_chap01 by wangnianwu

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									       Ch 1
Intro to Financial
   Accounting
C2
                  Users of Accounting
                      Information
                                                  Internal Users
            External Users




 •Lenders      •Consumer Groups           •Managers         •Sales Staff
 •Shareholders •External Auditors         •Officers         •Budget Officers
 •Governments •Customers                  •Internal Auditors•Controllers


     Should I lend this business money?   How can I make the best business
        Invest? Purchase Products?                   decisions?
                                                                               1-2
C3
          Opportunities in Accounting
     Financial -1a
     Financial -1a       Managerial -1b
                         Managerial -1b                   Taxation
                                                          Taxation
     *Preparation        •General accounting
                          •General accounting          •Preparation
                                                        •Preparation
      *Preparation
     •Analysis           •Cost accounting
                          •Cost accounting             •Planning
                                                        •Planning
      •Analysis
     •Auditing           •Budgeting
                          •Budgeting                   •Regulatory
                                                        •Regulatory
      •Auditing
     •Regulatory         •Internal auditing
                          •Internal auditing           •Investigations
                                                        •Investigations
      •Regulatory
     •Consulting         •Consulting
                          •Consulting                  •Consulting
                                                        •Consulting
      •Consulting
     •Planning           •Controller
                          •Controller                  •Enforcement
                                                        •Enforcement
      •Planning
     •Criminal           •Treasurer
                          •Treasurer                   •Legal services
                                                        •Legal services
      •Criminal
       investigation     •Strategy
                          •Strategy                    •Estate plans
                                                        •Estate plans
        investigation

                        •Lenders
                         •Lenders               •FBI investigators
                                                 •FBI investigators
                        •Consultants
                         •Consultants           •Market researchers
                                                 •Market researchers
                        •Analysts
                         •Analysts              •Systems designers
                                                 •Systems designers
        Accounting-
        Accounting-     •Traders
                         •Traders               •Merger services
                                                 •Merger services
                        •Directors              •Business valuation
          related
           related       •Directors
                        •Underwriters
                                                 •Business valuation
                                                •Forensic accountant
                         •Underwriters           •Forensic accountant
                        •Planners
                         •Planners              •Litigation support
                                                 •Litigation support
                        •Appraisers
                         •Appraisers            •Entrepreneurs
                                                 •Entrepreneurs
                                                                          1-3
Accounting Salaries
C1
      Importance of Accounting
                        is a
        Accounting
     Accounting                         Identifies
                                         Identifies
                     system that

                                         Records
                                         Records
       GAAP
                     information
      Relevant
      Relevant                        Communicates
                                      Communicates
                        that is

      Reliable
      Reliable
                                   to help users make
                                   to help users make
     Comparable                     better decisions.
                                    better decisions.
     Comparable
                                                        1-5
    Technology & Accounting
• Reduces time, effort & cost of recording
  business transactions.
• Improves clerical accuracy (I.e. addition,
  subtraction, etc.)
• Frees time & labor dollars for selling more
  products or making better
   business decisions.
C5
     Generally Accepted Accounting
               Principles
     Financial accounting practice is governed by
     Financial accounting practice is governed by
     concepts and rules known as generally accepted
     concepts and rules known as generally accepted
     accounting principles (GAAP = Rulebook).
     accounting principles (GAAP = Rulebook).

            RELEVANT
             RELEVANT          Affects the decision of
                               Affects the decision of
            Information
             Information              its users.
                                       its users.

             RELIABLE
              RELIABLE              Is trusted by
                                     Is trusted by
            Information
             Information                users.
                                         users.

          COMPARABLE
          COMPARABLE              Used in comparisons
                                   Used in comparisons
           Information         across years & companies.
                                across years & companies.
            Information
                                                            1-7
C5
       Setting Accounting Principles
     The Financial Accounting Standards
      The Financial Accounting Standards
     Board (FASB) is “RULEMAKER” and
      Board (FASB) is “RULEMAKER” and
     the private group that sets both broad
      the private group that sets both broad
     and specific principles.
      and specific principles.

     The Securities and Exchange Commission is the
      The Securities and Exchange Commission is the
     “POLICE” and government group that establishes
      “POLICE” and government group that establishes
     reporting requirements for companies that issue stock to
      reporting requirements for companies that issue stock to
     the public.
      the public.

     The International Accounting Standards Board (IASB)
     issues international standards that identify preferred
     accounting practices in other countries. The IASB does
     not have authority to impose its standards on companies.

                                                                 1-8
C4


           Ethics—A Key Concept

                    Ethics

     Beliefs that
                               Accepted
     distinguish
                             standards of
      right from
                             good and bad
        wrong
                               behavior



                                            1-9
 C4          Guidelines for Ethical
                  Decisions
    Œ Identify        Analyze        Ž Make ethical
 ethical concerns     options           decision




  Use personal        Consider all    Choose best
    ethics to        good and bad      option after
recognize ethical   consequences.     weighing all
    concern.                         consequences.

