Introduction To Business and Accounting

CHAPTER 1
INTRODUCTION TO
BUSINESS AND
ACCOUNTING
1
Chapter Overview
 Why is it necessary to have an understanding
of business before trying to learn about
accounting?
 What is the role of accounting information

within the business environment?
 What is private enterprise, and what forms

does it take?
 What types of regulations do companies

face?
2
Chapter Overview
 What activities contribute to the operations of a

company?
 Are there any guidelines for reporting to

company managers?
 Are there any guidelines in the United States for

reporting to people outside of a company?
 What role does ethics play in the business

environment?
3
Reflection Will I be sufficiently informed
What
to will
make I do
Will
good I understand
business the role
when I of
decisions, graduate
accounting
both in business so
in my personal
from college?
that I have gained
life and financial
at work?
literacy to achieve
my goals?
4
Private Enterprise
and Capitalism
 Businesses in the United States and most
other countries operate in an economic system
called private enterprise.
 In this system, individuals (people like you and

me) own companies (businesses) that produce
and sell services and or goods for a profit.
 These companies generally fall into three

categories: service, merchandising, and
manufacturing.
5
Service Companies
 Service companies perform services or

activities that benefit individuals or business
customers.
 Companies like A Great Cut, Midas Muffler

Shops, Merry Maids, UPS, and many
professional practices such as accounting,
law, architecture, and medicine, are all
service companies.
6
Merchandising Companies
 Merchandising companies purchase goods

(sometimes referred to as merchandise or
products) for resale to their customers.
 Some merchandising companies are

wholesalers, meaning they sell their goods to
retailers or other commercial users.
Examples include plumbing supply stores,
electrical suppliers, or beverage distributors.
7
Merchandising Companies
 Some merchandising companies are retailers,

meaning they sell their goods directly to
consumers like you and me.
 Most of the businesses you come in contact

with are probably retailers, such as JC
Penney, Toys ’R’ Us, amazon.com, and
Circuit City.
8
Manufacturing Companies
 Manufacturing companies make their

products and then sell these products to their
customers.
 Unlike merchandisers who purchase ready-to-

sell merchandise, a manufacturer has no
goods to sell until they are manufactured.
 Examples of manufacturing companies

include General Motors, Black & Decker, and
Dell Corporation.
9
Entrepreneurship
 Entrepreneurship is a combination of three
factors:
 A company owner’s idea for a

business.
 The willingness of the company’s
owner to take a risk in starting a
business.
 Abilities of the company’s owners and
employees to use capital and to
produce and sell goods or services.
10
Sources of Capital
 Entrepreneurs can raise capital in two ways:
 Investing his/her own money into the

business for a greater future return or
finding other investors to do the same.
 Borrowing money from a bank or other

lending sources (creditors). Since
borrowings have specific repayment
schedules, they creates more risk for the
business.
11
Business Organizations
 Business organizations or companies are a

significant aspect of the U.S. and world
economies.
 A company may be organized as a sole

proprietorship, partnership, or a corporation.
 Each of these business forms has its

advantages and disadvantages.
12
Business Organizations
Exhibit 1-3
13
Regulatory Environment
 Many different laws and authorities regulate

the business environment, covering issues
from consumer protection, environmental
protection, employee safety, hiring practices,
and taxes.
 Companies must comply with different sets

of regulations depending on the nature of
their business.
14
Integrated Accounting
System
 An integrated accounting system is a means by which
accounting information about a company’s activities is
identified, measured, recorded, and summarized so that it can
be communicated to users.
 External users include the many diverse groups of people

outside the company.
 Internal users include the managers and employees within the

company.
15
Managerial Accounting
Information
 Management accounting information helps

managers plan, operate, and evaluate a
company’s activities.
 This information has an internal focus and is free

from the restrictions of regulatory bodies interested
in how companies report to external users.
16
Financial Accounting
Information
 Financial accounting information is organized for the

use of interested people outside of the company.
 This information has an external focus and must

follow the guidelines of generally accepted
accounting principles, standards for preparing
financial accounting information.
17
Basic Management
Accounting Reports
 Budgets: A financial plan that quantifies managers’
plans and the impact on the company’s operating
activities and financial position.
 Cost Analysis: The process of determining and
evaluating costs of specific products or activities.
 Manufacturing Cost Reports: Cost reports that help
monitor and evaluate a company's operations to
determine if its plans are being achieved.
18
Generally Accepted
Accounting Principles (GAAP)
 Accepted principles, procedures, and practices
that companies use for financial accounting and
reporting in the United States.
 These principles, or “rules” must be followed in the
external reports of companies that sell stock to the
public in the United States and by many other
companies as well.
 GAAP covers a wide range of issues from how to
account for inventory, buildings, income taxes, as
well as specialized industry guidelines.
19
Basic Financial Statements
 Financial statements are accounting reports used
to summarize and communicate financial
information about a company.
 A company’s integrated accounting system
produces three major statements: the income
statement, the balance sheet, and the cash flow
statement, as well as a supporting statement
called the changes in owners’ equity.
 Each financial statement summarizes specific
information and serves specific purposes.
20
Income Statement
21
Balance Sheet
22
Cash Flow Statement
23
Ethics in Business
and Accounting
 A company’s financial statements are
N meant to convey information about the
R O
EN company to internal and external users
in order to facilitate decision-making.
 If the information in the financial
statements does not convey a realistic
picture, the decisions based on this
information can have disastrous
consequences.
24
Code of Ethics
 The American Institute of Certified Public
Accountants (AICPA) has a professional code of
ethics that guides the professional work of CPAs.
 The Institute of Management Accountants (IMA)
and the International Federation of Accountants
(IFAC) have a code similar to the AICPA.
 Many companies have codes or statements of
company and business ethics to guide the actions
and behaviors of their employees.
25

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CHAPTER 1

 What is the role of accounting information

 What is private enterprise, and what forms

 What types of regulations do companies

 What activities contribute to the operations of a

 Are there any guidelines for reporting to

 Are there any guidelines in the United States for

 What role does ethics play in the business

 In this system, individuals (people like you and

 These companies generally fall into three

 Service companies perform services or

 Companies like A Great Cut, Midas Muffler

 Merchandising companies purchase goods

 Some merchandising companies are

 Some merchandising companies are retailers,

 Most of the businesses you come in contact

 Manufacturing companies make their

 Unlike merchandisers who purchase ready-to-

 Examples of manufacturing companies

 A company owner’s idea for a

 Entrepreneurs can raise capital in two ways:

 Investing his/her own money into the

 Borrowing money from a bank or other

 Business organizations or companies are a

 A company may be organized as a sole

 Each of these business forms has its

 Many different laws and authorities regulate

 Companies must comply with different sets

 External users include the many diverse groups of people

 Internal users include the managers and employees within the

 Management accounting information helps

 This information has an internal focus and is free

 Financial accounting information is organized for the

 This information has an external focus and must

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