Horngren Acct7 Ch01 Stu

Accounting and the
Business Environment
Chapter 1
Copyright 2007 Prentice-Hall. All rights reserved
Objective 1
Use accounting vocabulary
Accounting
Measures
Processes
Communicates
Financial information to decision makers
Decision Makers
Individuals
Businesses
Investors
Creditors
Taxing Authorities
Financial vs. Managerial

Accounting
Financial Accounting Information for
people outside of the company
Managerial Accounting Information for
internal decision makers
Governing Organizations
FASB Financial Accounting Standards
Board
SEC Securities and Exchange
Commission
AICPA American Institute of Certified
Public Accountants
IMA Institute of Management
Accountants
Ethics
Audit
Examination of companys financial situation
Performed by independent accountants
Sarbanes-Oxley Act criminal offense to

falsify financial statements
Public Companies Accounting Oversight
Board monitors work of accountants
Standards of Professional Conduct

AICPA Code of Professional Conduct for
Accountants
IMA Standards of Ethical Conduct
Types of Business
Organizations
Proprietorships
Partnerships
Corporations
Objective 2
Apply accounting concepts and
principles
10
GAAP
Generally Accepted Accounting Principles
Accounting guidelines that govern how
accountants measure, process, and
communicate financial information
Formulated by Financial Accounting

Standards Board (FASB)
11
GAAP
Primary objective of financial accounting
provide information that is useful for
making investment and lending decisions
12
Entity Concept
Accounting Entity organization that
stands apart as a separate economic unit
13
Reliability (Objectivity) Principle

Accounting information is based on the
most reliable data available
Verifiable
Free from bias
Individuals would arrive at similar conclusions
using same data
14
Cost Principle
Acquired assets and services should be
recorded at their actual cost (historical
cost)
15
Going Concern Concept

Assumes that the entity will remain in
operation for the foreseeable future
16
Stable-Monetary-Unit Concept
Assumes that the dollars purchasing
power is stable
17
Objective 3
Use the accounting equation
18
Assets
Economic resources, expected to benefit
the business in the future
Cash
Accounts receivable
Merchandise inventory
Furniture
Land
19
Claims to the Assets

Liabilities economic obligations payable
to an individual or organization outside the
business
Accounts payable
Notes payable
Salary payable
20
Claims to the Assets

Owners Equity (capital) claim of
business owner to the assets of the
business
21
The Accounting Equation

Assets
Economic
Resources
= Liabilities + Owners Equity
Claims to
Economic
Resources
22
Transactions that Affect

Owners Equity
OWNERS
EQUITY
INCREASES
OWNERS EQUITY
DECREASES
Owner
Withdrawals
Owner
Investments
Owners Equity
Revenues
Expenses
23
Revenues
Amounts earned by delivering goods or
services to customers
Sales revenue
Service revenue
Interest revenue
Dividend revenue
24
Expenses
Decrease in owners equity that occurs
from using assets or increasing liabilities
in the course of delivering goods or
services to customers
Salary expense
Rent expense
Utilities expense
Interest expense
25
Exercise 1-18
Assets
Pep Boys
Eddie Bauer
Benbrook Exxon
Liabilities
Owners
Equity
$?
$81,000
$60,000
$21,000
72,000
?
32,000
40,000
100,000
79,000
?
21,000
26
Objective 4
Analyze business transactions
27
Transaction
An event that affects the financial position
of a particular entity and can be recorded
reliably
28
Exercise 1-17
a. Increased assets (cash)
b. No effect on total assets. Increase in land
offset the decrease in cash
c. Decreased assets (cash)
d. Increased assets (equipment)
29
Exercise 1-17
e. Increased assets (accounts receivable)
f. Decreased assets (cash)
g. No effect on total assets. Increase in
cash offset the decrease in accounts
receivable
h. Increased assets (cash)
30
Exercise 1-22
31
Analyze this:
July 6: Lange invested $45,000 in the
business by opening a bank account in
the name of M. Lange, M.D.
What
Does the
accounts
account
areincrease
involved?
or decrease?
(1) Cash (asset)

(2) Owners Equity (equity)
32
Exercise 1-22
Date
Assets
July
Cash
45,000
Medical
Supplies
Liabilities Owners
Equity
Land
Accounts
Payable
M.Lange,
Capital
Type of
Transaction
45,000 Investment
Assets = $45,000
Liabilities &
Owners Equity = $45,000
33
Analyze this:
July 9: Paid $35,000 cash for land
DoesWhat
the account
increase
or decrease?
accounts
are involved?
(1) Cash (asset)

