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Accounting in the Information Age

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Living in the Information Age

Data

Communication

News

Commentary

Facts

Access
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Living in the Information Age

Data

Communication

Timeliness Independence

News

Commentary

Freedom-ofExpression

Facts

Access
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Influence of Accounting
is a Accounting system that

Identifies

Records information Relevant Reliable that is Communicates

Comparable
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to help users make better decisions.

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Business and Investment

Goal

Profit Products
Business

Sells Profit

Services
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Business Profit
Amounts earned from selling products or services

Sales - Expenses Profit

Costs incurred with sales

Amounts earned from sales less expenses incurred

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Nikes Profit Breakdown

Retail price Materials and labor Depreciation Rent Advertising and promotion Selling and administrative Interest U.S. taxes Other NIKE profit $ 100.00 (55.15) (6.98) (1.36) (11.83) (15.64) (0.63) (2.65) (1.58) $ 4.18

Exh. 1.1

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Return and Risk

The lower the risk of our investment, the lower is our expected return.
Amount of uncertainty about the return we expect to earn

Profit Investment

Return $

Risk ?

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Returns for Bonds with Different Risks

Exhibit 1.2
U.S. Treasury
Bond Types

Exh. 1.2

Bonds are written promises by organizations to repay amounts loaned to them with interest.

Low Risk Medium Risk High Risk 0% 2% 4% 6% 8% 10%

Different Risk Levels

Source: The Wall Street Journal

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Accounting Information
Factors of production are the means businesses use to make profit. Land and Building

Accounting Information
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Labor and Equipment

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Focus of Accounting
Recording Economic Events
Reporting and Analyzing Economic Events

Identifying Economic Events

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Setting Accounting Rules

Unions AICPA Lenders Politicians Others Investors

Securities and Exchange Commission

Accountants

Provide input to
Financial Accounting Standards Board

Help set
Generally Accepted Accounting Principles
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Accounting and Technology

Reduces time, effort and cost of recordkeeping. Improves clerical accuracy.

Technology
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Changes the way we store, process and summarize large masses of data.
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Forms of Organization

Exh. 1.4

Business

Sallys Grocery

Law Offices

Proprietorship
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Partnership

Corporation
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Forms of Organization

Exh. 1.4

Nonbusiness

Government
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Nonprofit

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Private

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Characteristics of Business Organizations

Exh. 1.6

Characteristics Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes

* Limited partnerships and limited liability partnerships specifically restrict certain partners liabilities.
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Corporation

Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it common stock (or capital stock).
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Nonbusiness Organization
Libraries Army Museums Hospitals

Colleges
Airports Cities

Schools
Prisons Shelters

Accounting for these organizations is usually a fundbased system, but the basic principles are similar to accounting for business organizations.
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Activities in Organizations
Financing Activities Owner financing (equity)
Nonowner financing (liabilities)

Financing

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Activities in Organizations
Investing Activities Buying resources (assets)
Selling resources (assets)

Investing

Financing

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Activities in Organizations
Operating activities
Aimed at selling products

Exh. 1.7

and services Result in sales and expenses

Investing

Financing

Operating
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Balance Sheet
A balance sheet reports on investing and financing. It lists amounts for assets, liabilities, and equity at a point in time. The relationship is reflected in the Balance Sheet equation:

Exh. 1.8

Assets = Liabilities + Equity

NIKE Balance Sheet (in millions) May 31, 2000 Assets $ 5,856.9 Liabilities Equity Total Liabilities & Equity $ 2,720.9 3,136.0 $5,856.9

Total Assets
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$5,856.9

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Income Statement
An income statement reports on operating activities. It lists sales (revenues), costs, and expenses over a period of time. The relationship is expressed:

Exh. 1.9

Net Income = Revenues - Expenses

NIKE Income Statement (in millions) For the Year Ended May 31, 2000 Revenues Costs and Expenses Net Income
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$ 8,995.1 8,416.0 $ 579.1

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Statement of Changes in Owners Equity

This statement reports changes in the owners claims on the business over a period of time. It includes changes due to income and any owner contributions and withdrawals (called dividends in a corporation).
NIKE Statement of Changes in Owners' Equity (in millions) For the Year Ended May 31, 2000 Equity, May 31, 1999 Add: Net Income Less: Dividend Other changes Equity, May 31, 2000 . $ 3,334.6 $ 579.1 (131.5) (646.2) $ 3,136.0

Exh. 1.10

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Statement of Cash Flows

The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.

Exh. 1.11

NIKE Statement of Cash Flows (in millions) For the Year Ended May 31, 2000 Cash from operating activities Cash from investing activities Cash from financing activites Net decrease in cash .
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759.9 (440.0) (263.7) 56.2

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Users of Accounting Information

Managerial Accounting is aimed at Internal Users Financial Accounting is aimed at External Users

Managers Officers

Internal Auditors
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Lenders Shareholders Government Labor Unions External Auditors Customers

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Internal Operating Functions

Research & Development Purchasing Human Resources Production Distribution Products and Services

Marketing Servicing
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Ethics and Social Responsibility

Ethics
Beliefs that separate right from wrong
Often coincide with laws

Accepted standards of good and bad behavior

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Guidelines for Ethical Decision Making

Analyze Options Make Ethical Decision

Identify Ethical Issues

Use personal Consider both ethics to the good and bad recognize ethical consequences issues. for all affected.
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Choose the best option after weighing all consequences.

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Social Responsibility

Donations to nonprofit organizations Programs to reduce pollution Programs to improve worker and consumer safety Paid time off for workers
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Exh. 1.15

Selected Opportunities in Accounting

Financial

Managerial

Taxation
Preparation Planning Regulatory Investigations Consulting

Statement General Accounting Preparation Cost Accounting Statement Analysis Budgeting Auditing Internal Auditing Regulatory Management Consulting Consulting Planning Criminal Investigation

Accountingrelated
Lenders Consultants Analysts Traders Managers Directors Underwriters Planners Appraisers FBI Investigators

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Accounting Specialization

Certified Public Accountant (CPA) Certified Management Accountant (CMA) Certified Internal Auditor (CIA) Chartered Financial Analyst (CFA)

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Return on Investment (ROI) = Net income Avg total assets

ROI is viewed as an indicator of operating efficiency.

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End of Chapter 1

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