                                                       1-10
C4
       Martha Stewart spent
      five months in jail after
        being found guilty of
      obstructing justice and
        lying to investigators
          about a well-timed
      stock sale. The former
     stockbroker turned style
     -setter avoided a loss of
           about $51,000 by
         selling her ImClone
      stock on Dec. 27, 2001,
         rather than the next
       trading day, when the
         stock tumbled after
      regulators rejected the
       company's application
       for a key cancer drug.
                                  1-11
      Imclone CEO Same Waksal
     Goes to Prison and Ensnares
           Martha Stewart




3 min: http://www.youtube.com/watch?v=CT31I9uCspw

15 min: http://www.youtube.com/watch?v=FWCYpUinsiw
                Madoff began his Ponzi scheme in 1991.
                He never made any legitimate
                investments with his clients' money.
                Instead, he said, he simply deposited the
                money into his personal business
                account. When his customers asked for
                withdrawals, he paid them out of the
                business account, a classic "robbing
                Peter to pay Paul" scenario. Losses to
                his investors range from $12 - $20 billion.




2min: http://www.youtube.com/watch?v=JOjC7zTOIJA&feature=relmfu
C5
             Principles of Accounting
 Cost principle means that                   Revenue recognition principle
 accounting information is based             provides guidance on when a
 on actual cost.                             company must recognize
                                             revenue.

     Going-concern means that
     accounting information reflects a       Business entity means that a
     presumption the business will           business is accounted for
     continue operating.                     separately from its owner or other
                                             business entities.

     Monetary unit means we can
     express transactions in money.          Matching Principle prescribes that
                                             a company must record its
                                             expenses incurred to generate the
                                             revenue.

     Full disclosure principle requires a company to report the details behind
     financial statements that would impact users’ decisions.
                                                                                  1-14
C5           Business Entity Forms
         Sole
          Sole                  Partnership
                                Partnership                 Corporation
                                                            Corporation
     Proprietorship
     Proprietorship




  Advantages: Ease &       Advantages: More fin’l &    Advantages: Access to
 Low Cost to Organize          mgmt resources         large capital thru stocks.
 Disadvantage: Limited                                Unlimited fin’l resources.
                           Disadvantage: Unlimited
   Fin’l Resources &               Liability           Disadvantage: Double
   Unlimited Liability                                        Taxation.
                            Usually organized as a
 Usually organized as a     LLC to reduce liability
 LLC to reduce liability          exposure.
        exposure.
                                                                                   1-15
A1
          Accounting Equation

     Assets
     Assets   =   Liabilities
                  Liabilities    +     Equity
                                       Equity




                         Liabilities
              Assets     & Equity


                                                1-16
A1
         Assets - OWN of value

                       Cash
                      Cash
       Accounts
     Accounts                          Notes
                                     Notes
       Receivable
     Receivable                      Receivable
                                   Receivable
                    Resources
                    Resources
                    owned or
                     owned or
      Vehicles      controlled
                    controlled
     Vehicles                            Land
                       by a
                       by a             Land
                     company
                     company
          Store
         Store                      Buildings
                                   Buildings
         Supplies
        Supplies       Equipment
                      Equipment
                                                  1-17
A1
      Liabilities - What you OWE

         Accounts
       Accounts                     Notes Payable
                                   Notes Payable
          Payable
        Payable

                      Creditors’
                      Creditors’
                      claims on
                      claims on
                        assets
                        assets
      Taxes Payable
     Taxes Payable                  Wages Payable
                                   Wages Payable


                                                1-18
A1                           Equity


       Contributed Capital
     Contributed Capital                  Retained Earning
             (Investments)              Retained Earnings
         (Investments)                       (Revenues/Expenses)
                                         (Revenues/Expenses)



                             Owner’s
                              Owner’s
                             claim on
                             claim on        Dividends
                                           Dividends
                              assets
                               assets



                                                             1-19
Go over Ex 1-9
A1               Expanded Accounting
                      Equation
     Assets
     Assets
     Assets
     Assets            =
                       =      Liabilities
                              Liabilities
                              Liabilities
                              Liabilities       +
                                                +        Equity
                                                         Equity
                                                         Equity
                                                         Equity


     Common
     Common         _      Dividends**                   _Expenses**
      Stock*
      Stock*
                           Dividends**
                                         +   Revenues*
                                             Revenues*    Expenses**



      •Increases Equity
     ** Decreases Equity
                                    Retained Earnings

                                                                  1-21
  What is a Business Transaction?




