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3. 1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the importance of business ethics and
the basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
Objectives
After studying this
chapter, you should
be able to:
4. 7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
Objectives
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to
analyze the ability of a business to withstand
poor business conditions.
5. Manufacturing Business
Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
6. Merchandising Business
Product
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video
retailer
Types of Businesses
8. There are three types of
business organizations
Proprietorship
Partnership
Corporation
9. A proprietorship
is owned by one
individual.
Advantages
• Ease in organizing
• Low cost of
organizing
Disadvantage
• Limited source of
financial resources
• Unlimited liability
Joe’s
10. A partnership is
owned by two or
more individuals.
Advantages
• More financial
resources than a
proprietorship.
• Additional
management skills.
Disadvantage
• Unlimited liability.
Joe and Marty’s
11. A corporation is
organized under state
or federal statutes as a
separate legal entity.
Advantage
• The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
• Double taxation.
J & M, Inc.
12. Business Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.
13. Business Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Wal-Mart
Southwest Airlines
14. Business Strategies
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
15. Value Chain of a Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
Inputs
Business
Processes
Products or
Services
Customer
Value
16. A business stakeholder is a person or
entity having an interest in the
economic performance of the business.
Business Stakeholders
20. Business Ethics
1. Avoid small ethical lapses.
2. Focus on your long-term
reputation.
3. You may expect to suffer
adverse personal
consequences for holding
to an ethical position.
Sound
Principles that
form the
foundation for
ethical
behavior
21. Profession of Accounting
Accountants employed by a business firm or
a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
23. The business entity concept
limits the economic data in
the accounting system to
data related directly to the
activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
24. The objectivity concept
requires that the accounting
records and reports be based
upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
28. 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.
29. On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.
30. a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
Chris Clark, Capital
25,000 Investment
by Chris
Clark
Cash
25,000
a.
Assets Owner’s Equity
=
=
31. b. NetSolutions exchanged $20,000 for land.
Chris Clark, Capital
25,000
Cash + Land
25,000
Bal.
Assets Owner’s Equity
=
=
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
32. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owner’s
Liabilities + Equity
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
33. d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500
d. + 7,500 + 7,500
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
Owner’s
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000
Fees
earned
=
=
34. e. – 3,650 –2,125
– 800
– 450
– 275
Wages
Rent
Util.
Misc.
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owner’s
Liabilities + Equity
=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850
35. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
f. NetSolutions paid $950 to
creditors during the month.
Owner’s
Liabilities + Equity
=
Bal. 8,850 1,350 20,000 1,350 28,850
f. – 950 – 950
=
Bal. 7,900 1,350 20,000 400 28,850
36. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owner’s
Liabilities + Equity
=
Bal. 7,900 1,350 20,000 400 28,850
g. – 800 – 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies
expense
37. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Owner’s
Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050
h. –2,000 –2,000
Bal. 5,900 550 20,000 400 26,050
With-
drawal
=
=
40. Financial Statements
• Income statement—A summary of the revenue
and expenses for a specific period of time.
• Statement of owner’s equity—A summary of
the changes in the owner’s equity that have
occurred during a specific period of time.
• Balance sheet—A list of the assets, liabilities,
and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the
cash receipts and disbursements for a specific
period of time.
41. Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00
Wages expense
800 00
Supplies expense
450 00
Utilities expense
275 00
Miscellaneous expense
Total operating expenses 1 135 00
NetSolutions
Income Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00
To the statement
of owner’s equity
42. Chris Clark, capital, November 1, 2005 $ 0
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2005
Investment on November 1 $25 000 00
Net income for November 3 050 00
$28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
Chris Clark, capital, November 30, 2005 $26 050 00
From the income
statement
To the
balance sheet
43. Assets Liabilities
NetSolutions
Balance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owner’s equity $26 450 00
From the
statement of
owner’s equity
This balance sheet presented
using the account form
44. When the balance sheet displays
the liabilities and owner’s equity
below the assets, the report form is
being used.
45. Cash flows from operating activities:
Cash received from customers $ 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Should match Cash on the balance sheet
)
46. Statement of Cash Flows
Cash Flows from Operating Activities—This section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing Activities—This section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing Activities—This section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
47. Ratio of liabilities
to owner’s equity
=
Total Liabilities
Total owner’s equity (or total
stockholders’ equity)
The ratio of liabilities to owner’s equity
allows owners like Chris Clark to analyze
the firm’s ability to withstand poor
business conditions.
Tools for Financial
Analysis and Interpretation
48. Ratio of
liabilities to
owner’s equity
=
$400
$26,050
Tools for Financial
Analysis and Interpretation
= 0.015
Ratio of
liabilities to
owner’s equity
