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finance

Accounting and the Business Environment

1.

Chapter 1
Accounting and the Business Environment
Zhou Hui, Ph.D., Associate Professor
Tel: 008618676480696
Email: [email protected]
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

2.

Attendance
Individual assignment
Group assignment
Final exam (week17-18)
Total
10 %
30 %
10 %
50 %
100%
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3.

Why study Accounting?
What did Warren Buffet about accounting?
October 24, 2007, Mr. Buffett was
interviewed by CCTV.
Reporter: "you read more than 10000
annual reports a year. Is that true?“
Buffet: "like other people reading newspapers, I read thousands
of them every year. I don't know how much I read. But like
PetroChina, I read the annual report of 2002 and 2003. Then I
decided to invest 500 million yuan in PetroChina. I have not met
the management or read the reports of analysts, but the annual
reports are easy to understand, and it is a good investment.
3-3
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4.

Why study Accounting?
Who should be blamed for the financial crisis?
During the 2008 financial crisis, criticisms of
the accounting field were widespread,
particularly from financial institutions.
The US Congress authorized an investigation
into the root causes of the crisis by the
Securities and Exchange Commission (SEC).
Financial institutions argued that fair value accounting was the cause
of the crisis. The accounting field maintained that it was not fair value
measurement that caused the financial crisis; fair value measurement
just accurately and timely reflected the problems in the crisis.
Following the investigation, it was determined that while fair value
accounting was not the primary cause of the financial crisis, it may
have played a contributing role.
3-4
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5.

Core Textbook
Horngren Accounting, 10th Edition, Pearson, 2017.
By Tracie Nobles, Brenda Mattison, Ella M. Matsumura.
American Accounting textbook
Supplementary Textbook
Financial Accounting 10th Edition,
By Weygandt, Kieso, Kimmel
American Accounting textbook
Financial Accounting and Reporting
By Elliott and Elliott
UK Accounting textbook
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.

6.

Financial Accounting
Chapter 1 Accounting and the Business Environment
Chapter 2 Recording Business Transactions
Chapter 3 Adjustments
Chapter 4 Completing the Accounting Cycle
Chapter 5 Merchandising Operations and Inventory
Chapter 6 Receivables
Chapter 7 Plant Assets and Intangibles
Chapter 8 Liabilities
Chapter 9 Stockholder’s Equity for Corporations
Management Accounting
Chapter 10 Master Budget(we will see if we have time)
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7.

Chapter 1
7
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8.

Define accounting vocabulary
Define the users of accounting information
Describe the accounting profession and the
organizations that govern it
Identify the different types of business
organizations
Delineate the distinguishing characteristics
and organization of a proprietorship
8
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9.

Apply accounting concepts and principles
Describe the accounting equation, and define
assets, liabilities, and equity
Use the accounting equation to analyze
transactions
Basic form of financial statements
9
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10.

1
Define accounting vocabulary
10
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11.

What is Accounting ?
Accounting is the information system that:
Identify business activity
Measures and record business activity
Processes the data into reports(Financial statements)
Presents information in monetary terms
Communicates the results to decision makers
The language of
business.
11
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12.

THE ACCOUNTING PROCESS
Accounting
Reports
Process data into
reports(financial statements)
SOFTBYTE
Annual Report
Identify transactions
(select economic events)
Measure and
record business
activities
Communicate and
Presents information
for decision makers.
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13.

2
Define the users of
accounting information
13
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14.

Individuals
Businesses
Creditors
Investors
Taxing Authorities
14
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15.

Financial Accounting
Managerial Accounting
Mainly provides
information for external
decision makers
Focuses on information for
internal decision makers
Investors
Creditors
Taxing Authorities
Managers
Business Owners
Competitors
Suppliers
Which one have more rules?
MA uses FA information.
15
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16.

