Transcript Chapter 1-1 Accounting in Action Chapter 1-2 Accounting Principles, Ninth Edition Study Objectives 1. Explain what accounting is. 2. Identify the users and uses of accounting. 3. Understand why ethics is.

Chapter
1-1
Accounting in
Action
Chapter
1-2
Accounting Principles, Ninth Edition
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 its components.
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
What is
Accounting?
Three
activities
Who uses
accounting
data
The Building
Blocks of
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions
Chapter
1-4
The Basic
Accounting
Equation
Assets
Using the
Basic
Accounting
Equation
Financial
Statements
Liabilities
Transaction
analysis
Income
statement
Owner’s
equity
Summary of
transactions
Owner’s
equity
statement
Balance
sheet
Statement of
cash flows
What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-5
SO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1
Accounting process
The accounting process includes
the bookkeeping function.
Chapter
1-6
SO 1 Explain what accounting is.
Who Uses Accounting Data?
Internal Users
Human
Resources
Finance
Management
IRS
Investors
There are two broad
groups of users of
financial information:
internal users and
external users.
Marketing
Customers
Chapter
1-7
SEC
Labor
Unions
Creditors
External
Users
SO 2 Identify the users and uses of accounting.
Who Uses Accounting Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?
User
Human Resources
2. Did the company earn a
satisfactory income?
Investors
3. Do we need to borrow in the
near future?
4. Is cash sufficient to pay
dividends to the stockholders?
Management
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
SO 2 Identify the users and uses of accounting.
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
SO 3 Understand why ethics is a fundamental business concept.
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 passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
Chapter
1-10
SO 3 Understand why ethics is a fundamental business concept.
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
SO 3 Understand why ethics is a fundamental business concept.
The Building Blocks of Accounting
Various users
need financial
information
The accounting profession
has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Chapter
1-12
Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
SO 4 Explain generally accepted accounting principles and the cost principle.
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
1-13
SO 4 Explain generally accepted accounting principles and the cost principle.
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
1-14
SO 4 Explain generally accepted accounting principles and the cost principle.
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.
Partnership.
Forms of
Business Ownership
Corporation.
Chapter
1-15
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
Forms of Business Ownership
Proprietorship
Chapter
1-16
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Often small
service-type
businesses
Often retail and
service-type
businesses
Ownership
divided into
shares of stock
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
Generally
unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
Chapter
1-17
SO 5 Explain the monetary unit assumption and the economic entity assumption.
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
1-18
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
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
1-19
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
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
1-20
SO 6 State the accounting equation, and define
its components.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
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
1-21
SO 6 State the accounting equation, and define
its components.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
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
1-22
SO 6 State the accounting equation, and define
its components.
The Basic Accounting Equation
Assets
=
Liabilities
+
Owner’s
Equity
Provides the underlying framework for recording and
summarizing economic events.
Owner’s Equity
Ownership claim on total assets.
Referred to as residual equity.
Chapter
1-23
Capital, Drawings, etc. (Proprietorship or
Partnership).
SO 6 State the accounting equation, and define
its components.
Owner’s 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
1-24
SO 6 State the accounting equation, and define
its components.
Owner’s 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
1-25
SO 6 State the accounting equation, and define
its components.
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
1-26
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Question?)
Q1-15: Are the following events recorded in the
accounting records?
Owner
An employee
is hired.
withdraws
cash for
personal use.
Event
Supplies are
purchased
on account.
Criterion
Is the financial position (assets, liabilities, or
owner’s equity) of the company changed?
Record/
Don’t Record
Chapter
1-27
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions
Discussion Question
Q1-18. In February 2010, 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
1-28
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
P1-1A: Barone’s Repair Shop was started on May 1 by Nancy
Barone. Prepare a tabular analysis of the following
transactions for the month of May.
1. Invested $10,000 cash to start the repair shop.
= Liabilities +
Assets
Cash
1.
+10,000
Chapter
1-29
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
2. Purchased equipment for $5,000 cash.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
3.
4.
5.
6.
7.
8.
9.
10.
Chapter
1-30
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
3. Paid $400 cash for May office rent.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
4.
5.
6.
7.
8.
9.
10.
Chapter
1-31
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
4. Incurred $250 of advertising costs, on account.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
+250
-250
5.
6.
7.
8.
9.
10.
Chapter
1-32
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
5. Received $5,100 from customers for repair service.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
5.
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
+250
+5,100
-250
+5,100
6.
7.
8.
9.
10.
Chapter
1-33
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
6. Withdrew $1,000 cash for personal use.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
+250
5.
+5,100
6.
-1,000
-250
+5,100
-1,000
7.
8.
9.
10.
Chapter
1-34
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
7. Paid part-time employee salaries of $2,000.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
+250
5.
+5,100
6.
-1,000
7.
-2,000
-250
+5,100
-1,000
-2,000
8.
9.
10.
Chapter
1-35
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
8. Paid utility bills $140.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
4.
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
+250
-250
5.
+5,100
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
-1,000
9.
10.
Chapter
1-36
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
9. Provided $750 of repair services on account.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
4.
+250
-250
5.
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
9.
+5,100
-1,000
+750
+750
10.
Chapter
1-37
SO 7 Analyze the effects of business transactions
on the accounting equation.
Transactions (Problem)
10. Collected $120 cash for services previously billed.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
4.
+250
-250
5.
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
9.
10.
Chapter
1-38
+5,100
-1,000
+750
+120
-120
+750
Transactions (Problem)
10. Collected $120 cash for services previously billed.
= Liabilities +
Assets
Cash
1.