A business transaction is an economic event or
   condition that directly changes an entity’s
financial condition or directly affects its results
                 of operations.
    Analyzing Business Transactions
•    Read the transaction. Decide which
     accounts are involved. Look first to see if
     cash is involved.
•    Decide if the accounts increase or decrease
     in value.
•    Classify the accounts involved (asset,
     liability, equity/capital, revenue, or
     expense).
•    After recording the transaction does:
      Assets = Liabilities + Owners’ Equity
A2               Transaction Analysis
 J. Scott invests $20,000 cash to start the
 business in return for stock.
1)   Is Cash Involved? If yes, is cash increased or decreased?
2)   What other account(s) are involved? Does their value increase or decrease?
3)   Does Assets = Liabilities + Equity?




                                                                                  1-24
A2
     Purchased supplies paying $1,000 cash.
     1)   Is Cash Involved? If yes, is cash increased or decreased?
     2)   What other account(s) are involved? Does their value increase or decrease?
     3)   Does Assets = Liabilities + Equity?




                                                                                       1-25
A2
     Purchased equipment for $15,000 cash.
     1)   Is Cash Involved? If yes, is cash increased or decreased?
     2)   What other account(s) are involved? Does their value increase or decrease?
     3)   Does Assets = Liabilites + Equity?




                                                                                       1-26
A2
             Purchased Supplies of $200 and
             Equipment of $1,000 on account.
     1)   Is Cash Involved? If yes, is cash increased or decreased?
     2)   What other account(s) are involved? Does their value increase or decrease?
     3)   Does Assets = Liabilites + Equity?




                                                                                       1-27
A2   Borrowed $4,000 from 1st American Bank.
      1)   Is Cash Involved? If yes, is cash increased or decreased?
      2)   What other account(s) are involved? Does their value increase or decrease?
      3)   Does Assets = Liabilites + Equity?




                                                                                        1-28
A2   The balances so far appear below. Note that the
     Balance Sheet Equation is still in balance.




                                                       1-29
A2
     Transaction Analysis


      Now, let’s look at transactions
     involving revenue, expenses and
                  dividends.




                                        1-30
                  Revenues
Monies earned by a business --
§Fees earned for services rendered (I.e. accounting,
legal)
§Income for selling merchandise (I.e. department store)
§Rental Income
§Interest income for lending money




Revenues INCREASE Owners’ Equity
A2    Provided consulting services receiving
      $3,000 cash.
 1)   Is Cash Involved? If yes, is cash increased or decreased?
 2)   What other account(s) are involved? Does their value increase or decrease?
 3)   Does Assets = Liabilites + Equity?




                                                                                   1-32
                   Expenses
Costs incurred to generate revenues --
§Salaries & Wages
§Materials
§Rent
§Advertising & marketing
§Interest for borrowed monies




Expenses DECREASE Owners’ Equity
A2        Paid salaries of $800 to employees.
     1)    Is Cash Involved? If yes, is cash increased or decreased?
     2)    What other account(s) are involved? Does their value increase or decrease?
     3)    Does Assets = Liabilites + Equity?




 Remember that expenses decrease equity.

                                                                                        1-34
             Dividends
      Distribution of assets to its
 stockholders. Generally represents
 a distribution of earnings back to the
              stockholders

Dividends DECREASE Owners’ Equity
A2   Dividends of $500 are paid to shareholders
     1)   Is Cash Involved? If yes, is cash increased or decreased?
     2)   What other account(s) are involved? Does their value increase or decrease?
     3)   Does Assets = Liabilites + Equity?




 Remember that dividends decrease equity.

                                                                                       1-36
Begin Ex. 1-11 (a-d) as a
         class.
P1         Financial Statements

      Let’s prepare the Financial Statements reflecting
     the transactions we have recorded.

                        • Income Statement
                        • Statement of Retained Earnings
                        • Balance Sheet
                        • Statement of Cash Flows (to be
                                                  (to be
                          discussed in Ch 12)
                          discussed in Ch 12)




                                                           1-38
P1         Income Statement
                                              Net
                                          income is
                                              the
                                          difference
                                           between
                                          Revenues
                                               &
                                          Expenses




 The income statement tells us whether the
 company was profitable over a period of time.
 Were revenues greater than expenses?
                                                   1-39
     Statement of Retained Earnings
P1




                       Net income
                       Net income
                        of $3,470
                         of $3,470
                        increases
                        increases
                         Retained
                         Retained
                       Earnings by
                       Earnings by
                          $3,470.
                          $3,470.

                                      1-40
P1                   Balance Sheet
  The Balance Sheet describes a company’s financial position at a
   The Balance Sheet describes a company’s financial position at a
point in time. It is the only Financial Statement for a point in time (I.e.
point in time. It is the only Financial Statement for a point in time (I.e.
                              Dec. 31, 2012)
                               Dec. 31, 2012)




                                                                         1-41
A3   Return on Assets (ROA)

     Return on       Net income
               =
      assets     Average total assets



                      ROA is viewed as an
                       ROA is viewed as an
                     indicator of operating
                      indicator of operating
                           efficiency.
                            efficiency.



                                               1-42
Go over BTN 1-2

								
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