S1-2: USERS OF FINANCIAL INFORMATION
Suppose you are the manager of Greg’s Tunes. The
company needs a bank loan in order to purchase music
equipment. In evaluating the loan request, the banker
asks about the assets and liabilities of the business. In
particular, the banker wants to know the amount of the
business’s owner’s equity.
Requirements:
1.Is the banker considered an internal or external user of
financial information?
The banker is an external user.
2.Which financial statement would provide the best
information to answer the banker’s questions?
The balance sheet would include assets,
liabilities and equity.
16
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17.

3
Describe the accounting
profession and the organizations
that govern it
17
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18.

Lucrative career with many opportunities
Certified Public Accountants (CPA)
Pass qualifying exam
Meet education and/or experience requirements
18
work for a single
professionals who
• Certified
public
serve the general
accountants who
• Licensed professional
Certified
Public
Accountants,
Certified
or CPAs
Management
Accountants,
or CMAs
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19.

19
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AICPA
• Private organization of public accountants
• American Institute of Certified Public Accountants
GAAP
• Main U.S. accounting rule book
• Generally Accepted Accounting Principles
IASB
international accounting rule book
International Financial Reporting Standards(IFRS), the
• International Accounting Standards Board publishes the
FASB
standards.
• A privately funded organization, formulates accounting
• Financial Accounting Standards Board
SEC
markets.
• U.S. governmental agency that oversees U.S. financial
• Securities and Exchange Commission

20.

Public Sector
(SEC)
Private Sector
(CPA)
Private Sector
(FASB)
GAAP
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21.

4
Identify the different types
of business organizations
21
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22.

Proprietorship
Partnership
Corporation
Not-for-profit
Others
22
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23.

Proprietorship
1.Proprietorship
-owned by one individual (single owner)
-usually a small local business
Advantage:
-Unification of Ownership and Management:total undivided
authority
-Business Taxation: only tax on the owner’s personal income
-Government regulation: minimal
-Easiest to start
Disadvantage:
-no continuous life/transferability of ownership
-unlimited liability of owners.
-limited financial resources available to the business
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24.

Partnership
2.Partnership
-owned by two or more individuals
-each owner is called “partner”
-Partnership agreement
-small or medium-sized business,specifically,
professional organizations
Advantage:
-more brain power
-only tax on the each partner’s personal income
Disadvantage:
-unlimited liability
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25.

Corporation
3.Corporations
-ownership divided into shares of stock
-owned by shareholders/stockholders
Advantage:
-Separation of ownership and management
-large amounts of resources
-transferability of ownership relatively easy
-unlimited life
-limited liability of stockholders .
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26.

Corporation
3.Corporations
Disadvantage:
-separation of ownership and management
-extensive governmental regulation
-double taxation: corporate income tax and personal
income tax
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27.

27
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28.

S1-4: TYPES OF BUSINESS ORGANIZATION
Chloe Michaels plans on opening Chloe Michaels’
Floral Designs. She is considering the various types
of business organizations and wishes to organize
her business with unlimited life and limited liability
features. Additionally, Chloe wants the option to
raise additional equity easily in the future. Which
type of business organization will meet Chloe’s
needs best?
A corporation has all the requirements of Chloe’s
request. A corporation has an unlimited life,
shareholders have limited liability and additional
stock can be sold to raise additional equity.
28
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29.

6
Apply accounting concepts and
principles
29
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30.

Generally Accepted Accounting Principles
Guidelines that govern accounting
Based on a conceptual framework
Goals include:
Provide useful information for investment and lending
decisions
30
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31.

Faithful
Entity
Representation
Concept
Principle
Stable
GoingCost
Monetary
Concern
Unit
Principle
Concept
Concept
31
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32.

Entity Concept
• A business is separate from its owners
• All activities of an entity are kept and
recorded
separate from
the activities of
Faithful
Representation
Principle
owners and
other economic
entities.
• its
Accounting
information
is complete,
Cost
Principle
andhired
free from
material
error
• neutral,
accountant
by BMW.
stockholder
• Assets
are recorded
at historical
A of BMW
bought a car
using his money
purchase price
• land bought 10years ago at$1000, now
32
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33.