(2) Land (asset)
34
Exercise 1-22
Date
Assets
Medical
Supplies
Liabilities Owners
Equity
July
Cash
Land
45,000
-35,000
35,000
Bal
10,000
35,000
Accounts
Payable
M.Lange,
Capital
Type of
Transaction
45,000 Investment
Assets = $45,000
45,000
Liabilities &
35
Analyze this:
July 12: Purchased medical supplies
for $2,000 on account
DoesWhat
the account
increase
or decrease?
accounts
are involved?
(1) Medical Supplies (asset)

(2) Accounts Payable (liability)
36
Exercise 1-22
Date
July
Bal
Assets
Cash
Medical
Supplies
10,000
Liabilities Owners
Equity
Land
Accounts
Payable
35,000
Type of
Transaction
45,000
12
2,000
2,000
Bal
10,000 2,000 35,000
2,000
Assets = $47,000
M.Lange,
Capital
45,000
Liabilities &
37
Analyze This:
July 15-31: During the rest of the month,
Lange treated patients and earned
service revenue of $7,000, receiving
cash
DoesWhat
the account
accounts
increase
are involved?
or decrease?
(1) Cash (asset)
(2) Revenues (equity)
When the
owner
completes
work, her
interest in the
assets
increases
38
Exercise 1-22
Date
July
Bal
15-31
Bal
Assets
Cash
Medical
Supplies
Liabilities Owners
Equity
Land
10,000 2,000 35,000
Accounts
Payable
M.Lange,
Capital
2,000
45,000
7,000
Type of
Transaction
7,000 Revenue
17,000 2,000 35,000
Assets = $54,000
2,000
52,000
Liabilities &
39
Analyze This:
July 15-31: Paid cash expenses
Does the
account
increase
or decrease?
What
accounts
are involved?
(1) Cash (asset)
(2) Expense (equity)
When an expense is
incurred, owners
equity decreases
40
Exercise 1-22
Date
July
Bal
Assets
Cash
Medical
Supplies
Liabilities Owners
Equity
Land
17,000 2,000 35,000
Accounts
Payable
M.Lange,
Capital
2,000
52,000
15-31 -1,700
Bal
Type of
Transaction
-1,700 Salaries Exp
-1,000
-1,000 Rent Exp
- 300
- 300 Utilities Exp
14,000 2,000 35,000
2,000
Assets = $51,000
Liabilities &
49,000
41
Analyze This:
July 28: Sold supplies to another
physician for the cost of those supplies
Does the
account
increase
or decrease?
What
accounts
are involved?
(1) Cash (asset)
(2) Medical Supplies (asset)
42
Exercise 1-22
Date
July
Bal
28
Bal
Assets
Cash
Medical
Supplies
Liabilities Owners
Equity
Land
Accounts
Payable
M.Lange,
Capital
2,000
49,000
14,500 1,500 35,000
2,000
49,000
Assets = $51,000
Liabilities &
14,000 2,000 35,000

500
Type of
Transaction
-500
43
Analyze This:
July 31: Paid $1,500 on account
Does the
account
increase
or decrease?
What
accounts
are involved?
(1) Cash (asset)
(2) Accounts Payable (liability)
44
Exercise 1-22
Date
July
Bal
31
Bal
Assets
Cash
Medical
Supplies
Liabilities Owners
Equity
Land
14,500 1,500 35,000

-1,500
Accounts
Payable
M.Lange,
Capital
2,000
49,000
Type of
Transaction
-1,500
13,000 1,500 35,000

Assets = $49,500
500
49,000
Liabilities &
45
Accounting for Business

Transactions
Note: The equation always stays in
balance
Each transaction affects at least two
accounts, sometimes more
Some transactions affect only one side of
the equation; some affect both sides
46
Objective 5
Prepare financial statements
Objective 6
Evaluate business performance
47
Financial Statements
Income statement
Statement of owners equity
Balance sheet
Statement of cash flows
48
Income Statement
Summary of an entitys revenues,
expenses, and net income or net loss for a
specific period
Revenues - Expenses
Net Income: Revenues > Expenses
Net Loss: Expenses > Revenues
49
Statement of Owners Equity

Summary of changes in an entitys
owners equity during a specific period
Beginning owners equity
+ Owners investments
+ Net income
- Net loss
- Owners withdrawals
Ending owners equity
50
Balance Sheet
Reports the entitys assets, liabilities, and
owners equity as of a specific date
Assets = Liabilities + Owners Equity
51
Statement of Cash Flows

Reports cash receipts and cash payments
during a period (covered in Chapter 17)
52
Financial Statements
Using the transactions from Exercise 1-22,
prepare the income statement, statement
of owners equity, and balance sheet
53
Maria Lange, M.D.

