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Chapter 1(accounting) kimmel kieso

This document provides an overview of key concepts in accounting. It begins by listing the learning objectives, which include explaining what accounting is, identifying users and uses of accounting, understanding ethics and GAAP, and analyzing how business transactions affect the accounting equation. It then defines accounting as identifying, recording, and communicating the economic events of an organization. The three main activities are identifying, measuring, and communicating financial information. It discusses the users of accounting data, both internal and external. It emphasizes the importance of ethics in financial reporting. It also introduces the accounting equation, defines its components, and provides examples of how business transactions affect the equation. Finally, it briefly introduces the four main financial statements and GAAP.

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1-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College
1-2 1 Learning Objectives After studying this chapter, you should be able to: [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. [5] Explain the monetary unit assumption and the economic entity assumption. [6] State the accounting equation, and define its components. [7] Analyze the effects of business transactions on the accounting equation. [8] Understand the four financial statements and how they are prepared. Accounting in Action
1-3 Preview of Chapter 1 Accounting Principles Eleventh Edition Weygandt Kimmel Kieso
1-4 LO 1 Explain what accounting is. Purpose of accounting is to: 1. identify, 2. record, and 3. communicate the economic events of an organization to interested users. What is Accounting?
1-5 Three Activities LO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. What is Accounting?
1-6 LO 2 Internal Users Illustration 1-2 Questions that internal users ask Who Uses Accounting Data
1-7
1-8 LO 2 External Users Illustration 1-3 Questions that external users ask Who Uses Accounting Data
1-9 Ethics In Financial Reporting United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.  Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.  Congress passed Sarbanes-Oxley Act of (SOX) 2002.  Effective financial reporting depends on sound ethical behavior. The Building Blocks of Accounting LO 3 Understand why ethics is a fundamental business concept.
1-10 Illustration 1-4 Steps in analyzing ethics cases and situations LO 3 Understand why ethics is a fundamental business concept. The Building Blocks of Accounting Ethics In Financial Reporting
1-11
1-12 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. Question LO 3 Understand why ethics is a fundamental business concept. Ethics in Financial Reporting
1-13 Various users need financial information Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Generally AcceptedGenerally Accepted AccountingAccounting Principles (GAAP)Principles (GAAP) Generally AcceptedGenerally Accepted AccountingAccounting Principles (GAAP)Principles (GAAP) LO 4 Explain generally accepted accounting principles. Generally Accepted Accounting Principles
1-14 Generally Accepted Accounting Principles (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes. Standard-setting bodies: ► Securities and Exchange Commission (SEC) ► Financial Accounting Standards Board (FASB) ► International Accounting Standards Board (IASB) Generally Accepted Accounting Principles LO 4 Explain generally accepted accounting principles.
1-15 Historical Cost Principle (or cost principle) dictates that companies record assets at their cost. Fair Value Principle states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Generally Accepted Accounting Principles Measurement Principles LO 4 Explain generally accepted accounting principles. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation.
1-16
1-17 Monetary Unit Assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. LO 5 Explain the monetary unit assumption and the economic entity assumption. Generally Accepted Accounting Principles Assumptions 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.