Going-Concern
• Assumption that business will remain in
operation for the foreseeable future
Stable Monetary Unit Concept
• In the U.S. amounts are recorded in
dollars
• The dollar is considered a stable unit of
measure
33
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34.

35.

THE BASIC ACCOUNTING EQUATION会计等式
Assets
resources
owned by
a business
Economic
Resources
=
Liabilities
Creditor’s claims
on assets
+
Equity
Owners’
claim
on assets
Claims to Economic
Resources
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36.

37.

Economic resources
Benefit the business in the future
Recorded at cost which is measurable
Examples:
Cash
Machine
Property, land
Furniture
Merchandise inventory
Accounts receivable
37
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38.

Liabilities
Debts payable mainly to
outsiders
Examples:
Bank loans
Mortgages
Accounts payable
wages payable
tax payable
38
Equity
Owner’s claims to the
assets of the business
Residual claim
Net worth or net asset
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39.

Assets
=
Liabilities
+
Equity
The owner’s capital refers to the
owner contribution
Owner’s Capital
profit
+Revenue
-Expense
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-Owner’s
Withdrawals 1-39
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40.

Amounts earned in business operation by
delivering goods, services to customers, rental of
property, lending of money or investment.
Sales revenue
Service revenue
Interest revenue
Dividend revenue
40
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41.

Outflows of assets or increasing liabilities in
operating business (delivering goods or services
to customers)
Occurred in the process of earning revenue
Store or rent expense
Salary expense
Advertising expense
Utilities expense
Interest expense
Property tax expense
41
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42.

Owner’s Withdrawals
Also called drawings
Payments of equity to the owner(usually in the
form of cash)
Is Owner’s Withdrawals an example of expense?
42
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43.

Equity (for a corporation)
For a corporation, equity is called Stockholders’ equity:
Stockholders’ equity= Paid-in capital + Retained earnings
Paid in Capital represents the total amount invested
by stockholders in a corporation.
43
Retained earnings represents
cumulative profits (or losses) retained
in the business over time.
=beginning retained earning +revenueexpense-dividend
Dividend is like owner’s withdrawals
for proprietorship.
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44.

E1-16: CHARACTERISTICS OF A CORPORATION,
ACCOUNTING CONCEPTS, AND USING THE ACCOUNTING
EQUATION
Select financial information for three corporations follows:
Liabilities
Equity
New Rock Gas
Assets
$?
$74,000
$24,000
$50,000
DJ Video Rentals
$75,000
$?
$43,000
$32,000
Corner Grocery
$100,000
$53,000
$?
$47,000
Requirements:
1.Compute the missing amount in the accounting equation
for each entity.
2.If revenue increases, how does it affect owner’s equity?
3.If expense increases, how does it affect owner’s equity?
4.If drawing
increases, how does it affect owner’s
44
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45.

Using the expanded accounting equation, solve for
the missing amount.
Assets
Liabilities
Owner's Capital
Owner's Withdrawal
Revenues
Expenses
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$ 71,288
2,260
?
14,420
53,085
28,675
1-45
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46.

47.

What is a business transaction?
An event that affects the financial position of
the business and must be recorded by
accountants
Can be measured reliably
In recording transactions:
The accounting equation balances before and
after each transaction
Every transaction impacts at least two items
Dual effect
47
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48.

TRANSACTION 1
November 2, 2014, Sheena Bright decide to start elearning agency company as a proprietorship named
Smart Touch Learning, Inc.
She invests $30,000 cash in exchange for $30,000 of
capital.
Assets
=
Liabilities
Bright, capital
Cash
(1) +30,000
+ Owner’s Equity
=
+30,000
1 accounts? types?
2 change?
3 balanced?
There is an increase in the asset Cash, $30,000, and an
equal increase in the owner’ equity, Bright ,capital,
$30,000.
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49.

