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Ch01

This document provides an overview of key accounting concepts covered in Chapter 1, including: 1. Accounting identifies, records, and communicates economic events of an organization to interested users like managers, investors, and creditors. 2. Accounting data is used internally by management and externally by regulators, investors, labor unions, and others. Ethics are fundamental as accounting relies on honest and fair financial reporting. 3. Generally accepted accounting principles and standards aim to develop a set of uniform accounting rules. The cost and monetary unit assumptions provide a basis for recording economic activity.

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Chapter 1-1
CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition Chapter 1-2
Study Objectives Study Objectives 1. Explain what accounting is. 2. Identify the users and uses of accounting. 3. Understand why ethics is a fundamental business concept. 4. Explain generally accepted accounting principles and the cost principle. 5. Explain the monetary unit assumption and the economic entity assumption. 6. State the accounting equation, and define assets, liabilities, and owner’s equity. 7. Analyze the effects of business transactions on the accounting equation. 8. Understand the four financial statements and how they are prepared. Chapter 1-3
Accounting in Action Accounting in Action Using the Using the The Building The Building The Basic The Basic What is What is Basic Basic Financial Financial Blocks of Blocks of Accounting Accounting Accounting? Accounting? Accounting Accounting Statements Statements Accounting Accounting Equation Equation Equation Equation Three Ethics in Assets Transaction Income activities financial Liabilities analysis statement Who uses reporting Summary of Owner’s Owner’s accounting Generally equity transactions equity data accepted statement accounting Balance principles sheet Assumptions Statement of cash flows Chapter 1-4
What is Accounting? What is Accounting? The purpose of accounting is to: (1) identify, record, and communicate the identify record economic events of an (2) organization to (3) interested users. Chapter 1-5 LO 1 Explain what accounting is.
What is Accounting? What is Accounting? Illustration 1-1 Three Activities Accounting process The accounting process includes the bookkeeping function. Chapter 1-6 LO 1 Explain what accounting is.
Who Uses Accounting Data? Who Uses Accounting Data? Internal Users Management IRS Human Investors Resources There are two broad groups of users of Labor financial information: Unions Finance internal users and external users. Creditors Marketing SEC Customers External Users Chapter 1-7 LO 2 Identify the users and uses of accounting.
Who Uses Accounting Data? Who Uses Accounting Data? Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? Investors 3. Do we need to borrow in the near future? Management 4. Is cash sufficient to pay dividends to the stockholders? Finance 5. What price for our product will maximize net income? Marketing 6. Will the company be able to pay its short-term debts? Creditors Chapter 1-8 LO 2 Identify the users and uses of accounting.
Who Uses Accounting Data? Who Uses Accounting Data? Discussion Question Q1. “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain. See notes page for discussion Chapter 1-9 LO 3 Understand why ethics is a fundamental business concept .
The Building Blocks of Accounting The Building Blocks of Accounting Ethics In Financial Reporting Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics. Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passedSarbanes-Oxley Act of 2002. Effective financial reporting depends on sound ethical behavior. Chapter 1-10 LO 3 Understand why ethics is a fundamental business concept .
Ethics Ethics Review Question Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Chapter 1-11 LO 3 Understand why ethics is a fundamental business concept .
Ethics Ethics Review Question Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Chapter 1-12 LO 3 Understand why ethics is a fundamental business concept .
The Building Blocks of Accounting The Building Blocks of Accounting Financial Statements Various users Balance Sheet need financial Income Statement Statement of Owner’s Equity information Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop Generally Accepted a set of standards that Accounting are generally accepted and universally practiced. Principles (GAAP) Chapter 1-13 LO 4 Explain generally accepted accounting principles and the cost principle.
The Building Blocks of Accounting The Building Blocks of Accounting Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) http://www.sec.gov/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ International Accounting Standards Board (IASB) http://www.iasb.org/ Chapter 1-14 LO 4 Explain generally accepted accounting principles and the cost principle.
The Building Blocks of Accounting The Building Blocks of Accounting Cost Principle (Historical) – dictates that companies record assets at their cost. Issues: Reported at cost when purchased and also over the time the asset is held. Cost easily verified, whereas market value is often subjective. Fair value information may be more useful. Chapter 1-15 LO 4 Explain generally accepted accounting principles and the cost principle.
Assumptions Assumptions Monetary Unit Assumption – include in the accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship. Forms of Partnership. Business Ownership Corporation. Chapter LO 5 Explain the monetary unit assumption 1-16 and the economic entity assumption.