1-18 Proprietorship Partnership Corporation  Owned by two or more persons.  Often retail and service-type businesses  Generally unlimited personal liability  Partnership agreement  Ownership divided into shares of stock  Separate legal entity organized under state corporation law  Limited liability  Generally owned by one person.  Often small service-type businesses  Owner receives any profits, suffers any losses, and is personally liable for all debts. LO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership
1-19 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. LO 5 Explain the monetary unit assumption and the economic entity assumption. Generally Accepted Accounting Principles
1-20 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. LO 5 Explain the monetary unit assumption and the economic entity assumption. Question Generally Accepted Accounting Principles
1-21
1-22 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. AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= + LO 6 State the accounting equation, and define its components. The Basic Accounting Equation
1-23 AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= +  Resources a business owns.  Provide future services or benefits.  Cash, Supplies, Equipment, etc. LO 6 State the accounting equation, and define its components. Assets The Basic Accounting Equation
1-24  Claims against assets (debts and obligations).  Creditors - party to whom money is owed.  Accounts payable, Notes payable, etc. LO 6 State the accounting equation, and define its components. Liabilities The Basic Accounting Equation AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= +
1-25  Ownership claim on total assets.  Referred to as residual equity.  Investment by owners and revenues (+)  Drawings and expenses (-). LO 6 State the accounting equation, and define its components. Owner’s Equity The Basic Accounting Equation AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= +
1-26 ♦ Investments by owner are the assets the owner puts into the business. ♦ 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. Illustration 1-6 LO 6 State the accounting equation, and define its components. Owner’s Equity Increases in Owner’s Equity
1-27 ♦ Drawings An owner may withdraw cash or other assets for personal use. ♦ 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. Illustration 1-6 LO 6 State the accounting equation, and define its components. Owner’s Equity Decreases in Owner’s Equity
1-28 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. LO 7 Analyze the effects of business transactions on the accounting equation. Using the Accounting Equation
1-29 Illustration: Are the following events recorded in the accounting records? Event Purchase computer Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Pay rent Record/ Don’t Record LO 7 Analyze the effects of business transactions on the accounting equation. Using the Accounting Equation Discuss guided trip options with customer
1-30 Transaction (1): Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2014, Ray Neal invests $15,000 cash in the business. LO 7 Transaction Analysis
1-31 Transaction (2): Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash. LO 7 Transaction Analysis
1-32 Transaction (3): Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account. LO 7 Transaction Analysis
1-33 Transaction (4): Softbyte receives $1,200 cash from customers for programming services it has provided. LO 7 Transaction Analysis
1-34 Transaction (5): Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date. LO 7 Transaction Analysis
1-35 Transaction (6): Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 7 Transaction Analysis
1-36 Transaction (7): Softbyte pays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200. LO 7 Transaction Analysis
1-37 Transaction (8): Softbyte pays its $250 Daily News bill in cash. LO 7 Transaction Analysis
1-38 Transaction (9): Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)]. LO 7 Transaction Analysis
1-39 Transaction (10): Ray Neal withdraws $1,300 in cash from the business for his personal use. LO 7 Transaction Analysis Illustration 1-8 Tabular summary of Softbyte transactions
1-40 Companies prepare four financial statements : Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement LO 8 Understand the four financial statements and how they are prepared. Financial Statements
1-41 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. LO 8 Understand the four financial statements and how they are prepared. Financial Statements Question
1-42 Net income is needed to determine the ending balance in owner’s equity. Illustration 1-9 Financial statements and their interrelationships Financial Statements LO 8
1-43 The ending balance in owner’s equity is needed in preparing the balance sheetFinancial Statements Illustration 1-9 LO 8
1-44 The balance sheet and income statement are needed to prepare statement of cash flows.Financial Statements Illustration 1-9 LO 8
1-45 LO 8 Understand the four financial statements and how they are prepared.  Reports the revenues and expenses for a specific period of time.  Lists revenues first, followed by expenses.  Shows net income (or net loss). Financial Statements Income Statement
1-46 LO 8 Understand the four financial statements and how they are prepared.  Reports the changes in owner’s equity for a specific period of time.  The time period is the same as that covered by the income statement. Financial Statements Owner’s Equity Statement
1-47 LO 8 Understand the four financial statements and how they are prepared.  Reports the assets, liabilities, and owner’s equity at a specific date.  Lists assets at the top, followed by liabilities and owner’s equity.  Total assets must equal total liabilities and owner’s equity.  Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year- end). Financial Statements Balance Sheet
1-48 LO 8 Understand the four financial statements and how they are prepared.  Information for a specific period of time.  Answers the following: 1. Where did cash come from? 2. What was cash used for? 3. What was the change in the cash balance? Financial Statements Statement of Cash Flows
1-49
1-50 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. LO 8 Understand the four financial statements and how they are prepared. Financial Statements Question
1-51 APPENDIX 1A Accounting Career Opportunities Forensic Accounting Uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities. Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation. LO 9 Explain the career opportunities in accounting. Public Accounting Careers in auditing, taxation, and management consulting serving the general public.
