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Chapter1-1

Accounting inAction

Accounting Principles, Ninth Edition

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Chapter1-2

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 accountingequation.

8. Understand the four financial statements and how they areprepared.

Study Objectives

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Chapter1-3

Accounting in Action

Ethics infinancial

reporting

Generally

accepted

accounting

principles

Assumptions

What is

Accounting?

The Building

Blocks of

Accounting

The Basic

Accounting

Equation

Using theBasic

AccountingEquation

Financial

Statements

Threeactivities

Who uses

accounting

data

AssetsLiabilities

Owners

equity

Transactionanalysis

Summary of

transactions

Incomestatement

Owners

equity

statement

Balance

sheetStatement of

cash flows

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Chapter1-4

What is Accounting?

SO 1 Explain what accounting is.

The purpose of accounting is to:

(1) identify, record, and communicatetheeconomic events of an

(2) organization to

(3) interested users.

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Chapter1-5

Three Activities

What is Accounting?

SO 1 Explain what accounting is.

Illustration 1-1

Accounting process

The accounting process includesthe bookkeeping function.

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Chapter1-6

Management

There are two broad

groups of users offinancial information:internal users andexternal users.

HumanResources

IRS

LaborUnions

SEC

Marketing

Finance

Investors

Creditors

Who Uses Accounting Data?

SO 2 Identify the users and uses of accounting.

Customers

Internal Users

ExternalUsers

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Chapter1-7

Common Questions Asked User

1. Can we afford to give ouremployees a pay raise? Human Resources

2. Did the company earn asatisfactory income?

3. Do we need to borrow in thenear future?

4. Is cash sufficient to paydividends to the stockholders?

5. What price for our productwill maximize net income?


SO 2 Identify the users and uses of accounting.

6. Will the company be able topay its short-term debts?

Investors

Management

Finance

Marketing

Creditors

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Chapter1-8

Discussion Question

SO 3 Understand why ethics is a fundamental business concept.

Q1-1:Accounting is ingrained in our society and it

is vital to our economic system. Do you agree?

Explain.

See notes page for discussion


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Chapter1-9

The Building Blocks of Accounting

Ethics In Financial Reporting


Standards of conduct by which ones actions arejudged as right or wrong, honest or dishonest, fair ornot 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 soundethical behavior.

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Chapter1-10

Ethics are the standards of conduct by which one'sactions are judged as:

a. right or wrong.b. honest or dishonest.

c. fair or not fair.

d. all of these options.

Review Question

Ethics


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Chapter1-11

Various usersneed financialinformation

The accounting professionhas attempted to develop

a set of standards thatare generally acceptedand universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Owners EquityStatement of Cash FlowsNote Disclosure

Generally Accepted

AccountingPrinciples (GAAP)


SO 4 Explain generally accepted accounting principles and the cost principle.

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Chapter1-12

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board(IASB)



http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/
http://www.fasb.org/http://www.sec.gov/http://www.iasb.org/http://www.iasb.org/http://www.sec.gov/http://www.fasb.org/

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Chapter1-13

Cost Principle (Historical)dictates that companiesrecord assets at their cost.

Issues:

Reported at cost when purchased and also over thetime the asset is held.

Cost easily verified, whereas market value is oftensubjective.

Fair value information may be more useful.



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Chapter1-14

Monetary Unit Assumptioninclude in theaccounting records only transaction data that can beexpressed in terms of money.

Economic Entity Assumptionrequires thatactivities of the entity be kept separate and distinctfrom the activities of its owner and all other economicentities.

Proprietorship.Partnership.

Corporation.

Assumptions

SO 5 Explain the monetary unit assumptionand the economic entity assumption.

Forms ofBusiness Ownership

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Chapter1-15

Proprietorship Partnership Corporation

Owned by two ormore persons.

Often retail andservice-typebusinesses

Generally

unlimitedpersonal liability

Partnershipagreement

Ownershipdivided into

shares of stockSeparate legalentity organizedunder statecorporation law

Limited liability

Forms of Business Ownership

Generally ownedby one person.

Often smallservice-typebusinesses

Owner receives

any profits,suffers anylosses, and ispersonally liablefor all debts.


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Chapter1-16

Combining the activities of Kellogg and GeneralMills would violate the

a. cost principle.b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

Assumptions


Review Question

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Chapter1-17

A business organized as a separate legal entityunder state law having ownership divided intoshares of stock is a

a. proprietorship.

b. partnership.

c. corporation.d. sole proprietorship.


Forms of Business Ownership

Review Question

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Chapter1-18

Assets Liabilities OwnersEquity

= +

Provides the underlying frameworkfor recording andsummarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownershipclaims.

The Basic Accounting Equation

SO 6 State the accounting equation, and defineits components.

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Chapter1-19


= +



Resources a business owns.Provide future services or benefits.

Cash, Supplies, Equipment, etc.

Assets


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Chapter1-20


= +



Claims against assets (debts and obligations).Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

Liabilities


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Chapter1-21


= +



Ownership claim on total assets.Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship orPartnership).

Owners Equity


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Chapter1-22

Owners Equity

Revenuesresult from business activities entered into forthe purpose of earning income.

