1、1 of 35,ACCOUNTING: The Language of Business,CHAPTER 1,Learning Objectives (LO),After studying this chapter, you should be able to Explain how accounting information assists in making decisions Describe the components of the balance sheet Analyze business transactions and relate them to changes in t
2、he balance sheet Prepare a balance sheet from transactional data Compare the features of sole proprietorships, partnerships, and corporations,2 of 35,3 of 35,Learning Objectives (LO),After studying this chapter, you should be able to Identify how the owners equity section in a corporate balance shee
3、t differs from that in a sole proprietorship or partnership Explain the regulation of financial reporting including differences between U.S. GAAP an IFRS Describe auditing and how it enhances the value of financial information 9. Evaluate the role of ethics in the accounting profession,3 of 35,4 of
4、35,LO 1 - Accounting and Decision-Making,Accounting the process of identifying, recording, summarizing, and reporting economic information to decision makers Types of Accounting: Tax primarily used by the government Non-Profit (donors, governments) Managerial insiders (budgets, planning, costing, pr
5、icing, managing product mix, etc.) Financial outsiders (owners, creditors, suppliers, regulators, unions, others),5 of 35,LO 1 - Accounting and Decision-Making,Principal Components of Annual Financial Reports A letter from corporate management Managements discussion and analysis of past and possible
6、 future transactions, events, circumstances Financial statements Footnotes explaining many elements of the financial statements in more detail Independent auditors report A statement of managements responsibility for preparation of the financial statements Other corporate information,6 of 35,LO 1 -
7、Accounting and Decision-Making,Sequence of Events Leading to Financial Statements Found in Those Reports Measurable economic event occurs Private (work for the reporting entity) bookkeepers/accountants analyze event to determine what elements/accounts are affected, then record the event into records
8、 Records are summarized into financial statements Financial reports that include the statements are provided to users who make decisions,7 of 35,LO 1 - Accounting and Decision-Making,Characteristics of Financial Reports Prepared by management Provided to outsiders quarterly and annually Primarily ab
9、out past transactions and events Tell very little about future transactions, events, or circumstances Financial Statements (part of those reports) Balance Sheet Income Statement Statement of Cash Flows Statement of Stockholders Equity,8 of 35,LO 1 - Accounting and Decision-Making,Accessing Financial
10、 Reports and Statements Available to all via the Internet from companys website Formally sent or made available to owners by preparer Formally filed with the U.S. Government (Securities and Exchange Commission) (10-Q, 10-K, and numerous other forms) and subsequently accessible from the SECs EDGAR sy
11、stem,9 of 35,LO 2 - The Balance Sheet,The balance sheet (also called the statement of financial position) shows the financial status of a company at a particular instant in time Reflects the basic accounting equation, which is,Assets = Liabilities + Owners equity,Resources = Claims against those res
12、ources,10 of 35,LO 2 - The Balance Sheet,Assets economic resources that the company owns or controls from past transactions/events that it expects to help generate future benefits Accounts subdivision of the element Assets Cash and cash equivalents Accounts Receivable (Customer bought it on credit)
13、Inventories (Merchandise, Supplies, Parts) Prepaid Expenses (taxes, utilities, insurance) Property Plant Equipment,CurrentAssets,Long-termAssets,11 of 35,LO 2 - The Balance Sheet,Liabilities economic obligations of the organization to outsiders from past transactions /events that it expects to pay i
14、n the future Accounts subdivision of the element Liabilities Accounts Payable (We bought it on credit) Notes Payable Long-term debt,12 of 35,LO 2 - The Balance Sheet,Owners equity is the owners claim on the organizations assets, i.e., assets minus liabilities Accounts subdivision of the element Equi
15、ty Sole Proprietorships - XX Capital Partnerships - YY Capital Corporations - Capital (Common) Stock- Paid in Capital in excess of par/stated value (See LO 6),13 of 35,LO 3 - Balance Sheet Transactions,Every transaction of a company or entity affects the balance sheet equation An entity is an organi
16、zation that stands apart from other organizations and individuals as a separate economic unit for which the balance sheet is being prepared A transaction is any event that affects the financial position of that entity and that can be reliably recorded in money terms At least two accounts will be aff
17、ected for every entry recorded (compound entry = 2 accounts),LO 3 - Balance Sheet Transactions,Assets = Liabilities + Owners Equity,Cash Lopez, Capital,(1) + $400,000 = +$400,000,Transaction 1: Initial Investment of $400,000,(Owner Investment),15 of 35,LO 3 - Balance Sheet Transactions,Transaction 2
18、: Loan of $100,000 from Bank,Assets = Liabilities + Owners Equity,Cash Note payable Lopez, Capital,(1) + $400,000 = +$400,000,(2) + $100,000 = + $100,000,Bal. $500,000 = $100,000 $400,000,$500,000 $500,000,16 of 35,LO 3 - Balance Sheet Transactions,Transaction 3: Acquire Store Equipment for Cash, $1
19、5,000,Assets = Liabilities + Owners Equity,Cash Store Equipment Note payable Lopez, Capital,Bal. $500,000 = $100,000 $400,000,(3) 15,000 +15,000 =,Bal. 485,000 15,000 = 100,000 400,000,$500,000 $500,000,17 of 35,LO 3 - Balance Sheet Transactions,18 of 35,LO 4 Preparing the Balance Sheet,19 of 35,LO
20、5 Comparative Ownership Features,Sole proprietorship a single owner Partnership two or more co-owners Corporation created under (U.S.) state laws Publicly owned Owned by the public through the sale of shares; potentially thousands of ownersPrivately owned Owned by families or a small group of shareh
21、olders; shares are not sold or traded,20 of 35,LO 5 Comparative Ownership Features,Advantages of a Corporation Limited liability (claims against corporate assets only not personal assets of managers) Easy transfer of ownership Ability to raise capital from thousands Continuity of existence Prestige