+10,000
2.
-5,000
3.
-400
Accounts
+ Receivable +
Equipment
=
Accounts
Payable
+
Owners’ Equity
Barone,
Capital
-
Barone,
Drawing
+ Revenues - Expenses
+10,000
+5,000
-400
4.
+250
-250
5.
+5,100
6.
-1,000
7.
-2,000
-2,000
8.
-140
-140
9.
+5,100
-1,000
+750
10.
+120
-120
+6,680
+630
Chapter
1-39
$12,310
+750
+5,000
= +250
+10,000
-1,000
$12,310
+5,850
-2,790
Financial Statements
Companies prepare four financial statements from
the summarized accounting data:
Income
Statement
Chapter
1-40
Owner’s
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
SO 8 Understand the four financial statements and how they are prepared.
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
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Income Statement
Barone’s Repair Shop
Income Statement
For the Month Ended May 31, 2010
Revenues:
Service revenue
$ 5,850
Expenses:
Salary expense
Rent expense
Utility expense
Advertising expense
Total expenses
Net income
Chapter
1-42
2,000
400
140
250
2,790
$ 3,060
Reports the revenues
and expenses for a
specific period of time.
Net income – revenues
exceed expenses.
Net loss – expenses
exceed revenues.
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Income Statement
Barone’s Repair Shop
Barone’s Repair Shop
Income Statement
Owner's Equity Statement
For the Month Ended May 31, 2010
For the Month Ended May 31, 2010
Revenues:
Service revenue
$ 5,850
Expenses:
Salary expense
Rent expense
Utility expense
Advertising expense
Total expenses
Net income
Chapter
1-43
Owner’s Equity Statement
2,000
400
140
250
2,790
$ 3,060
Barone's, Capital May 1
$
-
Add: Investment
10,000
Net income
3,060
Less: Drawings
Barone's, Capital May 31
13,060
0
$13,060
Net income is needed to determine
the ending balance in owner’s equity.
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Owner’s Equity Statement
Statement indicates the
reasons why owner’s
equity has increased or
decreased during the
period.
Barone’s Repair Shop
Owner's Equity Statement
For the Month Ended May 31, 2010
Barone's, Capital May 1
-
Add: Investment
10,000
Net income
3,060
Less: Drawings
Barone's, Capital May 31
Chapter
1-44
$
13,060
1,000
$12,060
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Owner’s Equity Statement
Barone’s Repair Shop
Balance Sheet
Barone’s Repair Shop
May 31, 2010
Owner's Equity Statement
Assets
Cash
Accounts receivable
Equipment
Total assets
For the Month Ended May 31, 2010
$ 7,680
630
5,000
$ 13,310
Liabilities
Accounts payable
Barone's, Capital May 1
Add: Investment
Net income
Less: Drawings
$
250
Barone's, Capital May 31
$
10,000
3,060
13,060
0
$ 13,060
Owner's Equity
Barone's, capital
Total liab. & equity
Chapter
1-45
13,060
$ 13,310
The ending balance in owner’s equity is
needed in preparing the balance sheet
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Reports the assets,
liabilities, and owner’s
equity at a specific date.
Barone’s Repair Shop
Balance Sheet
May 31, 2010
Assets
Cash
Accounts receivable
Equipment
Total assets
$ 7,680
630
5,000
$ 13,310
Liabilities
Accounts payable
$
250
Owner's Equity
Barone's, capital
Total liab. & equity
Chapter
1-46
13,060
$ 13,310
Assets listed at the top,
followed by liabilities
and owner’s equity.
Total assets must equal
total liabilities and
owner’s equity.
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Statement of Cash Flows
Barone’s Repair Shop
Barone’s Repair Shop
Balance Sheet
Statement of Cash Flows
May 31, 2010
For the Month Ended May 31, 2010
Assets
Cash flow from operating activities
Cash
$ 7,680
Accounts receivable
Equipment
Total assets
630
5,000
$ 13,310
Liabilities
Accounts payable
$
250
Owner's Equity
Barone's, capital
Total liab. & equity
Chapter
1-47
13,060
$ 13,310
Cash receipts from revenues
Cash paid for expenses
Cash provided by operations
$ 5,220
(2,540)
2,680
Cash flow from investing activitites
Purchase of equipment
(5,000)
Cash flow from financing activities
Investment by owners
Cash provided by financing
10,000
10,000
Net increase in cash
7,680
Cash balance, May 1
-
Cash balance, May 31
$ 7,680
Financial Statements
Information for a
specific period of time.
Statement of Cash Flows
Answers the following:
Statement of Cash Flows
For the Month Ended May 31, 2010
1. Where did cash come
Cash flow from operating activities
2. What was cash used
Cash flow from investing activitites
from?
for?
3. What was the change
in the cash balance?
Chapter
1-48
Barone’s Repair Shop
Cash receipts from revenues
Cash paid for expenses
Cash provided by operations
Purchase of equipment
$ 5,220
(2,540)
2,680
(5,000)
Cash flow from financing activities
Investment by owners
Cash provided by financing
10,000
10,000
Net increase in cash
7,680
Cash balance, May 1
-
Cash balance, May 31
$ 7,680
SO 8 Understand the four financial statements and how they are prepared.
Chapter
1-49
SO 8 Understand the four financial statements and how they are prepared.
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
1-50
SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Discussion Question
Q1-19. “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
1-51
SO 8 Understand the four financial statements and how they are prepared.
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
1-52
SO 9 Explain the career opportunities in accounting.
Copyright
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use of these programs or from the use of the information
contained herein.
Chapter
1-53