TRANSACTION 2
Smart Touch purchases land by $20,000 cash.
Old Bal.
(2)
New Bal.
Cash
$30,000
Assets
=
+
=
Land
-20,000
+$20,000
$ 10,000 +
$20,000
Liabilities
=
+ Owner’s Equity
Bright,
capital
$30,000
$30,000
Asset Cash is decreased $20,000 and
the asset Land is increased $20,000.
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50.

TRANSACTION 3
Smart Touch purchases office supplies of $500 from a store.
Smart Touch Learning pay this $500 now.
This transaction is often referred to as a purchase on account or a credit purchase.
Assets
Old Bal.
(3)
New Bal.
Cash
+
$10,000
$10,000 +
Supplies
+$500
$500
=
+
+
Land
$2,000
$2,000
=
Liabilities
Accounts
Payable
=
+$500
$500
+ Owner’s Equity
Bright,
+
capital
$30,000
+
$30,000
The asset Office Supplies is increased $500 and the
liability Accounts Payable is increased by the same
amount.
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51.

TRANSACTION 4
Smart Touch receives $5,500 cash from customers for services
it has provided. It has earned service revenue and collect the
cash immediately.
Assets
Old Bal.
4)
Cash
+
$ 10,000
+5,500
New Bal.
$15,500 +
= Liabilities +
Owner’ Equity
Accounts
Br ight
Supplies
+ Land
= Payable + Captial
$500
$20,000
$500
$30,000
+
$500 + $20,000 =
$500
$30,000
Ser vice
Revenue
+5,500
$5,500
Cash is increased $5,500 and Service Revenue is increased
$5,500 because it is earned.
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52.

TRANSACTION 5
Smart Touch provides service for a customer and earned
service revenue . But the customer does not pay immediately
and promise to pay $3000 cash within one month.
Assets
Old Bal.
(6)
New Bal.
= Liabilities +
Owner’ Equity
Accounts
Accounts
Bright
Cash
+ Receivable + Supplies + Land
= Payable + Captial
$ 15,500
$500
$20,000
$500
$30,000
+3,000
+
$15,500 +
3,000 +
$500 + $20,000 =
$500
$30,000
Service
Revenue
$5,500
+3,000
$8,500
The asset Accounts Receivable应收账款 is increased
$3,000; and Owner’s Equity is increased $3,000 because of
revenue earned.
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53.

TRANSACTION 6
Smart Touch pays $3,200 cash for expenses:
$2,000 for office rent and $1,200 for employee salaries.
$35,700
Cash is decreased $3,200 and Owner’s equity is
decreased by $3,200 because of expense occurred.
.
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54.

TRANSACTION 7
Smart touch pays $300 in cash for supplies purchased in
transaction 3. It is called “payment on account”
Cash is decreased $300 and Accounts Payable is
decreased by $300.
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55.

TRANSACTION 8
Smart Touch collects $2,000 from the client for which Smart
Touch performed services in Transaction #5 .
It is called “collection on account”.
Cash is increased $2000 and Accounts
Receivable is decreased by the same amount.
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56.

TRANSACTION 9
Sheena Bright withdraws $5,000 cash from the business.
-Bright
Withdrawals
$14,000
$1,000
-$5,000
(9) -$5,000
$9,000
$200
$1,000
-$5,000
Cash is decreased $5,000 and Owner’s Equity is
decreased by the same amount because of drawings .
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57.

58.

59.

60.

On Mar.1, Ray and Barbara Neal invest $15,000 cash in Softbyte in exchange
for $15,000 of capital.
On Mar.5, Softbyte receives a utility bill for $1000 from the Daily Utilities
Company for utilities expense but postpones payment of
the bill until a later date.
On Mar.10, Softbyte pays its Daily Utilities bill of $1000 in cash.
On Mar.15, Softbyte provides services of $4,000 for customers.
A bill of $4,000 is sent to customers on account.
On Mar 22, the amount of $500 in cash is received from customers
who have previously been billed for services provided on Mar. 15.
.
60
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61.