1-52 LO 10 Describe the impact of international accounting standards on U.S. financial reporting. Key Points  International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB).  Recent events in the global capital markets have underscored the importance of financial disclosure and transparency not only in the United States but in markets around the world. As a result, many are examining which accounting and financial disclosure rules should be followed. As indicated in the graphic on the next page, much of the world has voted for the standards issued by the IASB. Over 115 countries require or permit use of IFRS. A Look at IFRS
1-53 LO 10 Describe the impact of international accounting standards on U.S. financial reporting. Key Points  U.S standards, referred to as generally accepted accounting principles (GAAP), are developed by the Financial Accounting Standards Board (FASB). The fact that there are differences between what is in this textbook (which is based on U.S. standards) and IFRS should not be surprising because the FASB and IASB have responded to different user needs. In some countries, the primary users of financial statements are private investors; in others, the primary users are tax authorities or central government planners. It appears that the United States and the international standard-setting environment are primarily driven by meeting the needs of investors and creditors. A Look at IFRS
1-54 LO 10 Describe the impact of international accounting standards on U.S. financial reporting. Key Points  The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is a continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation. Debate about international companies (non-U.S.) adopting SOX-type standards centers on whether the benefits exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive.  The textbook mentions a number of ethics violations, such as Enron, WorldCom, and AIG. These problems have also occurred internationally, for example, at Satyam Computer Services (India), Parmalat (Italy), and Royal Ahold (the Netherlands). A Look at IFRS
1-55 LO 10 Describe the impact of international accounting standards on U.S. financial reporting. Key Points  IFRS tends to be simpler in its accounting and disclosure requirements; some people say more “principles-based.” GAAP is more detailed; some people say it is more “rules-based.” This difference in approach has resulted in a debate about the merits of “principles-based” versus “rules-based” standards.  U.S. regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with GAAP. A Look at IFRS
1-56 LO 10 Describe the impact of international accounting standards on U.S. financial reporting. Key Points  The three most common forms of business organization, proprietorships, partnerships, and corporations, are also found in countries that use IFRS. Because the choice of business organization is influenced by factors such as legal environment, tax rates and regulations, and degree of entrepreneurism, the relative use of each form will vary across countries.  The conceptual framework that underlies IFRS is very similar to that used to develop GAAP. The basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues (referred to as income), and expenses, are simplified versions of the official definitions provided by the FASB. A Look at IFRS
1-57 Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. In fact, at one time the IASB stated that no new major standards would be issued for a period of time. The major reason for this policy was to provide companies the time to translate and implement IFRS into practice, as much has happened in a very short period of time. Consider, for example, that as a result of a joint project on the conceptual framework, the definitions of the most fundamental elements (assets, liabilities, equity, revenues, and expenses) may actually change. However, whether the IASB adopts internal control provisions similar to those in SOX remains to be seen. Looking into the Future A Look at IFRS LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
1-58 Which of the following is not a reason why a single set of high-quality international accounting standards would be beneficial? a) Mergers and acquisition activity. b) Financial markets. c) Multinational corporations. d) GAAP is widely considered to be a superior reporting system. A Look at IFRS IFRS Practice LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
1-59 The Sarbanes-Oxley Act determines: a) international tax regulations. b) internal control standards as enforced by the IASB. c) internal control standards of U.S. publicly traded companies. d) U.S. tax regulations. A Look at IFRS IFRS Practice LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
1-60 IFRS is considered to be more: a) principles-based and less rules-based than GAAP. b) rules-based and less principles-based than GAAP. c) detailed than GAAP. d) None of the above. IFRS Practice A Look at IFRS LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
1-61 “Copyright © 2013 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.” Copyright

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Chapter 1(accounting) kimmel kieso

  • 1.
    1-1 Prepared by Coby Harmon Universityof California, Santa Barbara Westmont College
  • 2.
    1-2 1 Learning Objectives After studyingthis chapter, you should be able to: [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. [5] Explain the monetary unit assumption and the economic entity assumption. [6] State the accounting equation, and define its components. [7] Analyze the effects of business transactions on the accounting equation. [8] Understand the four financial statements and how they are prepared. Accounting in Action
  • 3.
    1-3 Preview of Chapter1 Accounting Principles Eleventh Edition Weygandt Kimmel Kieso
  • 4.
