chapter 1-1. chapter 1-2 accounting in action accounting principles, ninth edition

Chapter 1-1

Chapter 1-2

Accounting in Action

Accounting Principles, Ninth Edition

Chapter 1-3

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.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 1-4

Accounting in ActionAccounting in ActionAccounting in ActionAccounting in Action

Ethics in Ethics in financial financial reportingreporting

Generally Generally accepted accepted accounting accounting principlesprinciples

AssumptionsAssumptions

What is What is Accounting?Accounting?

What is What is Accounting?Accounting?

The Building The Building Blocks of Blocks of

AccountingAccounting

The Building The Building Blocks of Blocks of

AccountingAccounting

The Basic The Basic Accounting Accounting

EquationEquation

The Basic The Basic Accounting Accounting

EquationEquation

Using the Using the Basic Basic

Accounting Accounting EquationEquation

Using the Using the Basic Basic

Accounting Accounting EquationEquation

Financial Financial StatementsStatementsFinancial Financial

StatementsStatements

Three Three activitiesactivities

Who uses Who uses accounting accounting datadata

AssetsAssets

LiabilitiesLiabilities

Owner’s Owner’s equityequity

Transaction Transaction analysisanalysis

Summary of Summary of transactionstransactions

Income Income statementstatement

Owner’s Owner’s equity equity statementstatement

Balance Balance sheetsheet

Statement of Statement of cash flowscash flows

Chapter 1-5

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

SO 1 Explain what accounting is.SO 1 Explain what accounting is.

The purpose of accounting is to:

(1)(1) identifyidentify, recordrecord, and communicatecommunicate the economic events of an

(2) organization to

(3) interested users.

Chapter 1-6

Three Activities

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

SO 1 Explain what accounting is.SO 1 Explain what accounting is.

Illustration 1-1Accounting process

The accounting process includes the bookkeeping function.

Chapter 1-7

Management

There are two broad groups of users of

financial information: internal users and

external users.

Human Resources

IRS

Labor Unions

SEC

Marketing

Finance

Investors

Creditors

Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?

SO 2 Identify the users and uses of accounting.SO 2 Identify the users and uses of accounting.

Customers

Internal Users

External Users

Chapter 1-8

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?

3. Do we need to borrow in the near future?

4. Is cash sufficient to pay dividends to the stockholders?

5. What price for our product will maximize net income?


SO 2 Identify the users and uses of accounting.SO 2 Identify the users and uses of accounting.

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

Investors

Management

Finance

Marketing

Creditors

Chapter 1-9

Discussion Question

SO 3 Understand why ethics is a fundamental business conceptSO 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


Chapter 1-10

The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe 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 1-11

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.

Review QuestionReview Question

EthicsEthicsEthicsEthics


Chapter 1-12

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 StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Generally Generally Accepted Accepted

Accounting Accounting Principles Principles

(GAAP)(GAAP)

Generally Generally Accepted Accepted

Accounting Accounting Principles Principles

(GAAP)(GAAP)


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

Chapter 1-13

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB)SO 4 Explain generally accepted accounting principles and the SO 4 Explain generally accepted accounting principles and the

cost principle.cost principle.


http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/

Chapter 1-14

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.


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

Chapter 1-15

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.

Corporation.

AssumptionsAssumptionsAssumptionsAssumptions

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

Forms of Business

Ownership

Chapter 1-16

Proprietorship

Partnership Corporation

Owned by two Owned by two or more or more persons.persons.

Often retail and Often retail and service-type service-type businessesbusinesses

Generally Generally unlimited unlimited personal personal liabilityliability

Partnership Partnership agreementagreement

Ownership Ownership divided into divided into shares of stockshares of stock

Separate legal Separate legal entity entity organized organized under state under state corporation lawcorporation law

Limited liabilityLimited liability

Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership

Generally Generally owned by one owned by one person.person.

Often small Often small service-type service-type businessesbusinesses

Owner receives Owner receives any profits, any profits, suffers any suffers any losses, and is losses, and is personally personally liable for all liable for all debts.debts.


Chapter 1-17

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.

AssumptionsAssumptionsAssumptionsAssumptions



Chapter 1-18

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.


Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership


Chapter 1-19

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity

Owner’s Owner’s EquityEquity

= +

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.

The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation

SO 6 SO 6 State the accounting equation, and State the accounting equation, and define its components.define its components.

Chapter 1-20



= +



Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.

AssetAssetssAssetAssetss


Chapter 1-21



= +



Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

LiabilitiLiabilitiesesLiabilitiLiabilitieses


Chapter 1-22



= +



Ownership claim on total assets.

Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship or Partnership).

Owner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity


Chapter 1-23

Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity

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


Chapter 1-24

Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity

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


Chapter 1-25

Using The Basic Accounting EquationUsing The Basic Accounting EquationUsing The Basic Accounting EquationUsing 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.

SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.

Chapter 1-26

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

Event

Supplies are

purchased on account.

Criterion

Is the financial position (assets, liabilities, or owner’s equity) of the company

changed?


An employee is hired.

Owner withdraws cash for

personal use.

Record/ Don’t Record

Transactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)

Chapter 1-27

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?


TransactionsTransactionsTransactionsTransactions


Chapter 1-28

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

Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis


Chapter 1-29

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



Chapter 1-30



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

Chapter 1-31



Transaction (4). Services Provided for Cash.Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.

Chapter 1-32



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

Chapter 1-33



Transaction (6). Services Provided for Cash and Transaction (6). Services Provided for Cash and Credit.Credit. 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.

Chapter 1-34



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

Chapter 1-35



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

Chapter 1-36



Transaction (9). Receipt of Cash on Account.Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].

Chapter 1-37



Transaction (10). Withdrawal of Cash by Owner.Transaction (10). Withdrawal of Cash by Owner. Ray Neal withdraws $1,300 in cash from the business for his personal use.

Chapter 1-38



Summary of TransactionsSummary of TransactionsIllustration 1-8Tabular summary ofSoftbyte transactions

Chapter 1-39

Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:

Balance Sheet

Income Statemen

t

Statement of Cash

Flows

Owner’s Equity

Statement

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

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

Chapter 1-40

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



Income Statement

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

Illustration 1-9Financial statements andtheir interrelationships

Chapter 1-42

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements Net income is needed to determine the ending balance in owner’s equity.


Chapter 1-43



Statement indicates the reasons why owner’s equity has increased or decreased during the period.

Owner’s Equity Statement


Chapter 1-44

Financial Financial StatementStatementss


The ending balance in owner’s equity is needed in preparing the balance sheet


Chapter 1-45



Balance Sheet


Chapter 1-46




Chapter 1-47



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

Chapter 1-48



Statement of Cash Flows


Chapter 1-49

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

Discussion QuestionDiscussion 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.




Chapter 1-51

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.SO 9 Explain the career opportunities in accounting.

Accounting Career OpportunitiesAccounting Career OpportunitiesAccounting Career OpportunitiesAccounting Career Opportunities

Public AccountingCareers in auditing and taxation serving the general public.

Chapter 1-52

Copyright © 2009 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.

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chapter 1-1. chapter 1-2 accounting in action accounting principles, ninth edition

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