Monetary unit
assumption
13. Economic entiry
assumption
14. Going concern
assumption
15. IASB
Benefit Definition

11. FASB States.
12. Monetary unit
assumption
13. Economic entiry
assumption
14. Going concern
assumption
15. IASB
Benefit Definition
9. Faithful representation i. Requires information to be complete, neutral, and free from material error

11. FASB States.
12. Monetary unit
13. Economic entiry
assumption
14. Going concern
assumption
15. IASB

11. FASB States.
12. Monetary unit
13. Economic entiry
assumption b. Requires an organization to be a separate economic unit.
14. Going concern
assumption
15. IASB


11. FASB States.
12. Monetary unit
13. Economic entiry
14. Going concern
15. IASB

Benefit Definition

11. FASB States.
12. Monetary unit
13. Economic entiry
14. Going concern
15. IASB e. Creates International Financial Reporting Standards.
Describe the
accounting equation,
and define assets,
liabilities, and equity

The Accounting Equation
Assets = Liabilities + Equity
Rule: The Balance Sheet

Equation must ALWAYS be in
balance.

Assets are
economic
resources that are
expected to
benefit the
business in the
future.
Liabilities
are debts
that are
owed to
creditors.
Equity is the
owner’s residual
claim against the
assets of the
company.
The owner’s claim

on the resources
increase and Owner’s Capital
decrease as the – Owner’s Withdrawals
company engages + Revenues
in earnings - Expenses
activities.
Revenues are
economic
resources that have
been earned by Owner’s Capital
– Owner’s Withdrawals
delivering products + Revenues
or services to - Expenses
customers.
Expenses are the

costs associated Owner’s Capital
with selling goods – Owner’s Withdrawals
or services. + Revenues
- Expenses

Using the expanded accounting equation, solve for
the missing amount.
Assets $ 71,288
Liabilities 2,260
Owner's Capital ?
Owner's Withdrawal 14,420
Revenues 53,085
Expenses 28,675

Use the accounting

equation to analyze
transactions

How Do You Analyze A Transaction?
Think of a transaction
as a very special kind Is it a transaction?
of historical event.
1.It involves the exchange machine
Buying a copying
for the
of economic resources. office for $4,000
2.We must be able to cash.
measure the economic
impact in monetary units.
x Meeting with a
potential customer.

Sheena Bright starts a new business named

Smart Touch. She puts $30,000 into the
business. How does this impact the
Accounting Equation?
Note: You can make the analysis easier if the first question
you ask is whether cash exchanged hands.
Next, Smart Touch purchases land for $20,000

cash.
In this transaction, all the change occurred on the left side of

the equation. One asset was converted into a different asset.
In Transaction #3, Smart Touch buys $500 of

office supplies, offering to pay in 30 days.
Remember, in business it is quite common for a business to

purchase something now, and pay for it later.
In Transaction #4, Smart Touch provides

training services to customers for $5,500 cash.

In Transaction #5, Smart Touch performs

$3,000 of services for a customer who will pay
in one month.

In Transaction #6, Smart Touch pays $3,200 in

cash expenses; $2,000 for office rent and
$1,200 for employee salaries.

In Transaction #7, Smart Touch pays $300 to

the store from which it purchased office
supplies in Transaction #3.

In Transaction #8, Smart Touch collects $2,000

from the client for which Smart Touch
performed services in Transaction #5.

LO4: How Do You Analyze A
Transaction?

Prepare Financial
Statements

How Do You Prepare Financial
Statements?
Income Statement
These same four
Statement of Owner’s Equity basic financial
Balance Sheet statements are
used by all
Statement of companies as
Cash Flows the primary
means of
communicating
to stakeholders.