Anytime
Income Statement
you
subtotal,
For the Month Ended July 31,
2006
create a
Revenue:
Fees earned
Expenses:
Salary expense
Double
Rent
expense
underline
for yourexpense
Utilities
final answer
Total Expenses
Net income
new column
to the left
$7,000
Notice the
proper
heading$1,700
1,000
300
3,000
$4,000
54
Maria Lange, M.D.

Statement of Owners Equity
From income
statement
Dates
Forarethe Month Ended July 31,
2006
important to
the reader of
Maria
Lange,
the financial
reports
capital, July 1, 2006

Add: Investment by owner
Net income for the month
Less: Withdrawals by owner
Maria Lange, capital, July 31, 2006
0
45,000
4,000
$49,000
0
$49,000
55
Details, Details
Note the headings for both of these
statements
Name of company
Name of financial statement
For the period ended .
Both of these statements report activity

over a period of time
Final sums are double-underlined
56
Details, Details
Negative amounts are presented in
parentheses
Net income is computed first because you
need that number to complete the ending
balance in owners equity
When preparing a financial statement,
clearly label each line in the statement
57
Details, details
If you are using columnar paper, always
start your number columns in the far righthand column
Numbers that are added or subtracted
from each other should be in the same
column
58
Maria Lange, M.D.

Balance Sheet
July 31, 2006
From statement of
owners equity
Liabilities
Assets
Notice the
proper
heading
Accounts payable
$500
Owners equity,
M. Lange, capital
49,000
Total liabilities and

owners equity
$ 49,500
59
Details, details
Note the heading for the balance sheet is
different from the other statements
Name of company
Name of financial statement
Date
This statement reports what the company
owns and who has claims to the assets at
a specific point in time
60
Exercise 1-24
Allen Samuel Road Service
Balance Sheet
November 30, 2009
Liabilities
Assets
Cash
Accounts receivable
Supplies
Equipment
$2,000
6,000
500
15,500
Accounts payable
Note payable
Total liabilities
$24,000
5,000
$8,500
Owners Equity
A. Samuel, capital
Total Assets
$3,500
15,500
Total liabilities and

owners equity
$24,000
61
Exercise 1-24
What does a balance sheet report
financial position or operating results?
Financial position
Which financial statement reports the other

information?
The income statement summarizes revenues
and expenses
62
Exercise 1-26
Ciliotta Design Studio
Income Statement
Year Ended December 31, 2006
Service revenue
Expenses:
Salary expense
Rent expense
$60,000
24,000
Utilities expense
6,800
Supplies expense
4,000
Property tax expense
1,200
Total expenses
Net income
$158,100
96,000
$62,100
Exercise 1-26
2. Owners withdrawals:
Ciliottas, capital, beginning of year
Add: Net income
Investment by owner
Subtotal
Less: Owner withdrawal
Ciliotta, capital, end of year
$
0
62,100
15,000
$77,100
?
50,000
$27,100
64
End of Chapter 1
65

Horngren Acct7 Ch01 Stu

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Horngren Acct7 Ch01 Stu

Uploaded by

Copyright:

Available Formats

Accounting and the

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Financial vs. Managerial

Copyright 2007 Prentice-Hall. All rights reserved

Sarbanes-Oxley Act criminal offense to

Copyright 2007 Prentice-Hall. All rights reserved

Standards of Professional Conduct

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Formulated by Financial Accounting

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Reliability (Objectivity) Principle

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Going Concern Concept

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Claims to the Assets

Copyright 2007 Prentice-Hall. All rights reserved

Claims to the Assets

Copyright 2007 Prentice-Hall. All rights reserved

The Accounting Equation

= Liabilities + Owners Equity

Transactions that Affect

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

(1) Cash (asset)

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

(1) Cash (asset)

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

(1) Medical Supplies (asset)

Copyright 2007 Prentice-Hall. All rights reserved

10,000 2,000 35,000

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

10,000 2,000 35,000

17,000 2,000 35,000

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

17,000 2,000 35,000

-1,700 Salaries Exp

-1,000 Rent Exp

- 300 Utilities Exp

14,000 2,000 35,000

Copyright 2007 Prentice-Hall. All rights reserved

Copyright 2007 Prentice-Hall. All rights reserved

14,500 1,500 35,000

14,000 2,000 35,000