Common sources of revenue are: sales, fees, services,commissions, interest, dividends, royalties, and rent.

Illustration 1-6


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Chapter1-23

Owners Equity

Expensesare the cost of assets consumed or services usedin the process of earning revenue.

Common expenses are: salaries expense, rent expense,utilities expense, tax expense, etc.

Illustration 1-6


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Chapter1-24

Using The Basic Accounting Equation

Transactionsare a businesss economic eventsrecorded by accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effecton theaccounting equation.

SO 7 Analyze the effects of business transactionson the accounting equation.

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Chapter1-25

Q1-15:Are the following events recorded in theaccounting records?

EventSupplies arepurchasedon account.

Criterion Is the financial position (assets, liabilities, orowners equity) of the company changed?


An employeeis hired.

Ownerwithdrawscash for

personal use.

Record/Dont Record

Transactions (Question?)

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Chapter1-26

Discussion QuestionQ1-18:In February 2010, Paula King invested

an additional $10,000 in her business, Kings

Pharmacy, which is organized as a proprietorship.Kings accountant, Lance Jones, recorded this

receipt as an increase in cash and revenues. Is

this treatment appropriate? Why or why not?


Transactions


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Chapter1-27

Transaction (1). Investment By Owner. Ray Neal decidesto open a computer programming service which he namesSoftbyte. On September 1, 2010, he invests $15,000 cash inthe. The effect of this transaction on the basic equation is:

Transactions Analysis


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Chapter1-28

Transaction (2). Purchase of Equipment for Cash.Softbyte purchases computer equipment for $7,000 cash.



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Chapter

1-29



Transaction (3). Purchase of Supplies on Credit.Softbytepurchases for $1,600 from Acme Supply Company computerpaper and other supplies expected to last several months.

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Chapter

1-30



Transaction (4). Services Provided for Cash.Softbytereceives $1,200 cash from customers for programmingservices it has provided.

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Chapter

1-31



Transaction (5). Purchase of Advertising on Credit.Softbyte receives a bill for $250 from the Daily News foradvertising but postpones payment until a later date.

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Chapter

1-32



Transaction (6). Services Provided for Cash and Credit.Softbyte provides $3,500 of programming services forcustomers. The company receives cash of $1,500 fromcustomers, and it bills the balance of $2,000 on account.

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Chapter

1-33



Transaction (7). Payment of Expenses.Softbyte pays thefollowing Expenses in cash for September: store rent $600,salaries of employees $900, and utilities $200.

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Chapter

1-34



Transaction (8). Payment of Accounts Payable.Softbytepays its $250 Daily News bill in cash.

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Chapter

1-35



Transaction (9). Receipt of Cash on Account.Softbytereceives $600 in cash from customers who had been billedfor services [in Transaction (6)].

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Chapter

1-36



Transaction (10). Withdrawal of Cash by Owner.Ray Nealwithdraws $1,300 in cash from the business for his personaluse.

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Chapter

1-37



Summary of Transactions

Illustration 1-8

Tabular summary of

Softbyte transactions

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Chapter

1-38

Companies prepare four financial statements fromthe summarized accounting data:

BalanceSheet

IncomeStatement

Statementof CashFlows

OwnersEquity

Statement

Financial Statements

SO 8 Understand the four financial statements and how they are prepared.

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Chapter

1-39

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.



Review Question

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Chapter

1-40



Income Statement

Reports the revenues and expenses for a specific period of time.Net income revenues exceed expenses.Net loss expenses exceed revenues.

Illustration 1-9

Financial statements and

their interrelationships

Fi i l N t i i d d t d t i th

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Chapter

1-41

Financial Statements Net income is needed to determine theending balance in owners equity.

Illustration 1-9



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Chapter

1-42



Statement indicates the reasonswhy owners equity has increased ordecreased during the period.

Owners Equity Statement

Illustration 1-9



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Chapter

1-43

FinancialStatements

The endingbalance inowners equityis needed inpreparing thebalance sheet

Illustration 1-9



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Chapter

1-44



Balance Sheet

Illustration 1-9Financial statements and


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Chapter

1-45

FinancialStatements

Illustration 1-9



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Chapter

1-46



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?

Statement of Cash Flows

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Chapter

1-47



Statement of Cash Flows

Illustration 1-9Financial statements and


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Chapter

1-48

Which of the following financial statements isprepared as of a specific date?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.



Review Question

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Chapter

1-49

Discussion QuestionQ1-19:A companys net income appears directly on

the income statement and the owners equity

statement, and it is included indirectly in thecompanys balance sheet. Do you agree? Explain.




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Chapter

1-50

Forensic AccountingCareers with insurance companies and law offices to conduct

investigations into theft and fraud.

Opportunities in GovernmentCareers with the IRS, the FBI, the SEC, and in public

colleges and universities.

Private AccountingCareers in industry working in cost accounting, budgeting,

accounting information systems, and taxation.

SO 9 Explain the career opportunities in accounting.

Accounting Career Opportunities

Public AccountingCareers in auditing and taxation serving the general public.

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Chapter

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use of these programs or from the use of the informationcontained herein.

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