    1-4 LO 1Explain what accounting is. Purpose of accounting is to: 1. identify, 2. record, and 3. communicate the economic events of an organization to interested users. What is Accounting?
  • 5.
    1-5 Three Activities LO 1Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. What is Accounting?
  • 6.
    1-6 LO 2 Internal Users Illustration1-2 Questions that internal users ask Who Uses Accounting Data
  • 7.
  • 8.
    1-8 LO 2 External Users Illustration1-3 Questions that external users ask Who Uses Accounting Data
  • 9.
    1-9 Ethics In FinancialReporting United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.  Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.  Congress passed Sarbanes-Oxley Act of (SOX) 2002.  Effective financial reporting depends on sound ethical behavior. The Building Blocks of Accounting LO 3 Understand why ethics is a fundamental business concept.
  • 10.
    1-10 Illustration 1-4 Steps inanalyzing ethics cases and situations LO 3 Understand why ethics is a fundamental business concept. The Building Blocks of Accounting Ethics In Financial Reporting
  • 11.
  • 12.
    1-12 Ethics are thestandards 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. Question LO 3 Understand why ethics is a fundamental business concept. Ethics in Financial Reporting
  • 13.
    1-13 Various users need financial information Varioususers need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Generally AcceptedGenerally Accepted AccountingAccounting Principles (GAAP)Principles (GAAP) Generally AcceptedGenerally Accepted AccountingAccounting Principles (GAAP)Principles (GAAP) LO 4 Explain generally accepted accounting principles. Generally Accepted Accounting Principles
  • 14.
    1-14 Generally Accepted AccountingPrinciples (GAAP) - A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes. Standard-setting bodies: ► Securities and Exchange Commission (SEC) ► Financial Accounting Standards Board (FASB) ► International Accounting Standards Board (IASB) Generally Accepted Accounting Principles LO 4 Explain generally accepted accounting principles.
  • 15.
    1-15 Historical Cost Principle(or cost principle) dictates that companies record assets at their cost. Fair Value Principle states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Generally Accepted Accounting Principles Measurement Principles LO 4 Explain generally accepted accounting principles. Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation.
  • 16.
  • 17.
    1-17 Monetary Unit Assumptionrequires that companies include in the accounting records only transaction data that can be expressed in terms of money. LO 5 Explain the monetary unit assumption and the economic entity assumption. Generally Accepted Accounting Principles Assumptions 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.
  • 18.
    1-18 Proprietorship Partnership Corporation Owned by two or more persons.  Often retail and service-type businesses  Generally unlimited personal liability  Partnership agreement  Ownership divided into shares of stock  Separate legal entity organized under state corporation law  Limited liability  Generally owned by one person.  Often small service-type businesses  Owner receives any profits, suffers any losses, and is personally liable for all debts. LO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership
  • 19.
    1-19 Question Combining the activitiesof Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. LO 5 Explain the monetary unit assumption and the economic entity assumption. Generally Accepted Accounting Principles
  • 20.
    1-20 A business organizedas 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. LO 5 Explain the monetary unit assumption and the economic entity assumption. Question Generally Accepted Accounting Principles
  • 21.
  • 22.
    1-22 Provides the underlyingframework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims. AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= + LO 6 State the accounting equation, and define its components. The Basic Accounting Equation
  • 23.
    1-23 AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= + Resources a business owns.  Provide future services or benefits.  Cash, Supplies, Equipment, etc. LO 6 State the accounting equation, and define its components. Assets The Basic Accounting Equation
  • 24.
    1-24  Claims againstassets (debts and obligations).  Creditors - party to whom money is owed.  Accounts payable, Notes payable, etc. LO 6 State the accounting equation, and define its components. Liabilities The Basic Accounting Equation AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= +
  • 25.
    1-25  Ownership claimon total assets.  Referred to as residual equity.  Investment by owners and revenues (+)  Drawings and expenses (-). LO 6 State the accounting equation, and define its components. Owner’s Equity The Basic Accounting Equation AssetsAssets LiabilitiesLiabilities Owner’s Equity Owner’s Equity= +
  • 26.
    1-26 ♦ Investments byowner are the assets the owner puts into the business. ♦ 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. Illustration 1-6 LO 6 State the accounting equation, and define its components. Owner’s Equity Increases in Owner’s Equity
  • 27.