Forms of Business Ownership Forms of Business Ownership Proprietorship Partnership Corporation Generally owned Owned by two or Ownership by one person. more persons. divided into Often small shares of stock Often retail and service-type service-type Separate legal businesses businesses entity organized Owner receives under state Generally any profits, corporation law unlimited suffers any personal liability Limited liability losses, and is Partnership personally liable agreement for all debts. Chapter LO 5 Explain the monetary unit assumption 1-17 and the economic entity assumption.
Assumptions Assumptions Review Question Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Chapter LO 5 Explain the monetary unit assumption 1-18 and the economic entity assumption.
Assumptions Assumptions Review Question Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Chapter LO 5 Explain the monetary unit assumption 1-19 and the economic entity assumption.
Forms of Business Ownership Forms of Business Ownership Review Question A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Chapter LO 5 Explain the monetary unit assumption 1-20 and the economic entity assumption.
Forms of Business Ownership Forms of Business Ownership Review Question A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Chapter LO 5 Explain the monetary unit assumption 1-21 and the economic entity assumption.
The Basic Accounting Equation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims. Chapter LO 6 State the accounting equation, and define 1-22 assets, liabilities, and owner’s equity.
The Basic Accounting Equation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Chapter LO 6 State the accounting equation, and define 1-23 assets, liabilities, and owner’s equity.
The Basic Accounting Equation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Liabilities Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. Chapter LO 6 State the accounting equation, and define 1-24 assets, liabilities, and owner’s equity.
The Basic Accounting Equation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Owner’s Equity Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Chapter LO 6 State the accounting equation, and define 1-25 assets, liabilities, and owner’s equity.
Owners’ Equity Owners’ Equity Illustration 1-6 Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent. Chapter LO 6 State the accounting equation, and define 1-26 assets, liabilities, and owner’s equity.
Owners’ Equity Owners’ Equity Illustration 1-6 Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc. Chapter LO 6 State the accounting equation, and define 1-27 assets, liabilities, and owner’s equity.
Using The Basic Accounting Equation Using The Basic Accounting Equation Transactions are a business’s economic events recorded by accountants. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation. Chapter LO 7 Analyze the effects of business transactions 1-28 on the accounting equation.
Transactions (Question?) Transactions (Question?) Q1-15: Are the following events recorded in the accounting records? Owner Supplies are An employee withdraws Event purchased is hired. cash for on account. personal use. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Record/ Don’t Record Chapter LO 7 Analyze the effects of business transactions 1-29 on the accounting equation.
Transactions Transactions Discussion Question Q18. In February 2008, Paula King invested an additional $10,000 in her business, King’s Pharmacy, which is organized as a proprietorship. King’s accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not? See notes page for discussion Chapter LO 7 Analyze the effects of business transactions 1-30 on the accounting equation.
Transactions (Problem) Transactions (Problem) P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. 1. Invested $10,000 cash to start the repair shop. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment Chapter LO 7 Analyze the effects of business transactions 1-31 on the accounting equation.
Transactions (Problem) Transactions (Problem) 2. Purchased equipment for $5,000 cash. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 Chapter LO 7 Analyze the effects of business transactions 1-32 on the accounting equation.
Transactions (Problem) Transactions (Problem) 3. Paid $400 cash for May office rent. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense Chapter LO 7 Analyze the effects of business transactions 1-33 on the accounting equation.
Transactions (Problem) Transactions (Problem) 4. Received $5,100 from customers for repair service. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue Chapter LO 7 Analyze the effects of business transactions 1-34 on the accounting equation.
Transactions (Problem) Transactions (Problem) 5. Withdrew $1,000 cash for personal use. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings Chapter LO 7 Analyze the effects of business transactions 1-35 on the accounting equation.
Transactions (Problem) Transactions (Problem) 6. Paid part-time employee salaries of $2,000. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense Chapter LO 7 Analyze the effects of business transactions 1-36 on the accounting equation.
Transactions (Problem) Transactions (Problem) 7. Incurred $250 of advertising costs, on account. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense Chapter LO 7 Analyze the effects of business transactions 1-37 on the accounting equation.
Transactions (Problem) Transactions (Problem) 8. Provided $750 of repair services on account. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense 8. +750 +750 Revenue Chapter LO 7 Analyze the effects of business transactions 1-38 on the accounting equation.