Caren Smith opened a medical practice. During July, the first
month of operation, the business, titled Caren Smith, M.D.
experienced the following events:
1.Analyze the effects of these events on the accounting equation
of the medical practice of Caren Smith, M.D.
Assets
Date
Cash
Jul 6
$ 55,000
Bal
$ 55,000
9
(46,000)
Bal
$9,000
61
Medical
supplies
Land
Liabilities
Owner’s
Equity
Accounts
payable
Smith,
capital
$ 55,000
$
0
$
0
$
0
$ 55,000
$
0
$55,000
46,000
$
0
$46,000
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62.

Assets
Date
Cash
Jul 12
Bal
Medical
supplies
Land
$1,800
Liabilities
Owner’s
Equity
Accounts
payable
Smith,
capital
$1,800
$9,000
$1,800
$46,000
$1,800
$55,000
Bal
$9,000
$1,800
$46,000
$1,800
$55,000
15-31
8,000
Bal
$17,000
29
(1,600)
(900)
(100)
15
62
8,000
$1,800
$46,000
$1,800
$63,000
(1,600)
(900)
(100)
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63.

Assets
Date
Cash
Bal
$14,400
30
Medical
supplies
$1,800
Land
$46,000
(700)
Bal
$14,400
31
(1,100)
Bal
$13,300
63
Liabilities
$1,100
Owners Equity
Accounts
payable
$1,800
$60,400
(700)
$46,000
$1,100
$60,400
(1,100)
$1,100
$46,000
$ 0
$60,400
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64.

65.

After all transactions for the period are recorded, financial data
is summarized and that summary
data is used to generate the basic financial statements
-used by all companies as the primary means of communicating to stakeholders.
-usually prepared at the end of a fiscal year, season or month
-the final product of the whole accounting process
Income
Statement
Balance
Sheet
Statement of
Owner’s Equity
Statement of
Cash Flows
Statement of owner’s equity are prepared for
proprietorships and partnerships.
65
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66.

Income STATEMENT
SMART TOUCH LEARNING, INC.
Income Statement
For the Month Ended November 30, 2013
Revenues
Service revenue
Expenses
Rent expense
Salaries expense
Total expenses
Net income
$ 8,500
2,000
1,200
Reports the
success or failure
of the company’s
operations for a
period of time.
3,200
5,300
Net income of $5,300 will be added to Equity.
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67.

Statement of Owner’s Equity
SMART TOUCH LEARNING
Statement of Owner's Equity
Month Ended November 30, 2014
Bright Capital, November 1, 2014
Owner Contribution
Net income for the month
$
Owner Withdrawal
Bright Capital, November 30, 2014
Statement of Equity
$
Shows amounts and
causes of changes in
owner’s capital
during the period.
30,000
5,300
35,300
(5,000)
30,300
Month ended Dec31,2014
Bright capital, Dec1, 2014 30,300
owner contribution
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Net income
1-67
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68.

SMART TOUCH LEARNING
Balance Sheet
November 30, 2014
Assets
Cash
Accounts Receivable
Office Supplies
Land
Total assets
balance
1.equality
$
9,000
1,000
500
20,000
$ 30,500
2.leftover
Liabilities
Accounts Payable
$
200
Owner's Equity
Bright Capital, November 30, 2014
Total Liabilities and Owner's Equity
30,300
$ 30,500
Note that the Balance Sheet follows the Accounting Equation.
68
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69.

Answers the question of whether the business
generates enough cash to pay its bills.
The statement of cash flows reports the cash
receipts (positive amounts) and the cash
payments out (negative amounts) during a
period.
69
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70.