Statements?
Income Statement Reports the
success or failure
Statement of Owner’s Equity of the company’s
Balance Sheet operations for a
period of time.
Statement of
Cash Flows

Statements?
SMART TOUCH LEARNING

Inc o me Sta te me nt
Mo nth End e d No ve mb e r 30, 2014
Revenues
Service Revenue $ 8,500
Expenses
Rent expense $ 2,000
Salaries Expense 1,200
Total expenses 3,200
Net income $ 5,300

Statements?
Income Statement
Shows amounts
Statement of Owner’s Equity and causes of
Balance Sheet changes in
owner’s capital
during the period.
Statement of
Cash Flows

Statements?
The ending balance in Bright Capital will also

appear in the Equity section of the Balance Sheet.
Statements?
Income Statement Reports assets
and claims to
Statement of Owner’s Equity
those assets at a
Balance Sheet specific point in
time.
Statement of
Cash Flows

Balance Sheet
November 30, 2014
Assets
Cash $ 9,000
Accounts Receivable 1,000
Office Supplies 500
Land 20,000
Total assets $ 30,500
Liabilities
Accounts Payable $ 200
Owner's Equity
Bright Capital, November 30, 2014 30,300
Total Liabilities and Owner's Equity $ 30,500
Note that the Balance Sheet follows the

Accounting Equation.
Equation
Statements?
Income Statement Answers the
question of
Statement of Owner’s Equity
whether the
Balance Sheet business
generates enough
cash to pay its
Statement of
bills.
Cash Flows

Statement of Cash Flows
Month Ended November 30, 2014
Cash Flows from Operating Activities:
Receipts:
Collections from customers $ 7,500
Payments:
For rent $ (2,000)
For salaries (1,200)
For office supplies (300) (3,500)
Net cash provided by operating activities 4,000
Cash Flows from Investing Activities:
Acquisition of land (20,000)
Net cash used by investing activities (20,000)
Cash Flows from Financing Activities:
Owner contribution 30,000
Owner withdrawals (5,000)
Net cash provided by financing activities 25,000
Net increase in cash 9,000
Cash balance, November 1, 2014 -
Cash balance, November 30, 2014 $ 9,000

Use financial
statements and return
on assets (ROA) to
evaluate business
performance

How Do You Use Financial Statements
to Evaluate Performance?

End of Chapter 1

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Accounting and the

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-1

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-2

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-3

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-4

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-6

2. Accounting b. Licensed professional accountants who serve the general public.

3. Managerial accounting c. Any person or business to whom a business owes money.

5. Financial accounting e. Certified professionals who work for a single company.

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-7

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-8

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-9

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-10

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-11

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-12

6. Creditor c. Any person or business to whom a business owes money.

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-13

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-14

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-15

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-16

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-17

8. GAAP b. Requires an organization to be a separate economic unit.

9. Faithful representation c. Oversees US financial markets.

11. FASB e. Creates International Financial Reporting Standards.

8. GAAP f. The main US accounting rule book.

8. GAAP f. The main US accounting rule book.

8. GAAP f. The main US accounting rule book.

10. SEC c. Oversees US financial markets.

8. GAAP f. The main US accounting rule book.

10. SEC c. Oversees US financial markets.

8. GAAP f. The main US accounting rule book.

10. SEC c. Oversees US financial markets.

8. GAAP f. The main US accounting rule book.

10. SEC c. Oversees US financial markets.

©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-25

8. GAAP f. The main US accounting rule book.

10. SEC c. Oversees US financial markets.

©2014 Pearson Education, Inc. Publishing as Prentice Hall 7-26

8. GAAP f. The main US accounting rule book.

10. SEC c. Oversees US financial markets.

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-28

Assets = Liabilities + Equity

Rule: The Balance Sheet

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-29

Assets = Liabilities + Equity

Assets = Liabilities + Equity

Assets = Liabilities + Equity

Assets = Liabilities + Equity

The owner’s claim

Assets = Liabilities + Equity

Assets = Liabilities + Equity

Expenses are the

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-35

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-36

Use the accounting

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-38

©2014 Pearson Education, Inc. Publishing as Prentice Hall 1-39

Sheena Bright starts a new business named

Next, Smart Touch purchases land for $20,000

In this transaction, all the change occurred on the left side of

In Transaction #3, Smart Touch buys $500 of

Remember, in business it is quite common for a business to

In Transaction #4, Smart Touch provides