Transactions (Problem) Transactions (Problem) 9. Collected $120 cash for services previously billed. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense 8. +750 +750 Revenue 9. +120 -120 6,820 + 630 + 5,000 = 250 + 12,200 Chapter LO 7 Analyze the effects of business transactions 1-39 on the accounting equation.
Financial Statements Financial Statements Companies prepare four financial statements from Companies prepare four financial statements from the summarized accounting data: the summarized accounting data: Owner’s Statement Income Balance Equity of Cash Statement Sheet Statement Flows Chapter 1-40 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Review Question Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses. Chapter 1-41 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Income Statement Barone’s Repair Shop Reports the revenues Income Statement For the Month Ended May 31, 2008 and expenses for a Revenues: specific period of time. Service revenue $ 5,850 Expenses: Net income – revenues Salary expense 2,000 exceed expenses. Rent expense 400 Advertising expense 250 Total expenses 2,650 Net loss – expenses Net income $ 3,200 exceed revenues. Chapter 1-42 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Owner’s Equity Income Statement Statement Barone’s Repair Shop Barone’s Repair Shop Income Statement Owner's Equity Statement For the Month Ended May 31, 2008 For the Month Ended May 31, 2008 Revenues: Barone's, Capital May 1 $ - Service revenue $ 5,850 Add: Investment 10,000 Expenses: Net income 3,200 Salary expense 2,000 13,200 Rent expense 400 Less: Drawings 1,000 Advertising expense 250 Barone's, Capital May 31 $12,200 Total expenses 2,650 Net income $ 3,200 Net income is needed to determine the ending balance in owner’s equity. Chapter 1-43 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Owner’s Equity Statement Statement indicates the Barone’s Repair Shop Owner's Equity Statement reasons why owner’s For the Month Ended May 31, 2008 equity has increased or Barone's, Capital May 1 $ - decreased during the Add: Investment 10,000 period. Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 $12,200 Chapter 1-44 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Owners’ Equity Balance Sheet Statement Barone’s Repair Shop Barone’s Repair Shop Balance Sheet Owner's Equity Statement May 31, 2008 For the Month Ended May 31, 2008 Assets Cash $ 6,820 Barone's, Capital May 1 $ - Accounts receivable 630 Add: Investment 10,000 Equipment 5,000 Net income 3,200 Total assets $12,450 13,200 Liabilities Less: Drawings 1,000 Accounts payable $ 250 Barone's, Capital May 31 $ 12,200 Owner's Equity Barone's, capital 12,200 Total liab. & equity $12,450 The ending balance in owner’s equity is needed in preparing the balance sheet Chapter 1-45 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Balance Sheet Barone’s Repair Shop Reports the assets, Balance Sheet liabilities, and owner’s May 31, 2008 equity at a specific date. Assets Cash $ 6,820 Accounts receivable 630 Assets listed at the top, Equipment 5,000 followed by liabilities Total assets $12,450 and owner’s equity. Liabilities Accounts payable $ 250 Owner's Equity Total assets must equal Barone's, capital 12,200 total liabilities and Total liab. & equity $12,450 owner’s equity. Chapter 1-46 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Statement of Cash Flows Balance Sheet Barone’s Repair Shop Statement of Cash Flows Barone’s Repair Shop For the Month Ended May 31, 2008 Balance Sheet Cash flow from operating activities May 31, 2008 Cash receipts from revenues $ 5,220 Assets Cash paid for expenses (2,400) Cash $ 6,820 Cash provided by operations 2,820 Accounts receivable 630 Cash flow from investing activitites Equipment 5,000 Purchase of equipment (5,000) Total assets $12,450 Cash flow from financing activities Liabilities Investment by owners 10,000 Accounts payable $ 250 Drawings by owners (1,000) Owner's Equity Cash provided by financing 9,000 Barone's, capital 12,200 Net increase in cash 6,820 Total liab. & equity $12,450 Cash balance, May 1 - Cash balance, May 31 $ 6,820 Chapter 1-47 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Statement of Cash Flows Information for a Barone’s Repair Shop specific period of time. Statement of Cash Flows For the Month Ended May 31, 2008 Answers the following: Cash flow from operating activities Cash receipts from customers $ 5,220 1. Where did cash come Cash paid for expenses (2,400) from? Cash provided by operations 2,820 Cash flow from investing activities 2. What was cash used Purchase of equipment (5,000) Cash flow from financing activities for? Investment by owners 10,000 Drawings by owners (1,000) 3. What was the change Cash provided by financing 9,000 in the cash balance? Net increase in cash 6,820 Cash balance, May 1 - Cash balance, May 31 $ 6,820 Chapter 1-48 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Review Question Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. Chapter 1-49 LO 8 Understand the four financial statements and how they are prepared.
