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ACCT 2310 Accounting Principles I. Dr. Robert R. Oliva Professor and Chairperson Department of Accounting University of Arkansas at Little Rock. How to obtain class files:. Chapter 1: Introduction to Accounting and Business. - PowerPoint PPT Presentation


  • ACCT 2310 Accounting Principles IDr. Robert R. OlivaProfessor and ChairpersonDepartment of AccountingUniversity of Arkansas at Little Rock

  • How to obtain class files:

  • Chapter 1: Introduction to Accounting and Business

  • So you want to go into business?1. What kind of a legal entity is the business going to use?2. What business strategy will be implemented?3. What is the business going to sell?4. Who is going to be involved in the creation and continuing support of the business (stakeholders)?5. What kind of data will the stakeholders want and who will provide it?Recording and SummarizingFinancial StatementsFinancial Analysis

  • 1. What kind of a legal entity is the business going to use?

  • Types of Business EntitiesSole propietorships Pass-Through EntitiesPartnershipsS corporationsLLCsCorporations

  • Sole propietorshipOne ownerNo separate existenceBusiness MTR = individuals MTR

  • AdvantagesNo independent taxationLosses serve as tax shelter to other income

  • DisadvantagesNet profit taxed to owner when reported whether received or notOwner is not an employeeSelf-employment taxSame tax yearNo liability shield

  • Pass-Through EntitiesPartnershipsS CorporationsLLCs

  • Partnerships2 or more personsIndependent entity from ownerConduit/flow through: does not pay taxes

  • Advantages of a PartnershipEntity is tax exemptPartners able to withdraw and contribute affecting only adjusted basis Debt basis

  • DisadvantagesNet profit taxed to owner when reported whether received or notOwner is not an employeeSelf-employment tax

  • Types of partnershipGeneral LimitedFamily partnershipsPublicly traded partnership

  • Family PartnershipsReal or sham?Two kinds of partnerships based on what is the material income producing factorcapitalservicesIn service partnership, a partner family member must provide substantial servicesIn capital intensive partnerships: no as much of a problem

  • LLCs: Limited Liability CompaniesState created entityTaxed as a partnershipUnlike partnerships (and similar to corporations): members have limited liabilityUnlike limited partners: LLC members may participate in management

  • Advantages of LLCs (versus S)not limited to a specific number of membersnot limited to one class of stocknot limited to kinds of shareholdersNon-shareholder debt basis

  • Advantages of LLCs (v. LPs) No need for GP with personal liability All members have limited liability All members may participate in management

  • Advantages of LLCs (v. GPs)LLC members do not have personal liability

  • Advantages of LLCs (v. Sub Cs)LLCs may be taxed as pass through entitiesHas similar provision as IRC 351, without the need of control and can be used at anytime without concern for control [IRC 721].

  • Limited Liability PartnershipLike GP: severally and jointly liable for LLPs liabilities arising out of other than malpractice.From partnership to LLC: no tax consequences

  • S CorporationsHybridAdvantages/disadvantages Very similar to partnershipsVery similar to corporations

  • 2. What business strategy will be implemented?

  • What is a business strategy? (6)

  • Business StrategiesLow cost (7)Differentiation (8)Combination

  • DangersLow cost: Competition offering lower prices or using a differentiation strategy.Differentiation: Company may offer more than what the customer wants, followed by competition offering what the customer wants at a lower price.Company is so successful that everyone has bought the product. Followed by competition offering a new twist. Combination: Trying to be too many things to too many customers.

  • 3. What is the business going to sell?

  • The Value ChainTake inputs, apply a process, and end with a product or service to sell. Consider the process:ManufacturingRetailingService industryCapital intensiveService intensive.

  • 4. Who is going to be involved in the birth, life, and, hopefully not, death of the business?

    Who are the stakeholders?Internal stakeholders?External stakeholders?

  • Internal stakeholdersOwnersManagersEmployees

  • What do they have in common?

  • A need for reliable dataOwners?Managers?Employees?

  • External stakeholdersCustomersCreditorsGovernment

  • What do they have in common?

  • A need for reliable dataCustomers? Creditors? Government?

  • How are the business stakeholders going to be provided the much needed reliable data?

  • 5 Steps (11)-(13)

  • Who will implement?


  • Accounting as a ProfessionPrivate v. Public AccountingSpecialties: Financial: Report preparation under GAAPAuditing: Evaluation of the representationManagement: Data providers to managementCost: Determining product costsTax: Compliance and PlanningAIS: Designing computer financial systems to collect and secure data.International: Collecting, analyzing, and reporting data involving international tradeNFP: Reporting operations of not for profit organizationsSocial Accounting: Measuring social costs and benefits for (mostly) public and private actions.

  • Problem 1-2A: Chickadee TravelHow much money did it make last year?Prepare an income statement

  • Accounting Data: The need for standardized proceduresGAAP: Generally Accepted Accounting PrinciplesFrom research, to practice, to official pronoumcementFinancial Accounting Standards Board (FASB)Statements of Financial Accounting StandardsInterpretationsThus emphasis on principles and concepts

  • 4 Basic Accounting conceptsBusiness entityCostObjectivityUnit of measure

  • Business entity concept Defines what is the business being measured. If you own 4 different businesses, how do you keep track of profitability?

  • Cost concept At what price should your inputs be recorded?Assume you bought a building for your business, should it be recorded at the price paid or the appraised value?Need to use exchange price

  • Objectivity concept Accounting records and reports must be based on objective evidence.Using historical cost.

  • Unit of measure concept Record in dollars.

  • Exercise: We have a good idea about the cost of our car.But we have a harder time in determining its current value.

  • The Accounting Equation (18)Assets = Liabilities + Owners EquityEvery business transaction, e.g., one that affects a business financial condition, impact the Accounting equation.Every business transaction is an increase or decrease in the equation variables.But the equation is always balanced.

  • Recording and Summarizing Business Transactions Based on the Accounting Education

    Chris Clark and Net Solutions (p. 14)Jims Lawn Care

  • Chris Clark and Net Solutions: p. 14Transactions: Investment of cash: aBuying an asset with cash: bBuying an asset with credit: cIncome earning: dWithdrawal of cash: ePayment of a liability with cash: fRecording the use of supplies: gRecording the use of cash withdrawal: h

  • Jims Lawn Care: Consider the effect of May transactions onCashAccounts ReceivableSuppliesLawn EquipmentAccounts PayableJims Capital Account (Owners Equity)

  • Jims Capital Account (Owners Equity)Shows the effect of matching revenues and expenses during a discrete period of timeNet Income: increases owners equityNet Loss: decreases owners equityShows the effect of Investments: increase of Owners EquityWithdrawals: decrease in Owners Equity

  • Jim Lawns Care: May transactions$800 deposited bank account$1000 Sears lawnmower on credit$50 cash paid for supplies$700 IOU received from work performed$700 IOU paid in cash$1000 cash paid Sears for lawnmower$150 cash paid for advertisement $420 received for work performed$85 paid to assistant for work performed$600 IOU received for work performed$110 on gas on credit, bill received, pay in June$100 withdrawal from the business

  • Financial Statements (21)Income Statement (22)Statement of Owners Equity (23)Balance Sheet (24)Statement of Cash Flows (25)

  • Jims lawn Care: Financial Statements

  • Financial AnalysisRatio of Liabilities to Owners EquityWhich would you rather own?Company A:Assets: 100,000Liabilities: 95,000Owners Equity: 5,000Company B: Assets: 100,000Liabilities: 10,000Owners Equity: 90,000Which one has more risk?


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