    1-27 ♦ Drawings Anowner may withdraw cash or other assets for personal use. ♦ 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. Illustration 1-6 LO 6 State the accounting equation, and define its components. Owner’s Equity Decreases in Owner’s Equity
  • 28.
    1-28 Transactions are abusiness’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. LO 7 Analyze the effects of business transactions on the accounting equation. Using the Accounting Equation
  • 29.
    1-29 Illustration: Are thefollowing events recorded in the accounting records? Event Purchase computer Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? Pay rent Record/ Don’t Record LO 7 Analyze the effects of business transactions on the accounting equation. Using the Accounting Equation Discuss guided trip options with customer
  • 30.
    1-30 Transaction (1): RayNeal decides to open a computer programming service which he names Softbyte. On September 1, 2014, Ray Neal invests $15,000 cash in the business. LO 7 Transaction Analysis
  • 31.
    1-31 Transaction (2): Purchaseof Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash. LO 7 Transaction Analysis
  • 32.
    1-32 Transaction (3): Softbytepurchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months. The purchase is made on account. LO 7 Transaction Analysis
  • 33.
    1-33 Transaction (4): Softbytereceives $1,200 cash from customers for programming services it has provided. LO 7 Transaction Analysis
  • 34.
    1-34 Transaction (5): Softbytereceives a bill for $250 from the Daily News for advertising but postpones payment until a later date. LO 7 Transaction Analysis
  • 35.
    1-35 Transaction (6): Softbyteprovides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. LO 7 Transaction Analysis
  • 36.
    1-36 Transaction (7): Softbytepays the following expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200. LO 7 Transaction Analysis
  • 37.
    1-37 Transaction (8): Softbytepays its $250 Daily News bill in cash. LO 7 Transaction Analysis
  • 38.
    1-38 Transaction (9): Softbytereceives $600 in cash from customers who had been billed for services [in Transaction (6)]. LO 7 Transaction Analysis
  • 39.
    1-39 Transaction (10): RayNeal withdraws $1,300 in cash from the business for his personal use. LO 7 Transaction Analysis Illustration 1-8 Tabular summary of Softbyte transactions
  • 40.
    1-40 Companies prepare fourfinancial statements : Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement LO 8 Understand the four financial statements and how they are prepared. Financial Statements
  • 41.
    1-41 Net income willresult during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses. LO 8 Understand the four financial statements and how they are prepared. Financial Statements Question
  • 42.
    1-42 Net income isneeded to determine the ending balance in owner’s equity. Illustration 1-9 Financial statements and their interrelationships Financial Statements LO 8
  • 43.
    1-43 The ending balancein owner’s equity is needed in preparing the balance sheetFinancial Statements Illustration 1-9 LO 8
  • 44.
    1-44 The balance sheetand income statement are needed to prepare statement of cash flows.Financial Statements Illustration 1-9 LO 8
  • 45.
    1-45 LO 8Understand the four financial statements and how they are prepared.  Reports the revenues and expenses for a specific period of time.  Lists revenues first, followed by expenses.  Shows net income (or net loss). Financial Statements Income Statement
  • 46.
    1-46 LO 8Understand the four financial statements and how they are prepared.  Reports the changes in owner’s equity for a specific period of time.  The time period is the same as that covered by the income statement. Financial Statements Owner’s Equity Statement
  • 47.
    1-47 LO 8Understand the four financial statements and how they are prepared.  Reports the assets, liabilities, and owner’s equity at a specific date.  Lists assets at the top, followed by liabilities and owner’s equity.  Total assets must equal total liabilities and owner’s equity.  Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year- end). Financial Statements Balance Sheet
  • 48.
    1-48 LO 8Understand the four financial statements and how they are prepared.  Information for a specific period of time.  Answers the following: 1. Where did cash come from? 2. What was cash used for? 3. What was the change in the cash balance? Financial Statements Statement of Cash Flows
  • 49.
  • 50.
    1-50 Which of thefollowing 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. LO 8 Understand the four financial statements and how they are prepared. Financial Statements Question
  • 51.
    1-51 APPENDIX 1A AccountingCareer Opportunities Forensic Accounting Uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities. Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation. LO 9 Explain the career opportunities in accounting. Public Accounting Careers in auditing, taxation, and management consulting serving the general public.