Financial Statements Financial Statements Discussion Question Q19. “A company’s net income appears directly on the income statement and the owner’s equity statement, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain. See notes page for discussion Chapter 1-50 LO 8 Understand the four financial statements and how they are prepared.
Accounting Career Opportunities Accounting Career Opportunities Public Accounting Careers in auditing and taxation serving the general public. Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation. Opportunities in Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities. Forensic Accounting Careers with insurance companies and law offices to conduct investigations into theft and fraud. Chapter 1-51 LO 9 Explain the career opportunities in accounting.
Copyright Copyright Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Chapter 1-52

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Ch01

  • 1.
  • 2.
    CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition Chapter 1-2
  • 3.
    Study Objectives Study Objectives 1. Explain what accounting is. 2. Identify the users and uses of accounting. 3. Understand why ethics is a fundamental business concept. 4. Explain generally accepted accounting principles and the cost principle. 5. Explain the monetary unit assumption and the economic entity assumption. 6. State the accounting equation, and define assets, liabilities, and owner’s equity. 7. Analyze the effects of business transactions on the accounting equation. 8. Understand the four financial statements and how they are prepared. Chapter 1-3
  • 4.
    Accounting in Action Accounting in Action Using the Using the The Building The Building The Basic The Basic What is What is Basic Basic Financial Financial Blocks of Blocks of Accounting Accounting Accounting? Accounting? Accounting Accounting Statements Statements Accounting Accounting Equation Equation Equation Equation Three Ethics in Assets Transaction Income activities financial Liabilities analysis statement Who uses reporting Summary of Owner’s Owner’s accounting Generally equity transactions equity data accepted statement accounting Balance principles sheet Assumptions Statement of cash flows Chapter 1-4
  • 5.
    What is Accounting? What is Accounting? The purpose of accounting is to: (1) identify, record, and communicate the identify record economic events of an (2) organization to (3) interested users. Chapter 1-5 LO 1 Explain what accounting is.
  • 6.
    What is Accounting? What is Accounting? Illustration 1-1 Three Activities Accounting process The accounting process includes the bookkeeping function. Chapter 1-6 LO 1 Explain what accounting is.
  • 7.
    Who Uses AccountingData? Who Uses Accounting Data? Internal Users Management IRS Human Investors Resources There are two broad groups of users of Labor financial information: Unions Finance internal users and external users. Creditors Marketing SEC Customers External Users Chapter 1-7 LO 2 Identify the users and uses of accounting.
  • 8.
    Who Uses AccountingData? Who Uses Accounting Data? Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? Investors 3. Do we need to borrow in the near future? Management 4. Is cash sufficient to pay dividends to the stockholders? Finance 5. What price for our product will maximize net income? Marketing 6. Will the company be able to pay its short-term debts? Creditors Chapter 1-8 LO 2 Identify the users and uses of accounting.
  • 9.
    Who Uses AccountingData? Who Uses Accounting Data? Discussion Question Q1. “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain. See notes page for discussion Chapter 1-9 LO 3 Understand why ethics is a fundamental business concept .
  • 10.
    The Building Blocksof Accounting The Building Blocks of Accounting Ethics In Financial Reporting Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics. Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passedSarbanes-Oxley Act of 2002. Effective financial reporting depends on sound ethical behavior. Chapter 1-10 LO 3 Understand why ethics is a fundamental business concept .
  • 11.
    Ethics Ethics Review Question Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Chapter 1-11 LO 3 Understand why ethics is a fundamental business concept .
  • 12.
    Ethics Ethics Review Question Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Chapter 1-12 LO 3 Understand why ethics is a fundamental business concept .
  • 13.
    The Building Blocksof Accounting The Building Blocks of Accounting Financial Statements Various users Balance Sheet need financial Income Statement Statement of Owner’s Equity information Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop Generally Accepted a set of standards that Accounting are generally accepted and universally practiced. Principles (GAAP) Chapter 1-13 LO 4 Explain generally accepted accounting principles and the cost principle.
  • 14.