22、Disadvantages of a Corporation Unfavorable tax laws (double taxation on distributed earnings) Regulation,21 of 35,LO 6 Differences in Reporting Owners Equity,Proprietorships and Partnerships Owners equities = “Capital” Owners equities are recorded in the capital account Corporations Owners equities
23、(Residual interests in the company) also called Stockholders/Shareholders equity Total capital investment = Paid-in capital (e.g., $20) Common stock recorded at par/stated value Par/stated value = what is printed on the stock One share $5 par value = $5 Paid-in capital in excess of par value One sha
24、re ($20 $5 par value) = $15,22 of 35,LO 6 Differences in Reporting Owners Equity,Shareholders elect a board of directors to look out for their interests Board of Directors Often include outsiders such as CEOs and presidents of other corporations, academics, attorneys, and community representatives C
25、an also include insiders companys CEO, CFO, etc. Majority must be independent if stock is regulated Set strategic direction of the company Senior Managers run day to day operations,23 of 35,LO 7 Regulation of Financial Reporting,Federal Government Legislative (Congress) passes laws and funding for f
26、ederal agencies Judicial enforces laws Executive Proposes, signs, administers budgets and laws (see SEC below) SEC Has statutory authority to regulate investment management activities regulate stock market activities investigate violations of security laws control financial reports and their prepare
27、rs,24 of 35,LO 7 Regulation of Financial Reporting,Financial Accounting Standards Board (FASB) Independent nonprofit organization Writes accounting/reporting standards for not-for-profit organizations Has delegated authority from SEC to create and amend financial accounting/reporting standards for f
28、or-profit organizations subject to control by the SEC Authority may be rescinded at any time,25 of 35,LO 7 Regulation of Financial Reporting,FASB (continued) Does not have investigatory or enforcement authority Published over 160 separate opinions that include Generally Accepted Accounting Principal
29、s (GAAP) Selected recent/current projects Codification (now only one set of guidance) Convergence with the IFRS,26 of 35,LO 7 Regulation of Financial Reporting,International Accounting Standards Board (IASB) Not a U.S. governmental agency United States is represented on the board Creates and amends
30、financial accounting and reporting standards for European Union and many other countries Selected current projects: Convergence with U.S. GAAP,27 of 35,LO 7 Regulation of Financial Reporting,Sarbanes Oxley Act 2002 Board of directors must have an audit committee composed only of “independent” direct
31、ors Management must examine and certify the adequacy of internal controls used by its company Prohibits public accounting firms from providing audit clients with certain non-audit services Requires rotation every 5 years of the lead audit or coordinating partner and the reviewing partner,28 of 35,LO
32、 7 Regulation of Financial Reporting,Sarbanes Oxley Act 2002 (continued) Established the Public Company Accounting Oversight Board (PCAOB) Subordinate to the SEC Writes Generally Accepted Auditing Standards (GAAS) that external auditors must follow when conducting an audit Writes policies directed t
33、oward management regarding internal controls of the companies Investigates audit and management compliance SEC approves recommended disciplinary actions,29 of 35,LO 7 Regulation of Financial Reporting,American Institute of Certified Public Accountants (AICPA) National voluntary membership associatio
34、n of CPAs Sets strategic direction for the profession Members must abide by a code of conduct Writes/grades/updates the Uniform CPA Examination XXX Society of CPAs Each state has its own society Advocate for the profession within the state Provides multiple goods and services to members,30 of 35,LO
35、7 Regulation of Financial Reporting,State Boards of Accountancy (SBA) Sets knowledge, integrity, and ethics policies Uses the Uniform CPA Exam, written and graded by the AICPA, as part of the licensing process Licenses and disciplines CPAs Requires certain number of professional-subject courses (con
36、tinuing professional education CPE) to be taken within a period of time to maintain license Works with other SBA on reciprocity of CPA licenses between states,31 of 35,LO 8 Auditing,1929 Stock Market Crash Senior managers Rewarded in part by content of financial statements Prepare financial statemen
37、ts Potential for bias SEC Act of 1934 required public companies to have their financial statements audited by independent outside auditors who are CPAs File results with the SEC Shareholders audit report adds credibility to the financial statements they use when making decisions,32 of 35,LO 8 Auditi
38、ng,The four largest international public accounting firms are Deloitte Touche Tohmatsu Ernst & Young KPMG International PricewaterhouseCoopers 97% of the firms listed on the NYSE are clients of these four firms National, regional and local firms also exist Offer fee-based tax, consulting, auditing s
39、ervices,33 of 35,LO 8 Auditing,Audit examination of a companys transactions and the resulting financial statements Standard report includes the following topics: Introduction what was audited? Scope how was the audit conducted? Opinion as to fairness of financial statements degree to which GAAP was
40、followed Other topics (e.g., changes in principals, adequacy of managements review of internal controls)(,34 of 35,LO 9 Ethics,Ethics doing what is right for all stakeholders Ethics are an integral part of the accounting profession and are stressed in guidance from the following: Professional societ
41、ies (AICPA, IMA, state societies) Regulatory bodies (SEC, PCAOB, SBA) Accounting firms (international, national, regional, local) Publically traded firms (set the “tone at the top”) Nevertheless greed often trumps ethics,35 of 35,Miscellaneous,The Governmental Accounting Standards Board (GASB) regulates disclosures for nonfederal governmental organizations (states and below, organizations, etc.) More CEOs started out in finance or accounting than any other area, i.e., Accounting provides an excellent training ground for future managers and executives,