  • 52.
    1-52 LO 10 Describethe impact of international accounting standards on U.S. financial reporting. Key Points  International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB).  Recent events in the global capital markets have underscored the importance of financial disclosure and transparency not only in the United States but in markets around the world. As a result, many are examining which accounting and financial disclosure rules should be followed. As indicated in the graphic on the next page, much of the world has voted for the standards issued by the IASB. Over 115 countries require or permit use of IFRS. A Look at IFRS
  • 53.
    1-53 LO 10 Describethe impact of international accounting standards on U.S. financial reporting. Key Points  U.S standards, referred to as generally accepted accounting principles (GAAP), are developed by the Financial Accounting Standards Board (FASB). The fact that there are differences between what is in this textbook (which is based on U.S. standards) and IFRS should not be surprising because the FASB and IASB have responded to different user needs. In some countries, the primary users of financial statements are private investors; in others, the primary users are tax authorities or central government planners. It appears that the United States and the international standard-setting environment are primarily driven by meeting the needs of investors and creditors. A Look at IFRS
  • 54.
    1-54 LO 10 Describethe impact of international accounting standards on U.S. financial reporting. Key Points  The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is a continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation. Debate about international companies (non-U.S.) adopting SOX-type standards centers on whether the benefits exceed the costs. The concern is that the higher costs of SOX compliance are making the U.S. securities markets less competitive.  The textbook mentions a number of ethics violations, such as Enron, WorldCom, and AIG. These problems have also occurred internationally, for example, at Satyam Computer Services (India), Parmalat (Italy), and Royal Ahold (the Netherlands). A Look at IFRS
  • 55.
    1-55 LO 10 Describethe impact of international accounting standards on U.S. financial reporting. Key Points  IFRS tends to be simpler in its accounting and disclosure requirements; some people say more “principles-based.” GAAP is more detailed; some people say it is more “rules-based.” This difference in approach has resulted in a debate about the merits of “principles-based” versus “rules-based” standards.  U.S. regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with GAAP. A Look at IFRS
  • 56.
    1-56 LO 10 Describethe impact of international accounting standards on U.S. financial reporting. Key Points  The three most common forms of business organization, proprietorships, partnerships, and corporations, are also found in countries that use IFRS. Because the choice of business organization is influenced by factors such as legal environment, tax rates and regulations, and degree of entrepreneurism, the relative use of each form will vary across countries.  The conceptual framework that underlies IFRS is very similar to that used to develop GAAP. The basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues (referred to as income), and expenses, are simplified versions of the official definitions provided by the FASB. A Look at IFRS
  • 57.
    1-57 Both the IASBand the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. In fact, at one time the IASB stated that no new major standards would be issued for a period of time. The major reason for this policy was to provide companies the time to translate and implement IFRS into practice, as much has happened in a very short period of time. Consider, for example, that as a result of a joint project on the conceptual framework, the definitions of the most fundamental elements (assets, liabilities, equity, revenues, and expenses) may actually change. However, whether the IASB adopts internal control provisions similar to those in SOX remains to be seen. Looking into the Future A Look at IFRS LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
  • 58.
    1-58 Which of thefollowing is not a reason why a single set of high-quality international accounting standards would be beneficial? a) Mergers and acquisition activity. b) Financial markets. c) Multinational corporations. d) GAAP is widely considered to be a superior reporting system. A Look at IFRS IFRS Practice LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
  • 59.
    1-59 The Sarbanes-Oxley Actdetermines: a) international tax regulations. b) internal control standards as enforced by the IASB. c) internal control standards of U.S. publicly traded companies. d) U.S. tax regulations. A Look at IFRS IFRS Practice LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
  • 60.
    1-60 IFRS is consideredto be more: a) principles-based and less rules-based than GAAP. b) rules-based and less principles-based than GAAP. c) detailed than GAAP. d) None of the above. IFRS Practice A Look at IFRS LO 10 Describe the impact of international accounting standards on U.S. financial reporting.
  • 61.
    1-61 “Copyright © 2013John 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.” Copyright

Editor's Notes

  • #19 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