    The Building Blocksof Accounting The Building Blocks of Accounting Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) http://www.sec.gov/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ International Accounting Standards Board (IASB) http://www.iasb.org/ Chapter 1-14 LO 4 Explain generally accepted accounting principles and the cost principle.
  • 15.
    The Building Blocksof Accounting The Building Blocks of Accounting Cost Principle (Historical) – dictates that companies record assets at their cost. Issues: Reported at cost when purchased and also over the time the asset is held. Cost easily verified, whereas market value is often subjective. Fair value information may be more useful. Chapter 1-15 LO 4 Explain generally accepted accounting principles and the cost principle.
  • 16.
    Assumptions Assumptions Monetary Unit Assumption – include in the accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship. Forms of Partnership. Business Ownership Corporation. Chapter LO 5 Explain the monetary unit assumption 1-16 and the economic entity assumption.
  • 17.
    Forms of BusinessOwnership Forms of Business Ownership Proprietorship Partnership Corporation Generally owned Owned by two or Ownership by one person. more persons. divided into Often small shares of stock Often retail and service-type service-type Separate legal businesses businesses entity organized Owner receives under state Generally any profits, corporation law unlimited suffers any personal liability Limited liability losses, and is Partnership personally liable agreement for all debts. Chapter LO 5 Explain the monetary unit assumption 1-17 and the economic entity assumption.
  • 18.
    Assumptions Assumptions Review Question Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Chapter LO 5 Explain the monetary unit assumption 1-18 and the economic entity assumption.
  • 19.
    Assumptions Assumptions Review Question Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Chapter LO 5 Explain the monetary unit assumption 1-19 and the economic entity assumption.
  • 20.
    Forms of BusinessOwnership Forms of Business Ownership Review Question A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Chapter LO 5 Explain the monetary unit assumption 1-20 and the economic entity assumption.
  • 21.
    Forms of BusinessOwnership Forms of Business Ownership Review Question A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Chapter LO 5 Explain the monetary unit assumption 1-21 and the economic entity assumption.
  • 22.
    The Basic AccountingEquation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims. Chapter LO 6 State the accounting equation, and define 1-22 assets, liabilities, and owner’s equity.
  • 23.
    The Basic AccountingEquation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Chapter LO 6 State the accounting equation, and define 1-23 assets, liabilities, and owner’s equity.
  • 24.
    The Basic AccountingEquation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Liabilities Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. Chapter LO 6 State the accounting equation, and define 1-24 assets, liabilities, and owner’s equity.
  • 25.
    The Basic AccountingEquation The Basic Accounting Equation Owner’s Assets = Liabilities + Equity Provides the underlying framework for recording and summarizing economic events. Owner’s Equity Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Chapter LO 6 State the accounting equation, and define 1-25 assets, liabilities, and owner’s equity.
  • 26.
    Owners’ Equity Owners’ Equity Illustration 1-6 Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent. Chapter LO 6 State the accounting equation, and define 1-26 assets, liabilities, and owner’s equity.
  • 27.
    Owners’ Equity Owners’ Equity Illustration 1-6 Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc. Chapter LO 6 State the accounting equation, and define 1-27 assets, liabilities, and owner’s equity.
  • 28.
    Using The BasicAccounting Equation Using The Basic Accounting Equation Transactions are a business’s economic events recorded by accountants. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation. Chapter LO 7 Analyze the effects of business transactions 1-28 on the accounting equation.
  • 29.
    Transactions (Question?) Transactions (Question?) Q1-15: Are the following events recorded in the accounting records? Owner Supplies are An employee withdraws Event purchased is hired. cash for on account. personal use. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Record/ Don’t Record Chapter LO 7 Analyze the effects of business transactions 1-29 on the accounting equation.
  • 30.
    Transactions Transactions Discussion Question Q18. In February 2008, Paula King invested an additional $10,000 in her business, King’s Pharmacy, which is organized as a proprietorship. King’s accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not? See notes page for discussion Chapter LO 7 Analyze the effects of business transactions 1-30 on the accounting equation.
  • 31.
    Transactions (Problem) Transactions (Problem) P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. 1. Invested $10,000 cash to start the repair shop. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment Chapter LO 7 Analyze the effects of business transactions 1-31 on the accounting equation.
  • 32.
    Transactions (Problem) Transactions (Problem) 2. Purchased equipment for $5,000 cash. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 Chapter LO 7 Analyze the effects of business transactions 1-32 on the accounting equation.
