Chapter 1-1 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

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Chapter 1-1 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition Slide 2 Chapter 1-2 1. 1.Explain what accounting is. 2. 2.Identify the users and uses of accounting. 3. 3.Understand why ethics is a fundamental business concept. 4. 4.Explain generally accepted accounting principles and the cost principle. 5. 5.Explain the monetary unit assumption and the economic entity assumption. 6. 6.State the accounting equation, and define assets, liabilities, and owners equity. 7. 7.Analyze the effects of business transactions on the accounting equation. 8. 8.Understand the four financial statements and how they are prepared. Study Objectives Slide 3 Chapter 1-3 Accounting in Action Ethics in financial reporting Generally accepted accounting principles Assumptions What is Accounting? The Building Blocks of Accounting The Basic Accounting Equation Using the Basic Accounting Equation Financial Statements Three activities Who uses accounting data AssetsLiabilities Owners equity Transaction analysis Summary of transactions Income statement Owners equity statement Balance sheet Statement of cash flows Slide 4 Chapter 1-4 What is Accounting? LO 1 Explain what accounting is. The purpose of accounting is to: (1) identifyrecordcommunicate (1) identify, record, and communicate the economic events of an (2) organization to (3) interested users. Slide 5 Chapter 1-5 Three Activities What is Accounting? LO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. Slide 6 Chapter 1-6 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? LO 2 Identify the users and uses of accounting. Customers Internal Users External Users Slide 7 Chapter 1-7 Common Questions AskedUser 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? Who Uses Accounting Data? LO 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 Slide 8 Chapter 1-8 Discussion Question LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept. Q1. Accounting is ingrained in our society and it is vital to our economic system. Do you agree? Explain. See notes page for discussion Who Uses Accounting Data? Slide 9 Chapter 1-9 The Building Blocks of Accounting Ethics In Financial Reporting LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept. Standards of conduct by which ones actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics. Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passedSarbanes-Oxley Act of 2002. Effective financial reporting depends on sound ethical behavior. Slide 10 Chapter 1-10 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 Owners Equity Statement of Cash Flows Note Disclosure Financial Statements Balance Sheet Income Statement Statement of Owners Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle. Slide 11 Chapter 1-11 Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) LO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting http://www.fasb.org/ http://www.sec.gov/ http://www.iasb.org/ Slide 12 Chapter 1-12 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. The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle. Slide 13 Chapter 1-13 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. AssumptionsAssumptions LO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership Slide 14 Chapter 1-14 ProprietorshipPartnership 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 Forms of Business Ownership 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. Slide 15 Chapter 1-15 AssetsAssetsLiabilitiesLiabilities Owners 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. The Basic Accounting Equation LO 6 State the accounting equation, and define assets, liabilities, and owners equity. Slide 16 Chapter 1-16 AssetsAssetsLiabilitiesLiabilities Owners Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation LO 6 State the accounting equation, and define assets, liabilities, and owners equity. Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. AssetsAssets Slide 17 Chapter 1-17 AssetsAssetsLiabilitiesLiabilities Owners Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation LO 6 State the accounting equation, and define assets, liabilities, and owners equity. Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. LiabilitiesLiabilities Slide 18 Chapter 1-18 AssetsAssetsLiabilitiesLiabilities Owners Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation LO 6 State the accounting equation, and define assets, liabilities, and owners equity. Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Owners Equity Slide 19 Chapter 1-19 Owners 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 LO 6 State the accounting equation, and define assets, liabilities, and owners equity. Slide 20 Chapter 1-20 Owners 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 LO 6 State the accounting equation, and define assets, liabilities, and owners equity. Slide 21 Chapter 1-21 Using The Basic Accounting Equation Transactions are a businesss 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. Slide 22 Chapter 1-22 Q: Q: Are the following events recorded in the accounting records? Event Supplies are purchased on account. Criterion Is the financial position (assets, liabilities, or owners equity) of the company changed? LO 7 Analyze the effects of business transactions on the accounting equation. An employee is hired. Owner withdraws cash for personal use. Record/ Dont Record Transactions (Question?) Slide 23 Chapter 1-23 Discussion Question Q. In February 2008, 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? See notes page for discussion TransactionsTransactions LO 7 Analyze the effects of business transactions on the accounting equation. Slide 24 Chapter 1-24 P1-1A: P1-1A: Barones Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable Barone, Capital LO 7 Analyze the effects of business transactions on the accounting equation. ++=+ 1. Invested $10,000 cash to start the repair shop. Investment Assets LiabilitiesEquity Slide 25 Chapter 1-25 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable Barone, Capital LO 7 Analyze the effects of business transactions on the accounting equation. 2. Purchased equipment for $5,000 cash. -5,0002.+5,000 ++=+ Investment Assets LiabilitiesEquity Slide 26 Chapter 1-26 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 3. Paid $400 cash for May office rent. -5,0002.+5,000 ++=+ -4003.-400 Expense Barone, Capital Investment Assets LiabilitiesEquity Slide 27 Chapter 1-27 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 4. Received $5,100 from customers for repair service. -5,0002.+5,000 ++=+ -4003.-400 Expense +5,1004.+5,100 Revenue Barone, Capital Investment Assets LiabilitiesEquity Slide 28 Chapter 1-28 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 5. Withdrew $1,000 cash for personal use. -5,0002.+5,000 ++=+ -4003.-400 Expense +5,1004.+5,100 Revenue -1,0005.-1,000 Drawings Barone, Capital Investment Assets LiabilitiesEquity Slide 29 Chapter 1-29 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 6. Paid part-time employee salaries of $2,000. -5,0002.+5,000 ++=+ -4003.-400 Expense +5,1004.+5,100 Revenue -1,0005.-1,000 Drawings -2,0006.-2,000 Expense Barone, Capital Investment Assets LiabilitiesEquity Slide 30 Chapter 1-30 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 7. Incurred $250 of advertising costs, on account. -5,0002.+5,000 ++=+ -4003.-400 Expense +5,1004.+5,100 Revenue -1,0005.-1,000 Drawings -2,0006.-2,000 Expense +2507.-250 Expense Barone, Capital Investment Assets LiabilitiesEquity Slide 31 Chapter 1-31 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 8. Provided $750 of repair services on account. -5,0002.+5,000 ++=+ -4003.-400 Expense +5,1004.+5,100 Revenue -1,0005.-1,000 Drawings -2,0006.-2,000 Expense +2507.-250 Expense +7508.+750 Revenue Barone, Capital Investment Assets LiabilitiesEquity Slide 32 Chapter 1-32 Transactions (Problem) +10,0001.+10,000 Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 9. Collected $120 cash for services previously billed. -5,0002.+5,000 ++=+ -4003.-400 Expense +5,1004.+5,100 Revenue -1,0005.-1,000 Drawings -2,0006.-2,000 Expense +2507.-250 Expense +7508.+750 Revenue +1209.-120 Barone, Capital Investment Assets LiabilitiesEquity 6,820 + 630 + 5,000 = 250 + 12,200 Slide 33 Chapter 1-33 Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Owners Equity Statement Financial Statements LO 8 Understand the four financial statements and how they are prepared. Slide 34 Chapter 1-34 Income Statement Financial Statements LO 8 Understand the four financial statements and how they are prepared. Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues. Slide 35 Chapter 1-35 Income Statement Financial Statements LO 8 Understand the four financial statements and how they are prepared. Owners Equity Statement Net income is needed to determine the ending balance in owners equity. Slide 36 Chapter 1-36 Financial Statements LO 8 Understand the four financial statements and how they are prepared. Owners Equity Statement Statement indicates the reasons why owners equity has increased or decreased during the period. Slide 37 Chapter 1-37 Financial Statements LO 8 Understand the four financial statements and how they are prepared. Owners Equity Statement The ending balance in owners equity is needed in preparing the balance sheet Balance Sheet Slide 38 Chapter 1-38 Balance Sheet Financial Statements LO 8 Understand the four financial statements and how they are prepared. Reports the assets, liabilities, and owners equity at a specific date. Assets listed at the top, followed by liabilities and owners equity. Total assets must equal total liabilities and owners equity. Slide 39 Chapter 1-39 Balance Sheet Financial Statements LO 8 Understand the four financial statements and how they are prepared. Statement of Cash Flows Slide 40 Chapter 1-40 Financial Statements LO 8 Understand the four financial statements and how they are prepared. Statement of Cash Flows 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? Slide 41 Chapter 1-41 Forensic Accounting Careers with insurance companies and law offices to conduct investigations into theft and fraud. Opportunities in 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. Accounting Career Opportunities Public Accounting Careers in auditing and taxation serving the general public.

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