SMART TOUCH LEARNING
Statement of Cash Flows
Month Ended November 30, 2014
Cash Flows from Operating Activities:
Receipts:
Collections from customers
Payments:
For rent
$ (2,000)
For salaries
(1,200)
For office supplies
(300)
Net cash provided by operating activities
Cash Flows from Investing Activities:
Acquisition of land
$
(3,500)
4,000
(20,000)
Net cash used by investing activities
Cash Flows from Financing Activities:
Owner contribution
Owner withdrawals
(20,000)
30,000
(5,000)
Net cash provided by financing activities
Net increase in cash
Cash balance, November 1, 2014
Cash balance, November 30, 2014
7,500
25,000
$
9,000
9,000
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71.

Studio Photography is a priortership . The balance of Ansel, capital was
$45,000 at November 31, 2012. At December 31, 2012, the business’s
accounting records show these balances:
Insurance expense
$ 8,000 Accounts receivable
$ 8,000
Cash
37,000 Note payable
12,000
Accounts payable
7,000 Ansel, capital, Dec 31, 2012
Advertising expense
3,000 Salary expense
25,000
Service revenue
80,000 Equipment
50,000
Ansel, drawing
13,000
?
Prepare the following financial statements for Studio Photography, Inc. (a
proprietorship)for the month ended December 31, 2012:
a. Income statement
b. Statement of owner’s equity
c. Balance sheet
71
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72.

Studio Photography
Income Statement
For the Month Ended December 31, 2012
Revenue:
Service revenue
Expenses:
Salary expense
Insurance expense
Advertising expense
Total expenses
Net income
72
$ 80,000
$ 25,000
8,000
3,000
36,000
$ 44,000
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73.

Studio Photography
Statement of Owner’s Equity
For the Month Ended December 31, 2012
Ansel, capital, December 31, 2011
$ 45,000
Net income
44,000
Subtotal
$ 89,000
Less: Drawings
(13,000)
Ansel, capital, December 31, 2012
$ 76,000
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Studio Photography, Inc.
Balance Sheet
December 31, 2012
Assets
Cash
Liabilities
$37,000
Accounts payable
$ 7,000
Accounts receivable
8,000
Note payable
12,000
Equipment
50,000
Total liabilities
$19,000
Owner’s Equity
Total assets
74
$95,000
Ansel, capital
76,000
Total liabilities and
owner’s equity
$95,000
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75.

Accounting is the language of business. Financial
statements report a company’s activities in monetary
terms.
Different users—including individuals, business
owners, managers, investors, creditors, and tax
authorities—review a company’s financial statements
for different reasons. Each user’s goal will determine
which pieces of the financial statements he or she will
find most useful.
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Most U.S. businesses follow generally accepted
accounting principles (GAAP). If the company is
publicly traded, then it must also follow SEC
guidelines. If the company operates internationally,
then international financial reporting standards (IFRS)
will apply. The goal is that, eventually, all public U.S.
companies will report using IFRS rules.
There are five main forms of business organizations:
proprietorships, partnerships, corporations,
LLPs/LLCs, and not-for-profits. Each is unique in its
formation, ownership, life, and liability exposure.
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Proprietorships are formed when one person creates a
business. One person owns the proprietorship.
Although the proprietorship is a separate entity, it has
no continuous life, and the owner has unlimited
liability for the business’s debts. Proprietorships have
a more difficult time raising capital, but have the
advantage of reduced regulation and less taxes than
the corporate form of business.
The accounting concepts are the underlying
assumptions used when recording financial
information for a business. Think of the concepts like
rules of a game. You have to play by the rules.
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The accounting equation must always equal. That is,
Assets (what you own) must equal Liabilities (what
you owe) + Equity (net worth).
The accounting equation is Assets = Liabilities +
Equity. Every business transaction affects various
parts of the equation, but after each transaction is
recorded, the equation must ALWAYS balance
(equal).
Financial statements are prepared from the ending
balances of each account. Each financial statement
shows a different view of the company’s overall
results
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79.

Financial statements are prepared from the
transaction analyses (summary of events) reported
in each account (Exhibit 1-6) in the order shown in
Exhibit 1-7. No one financial statement shows
everything about a company. It is the financial
statements AND the relationships the statements
show that give users the overall picture for a
specific company.
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