  • 33.
    Transactions (Problem) Transactions (Problem) 3. Paid $400 cash for May office rent. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense Chapter LO 7 Analyze the effects of business transactions 1-33 on the accounting equation.
  • 34.
    Transactions (Problem) Transactions (Problem) 4. Received $5,100 from customers for repair service. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue Chapter LO 7 Analyze the effects of business transactions 1-34 on the accounting equation.
  • 35.
    Transactions (Problem) Transactions (Problem) 5. Withdrew $1,000 cash for personal use. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings Chapter LO 7 Analyze the effects of business transactions 1-35 on the accounting equation.
  • 36.
    Transactions (Problem) Transactions (Problem) 6. Paid part-time employee salaries of $2,000. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense Chapter LO 7 Analyze the effects of business transactions 1-36 on the accounting equation.
  • 37.
    Transactions (Problem) Transactions (Problem) 7. Incurred $250 of advertising costs, on account. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense Chapter LO 7 Analyze the effects of business transactions 1-37 on the accounting equation.
  • 38.
    Transactions (Problem) Transactions (Problem) 8. Provided $750 of repair services on account. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense 8. +750 +750 Revenue Chapter LO 7 Analyze the effects of business transactions 1-38 on the accounting equation.
  • 39.
    Transactions (Problem) Transactions (Problem) 9. Collected $120 cash for services previously billed. Assets Liabilities Equity Accounts Accounts Barone, Cash + Receivable + Equipment = Payable + Capital 1. +10,000 +10,000 Investment 2. -5,000 +5,000 3. -400 -400 Expense 4. +5,100 +5,100 Revenue 5. -1,000 -1,000 Drawings 6. -2,000 -2,000 Expense 7. +250 -250 Expense 8. +750 +750 Revenue 9. +120 -120 6,820 + 630 + 5,000 = 250 + 12,200 Chapter LO 7 Analyze the effects of business transactions 1-39 on the accounting equation.
  • 40.
    Financial Statements Financial Statements Companies prepare four financial statements from Companies prepare four financial statements from the summarized accounting data: the summarized accounting data: Owner’s Statement Income Balance Equity of Cash Statement Sheet Statement Flows Chapter 1-40 LO 8 Understand the four financial statements and how they are prepared.
  • 41.
    Financial Statements Financial Statements Review Question Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses. Chapter 1-41 LO 8 Understand the four financial statements and how they are prepared.
  • 42.
    Financial Statements Financial Statements Income Statement Barone’s Repair Shop Reports the revenues Income Statement For the Month Ended May 31, 2008 and expenses for a Revenues: specific period of time. Service revenue $ 5,850 Expenses: Net income – revenues Salary expense 2,000 exceed expenses. Rent expense 400 Advertising expense 250 Total expenses 2,650 Net loss – expenses Net income $ 3,200 exceed revenues. Chapter 1-42 LO 8 Understand the four financial statements and how they are prepared.
  • 43.
    Financial Statements Financial Statements Owner’s Equity Income Statement Statement Barone’s Repair Shop Barone’s Repair Shop Income Statement Owner's Equity Statement For the Month Ended May 31, 2008 For the Month Ended May 31, 2008 Revenues: Barone's, Capital May 1 $ - Service revenue $ 5,850 Add: Investment 10,000 Expenses: Net income 3,200 Salary expense 2,000 13,200 Rent expense 400 Less: Drawings 1,000 Advertising expense 250 Barone's, Capital May 31 $12,200 Total expenses 2,650 Net income $ 3,200 Net income is needed to determine the ending balance in owner’s equity. Chapter 1-43 LO 8 Understand the four financial statements and how they are prepared.
  • 44.
    Financial Statements Financial Statements Owner’s Equity Statement Statement indicates the Barone’s Repair Shop Owner's Equity Statement reasons why owner’s For the Month Ended May 31, 2008 equity has increased or Barone's, Capital May 1 $ - decreased during the Add: Investment 10,000 period. Net income 3,200 13,200 Less: Drawings 1,000 Barone's, Capital May 31 $12,200 Chapter 1-44 LO 8 Understand the four financial statements and how they are prepared.
  • 45.
    Financial Statements Financial Statements Owners’ Equity Balance Sheet Statement Barone’s Repair Shop Barone’s Repair Shop Balance Sheet Owner's Equity Statement May 31, 2008 For the Month Ended May 31, 2008 Assets Cash $ 6,820 Barone's, Capital May 1 $ - Accounts receivable 630 Add: Investment 10,000 Equipment 5,000 Net income 3,200 Total assets $12,450 13,200 Liabilities Less: Drawings 1,000 Accounts payable $ 250 Barone's, Capital May 31 $ 12,200 Owner's Equity Barone's, capital 12,200 Total liab. & equity $12,450 The ending balance in owner’s equity is needed in preparing the balance sheet Chapter 1-45 LO 8 Understand the four financial statements and how they are prepared.
  • 46.
    Financial Statements Financial Statements Balance Sheet Barone’s Repair Shop Reports the assets, Balance Sheet liabilities, and owner’s May 31, 2008 equity at a specific date. Assets Cash $ 6,820 Accounts receivable 630 Assets listed at the top, Equipment 5,000 followed by liabilities Total assets $12,450 and owner’s equity. Liabilities Accounts payable $ 250 Owner's Equity Total assets must equal Barone's, capital 12,200 total liabilities and Total liab. & equity $12,450 owner’s equity. Chapter 1-46 LO 8 Understand the four financial statements and how they are prepared.
  • 47.
    Financial Statements Financial Statements Statement of Cash Flows Balance Sheet Barone’s Repair Shop Statement of Cash Flows Barone’s Repair Shop For the Month Ended May 31, 2008 Balance Sheet Cash flow from operating activities May 31, 2008 Cash receipts from revenues $ 5,220 Assets Cash paid for expenses (2,400) Cash $ 6,820 Cash provided by operations 2,820 Accounts receivable 630 Cash flow from investing activitites Equipment 5,000 Purchase of equipment (5,000) Total assets $12,450 Cash flow from financing activities Liabilities Investment by owners 10,000 Accounts payable $ 250 Drawings by owners (1,000) Owner's Equity Cash provided by financing 9,000 Barone's, capital 12,200 Net increase in cash 6,820 Total liab. & equity $12,450 Cash balance, May 1 - Cash balance, May 31 $ 6,820 Chapter 1-47 LO 8 Understand the four financial statements and how they are prepared.
  • 48.
    Financial Statements Financial Statements Statement of Cash Flows Information for a Barone’s Repair Shop specific period of time. Statement of Cash Flows For the Month Ended May 31, 2008 Answers the following: Cash flow from operating activities Cash receipts from customers $ 5,220 1. Where did cash come Cash paid for expenses (2,400) from? Cash provided by operations 2,820 Cash flow from investing activities 2. What was cash used Purchase of equipment (5,000) Cash flow from financing activities for? Investment by owners 10,000 Drawings by owners (1,000) 3. What was the change Cash provided by financing 9,000 in the cash balance? Net increase in cash 6,820 Cash balance, May 1 - Cash balance, May 31 $ 6,820 Chapter 1-48 LO 8 Understand the four financial statements and how they are prepared.
  • 49.
    Financial Statements Financial Statements Review Question Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owner's equity statement. d. Statement of cash flows. Chapter 1-49 LO 8 Understand the four financial statements and how they are prepared.
  • 50.
    Financial Statements Financial Statements Discussion Question Q19. “A company’s net income appears directly on the income statement and the owner’s equity statement, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain. See notes page for discussion Chapter 1-50 LO 8 Understand the four financial statements and how they are prepared.
  • 51.
    Accounting Career Opportunities Accounting Career Opportunities Public Accounting Careers in auditing and taxation serving the general public. Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation. Opportunities in Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities. Forensic Accounting Careers with insurance companies and law offices to conduct investigations into theft and fraud. Chapter 1-51 LO 9 Explain the career opportunities in accounting.
  • 52.
    Copyright Copyright Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Chapter 1-52

Editor's Notes

  • #4 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
  • #5 Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • #10 Question 1 (textbook) Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.
  • #18 Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • #31 Question 18 (Chapter 1) No, this treatment is not proper. While the transactions does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transactions is simply an additional investment made by the owner in the business.
  • #51 Question 19 (textbook) Y e s . Net income does appear on the income statement — it is the result of subtracting expenses from revenues. In addition, net income appears in the statement of owner’s equity—it is shown as an addition to the beginning-of-period capital. Indirectly, the net income of a company is also included in the balance sheet. It is included in the capital account which appears in the owner’s equity section of the balance sheet.