fundamental accounting principles

52
© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Fundamental Accounting Principles Wild/Larson/ Chiappetta 18th Edition

Upload: jolene-prince

Post on 30-Dec-2015

418 views

Category:

Documents


66 download

DESCRIPTION

Fundamental Accounting Principles. Wild/Larson/Chiappetta 18th Edition. Chapter 1. Accounting in Business. Conceptual Chapter Objectives. C1: Explain the purpose and importance of accounting in the information age C2: Identify users and uses of accounting - PowerPoint PPT Presentation

TRANSCRIPT

Page 1: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Fundamental Accounting Principles

Fundamental Accounting Principles

Wild/Larson/Chiappetta 18th Edition

Wild/Larson/Chiappetta 18th Edition

Page 2: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Chapter 1

Accounting in Business

Page 3: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Conceptual Chapter Objectives

C1: Explain the purpose and importance ofaccounting in the information age

C2: Identify users and uses of accountingC3: Identify opportunities in accounting and

related fieldsC4: Explain why ethics are crucial in

accountingC5: Explain the meaning of GAAP, and define

and apply several key accounting principles

C6: Appendix 1B: Identify and describe the three major activities in organizations

Page 4: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Analytical Chapter Objectives

A1: Define and interpret the accounting equation and each of its components

A2: Analyze business transactions using the accounting equation

A3: Compute and interpret return on assets

A4: Appendix 1A: Explain the relation between return and risk

Page 5: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Procedural Chapter Objectives

P1: Identify and prepare basic financial statements and explain how they interrelate

Page 6: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

IdentifiesIdentifies

RecordsRecords

CommunicatesCommunicatesRelevantRelevant

ReliableReliable

ComparableComparable

Importance of Accounting

AccountingAccountingis a

system that

information

that is

to help users make better decisions.

to help users make better decisions.

C1

Page 7: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Identifying Business Activities

Recording Business Activities

Communicating Business Activities

Accounting ActivitiesC 1

Page 8: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Users of Accounting Information

External Users

•Lenders

•Shareholders

•Governments

•Consumer Groups

•External Auditors

•Customers

Internal Users

•Managers

•Officers/Directors

•Internal Auditors

•Sales Staff

•Budget Officers

•Controllers

C 2

Page 9: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Users of Accounting Information

External Users

Financial accounting provides external users with financial

statements.

Internal Users

Managerial accounting provides information needs for internal

decision makers.

C 2

Page 10: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Opportunities in Accounting

FinancialFinancial

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

ManagerialManagerial•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

TaxationTaxation•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate plans

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate plans

Accounting-related

Accounting-related

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

C 3

Page 11: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Accounting Jobs by Area

Government, not-for-profit, & education

15%

Public accounting

25%

Private accounting

60%

C 3

Page 12: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Beliefs that distinguish right from

wrong

Accepted standards of good and bad

behavior

Ethics

Ethics—A Key ConceptC 4

Page 13: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Identify ethical concerns

Analyze options

Make ethical decision

Use personal ethics to

recognize ethical concern.

Consider all good and bad

consequences.

Choose best option after weighing all

consequences.

Guidelines for Ethical Decisions

C 4

Page 14: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted Accounting Principles

Relevant Information

Relevant Information

Affects the decision of its users.

Affects the decision of its users.

Reliable InformationReliable Information Is trusted by users.

Is trusted by users.

Comparable Information

Comparable Information

Is helpful in contrasting organizations.

Is helpful in contrasting organizations.

C 5

Page 15: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The Securities and Exchange Commission is the government group that establishes reporting requirements for companies

that issue stock to the public.

The Securities and Exchange Commission is the government group that establishes reporting requirements for companies

that issue stock to the public.

Setting Accounting Principles

Financial Accounting Standards Board is the private group that sets both broad

and specific principles.

Financial Accounting Standards Board is the private group that sets both broad

and specific principles.

C 5

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify

preferred accounting practices.

Page 16: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Principles of Accounting

Now Future

Going-Concern PrincipleReflects assumption that the

business will continue operating instead of being closed or sold.

Cost PrincipleAccounting information is

based on actual cost.

Objectivity PrincipleAccounting information is supported by independent,

unbiased evidence.

C 5

Page 17: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Principles of Accounting

Revenue Recognition Principle1. Recognize revenue when it is

earned.2. Proceeds need not be in cash.3. Measure revenue by cash

received plus cash value of items received.

Monetary Unit PrincipleExpress transactions and events in

monetary, or money, units.

Business Entity PrincipleA business is accounted for

separately from other business entities, including its owner.

C 5

Page 18: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Business Entity Forms

Sole Proprietorship

Sole Proprietorship

PartnershipPartnership CorporationCorporation

C 5

Page 19: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

* Proprietorships and partnerships that are set up as LLCs provide limited liability.

* Proprietorships and partnerships that are set up as LLCs provide limited liability.

Characteristics of Businesses

Characteristic Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

Characteristic Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

**

C 5

Page 20: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it capital stock.

CorporationC 5

Page 21: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Accounting EquationA1

Assets = Liabilities + Equity

EQUITY

Page 22: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Sarbanes-Oxley Act

Also known as SOX Passed by Congress to help curb

financial abuses at companies that sell stock to the public

Requires accounting oversight and stringent internal controls

Penalties include stock market delisting and criminal prosecution

Page 23: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

VehiclesVehicles

Store Supplies

Store Supplies

Notes Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

Resources owned or controlled

by a company

Resources owned or controlled

by a company

AssetsA1

Page 24: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Taxes Payable

Taxes Payable

Wages Payable

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LiabilitiesA1

Page 25: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

CAPITALCAPITAL

Owner Investments

Owner Investments

EquityA1

Page 26: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Expanded Accounting Equation

RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital

Owner Withdrawals

Owner Withdrawals

__ ++ __

Owner's Equity

LiabilitiesLiabilities EquityEquityAssetsAssets = +

A1

Page 27: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis Equation

The accounting equation MUST remain in balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

A2

Page 28: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) Owner Capital (equity)

J. Scott invests $20,000 cash to start the business.

A2

Page 29: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

J. Scott invests $20,000 cash to start the business.

A2

Page 30: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

Transaction Analysis

Purchased supplies paying $1,000 cash.

A2

Page 31: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Purchased supplies paying $1,000 cash.

A2

Page 32: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

Transaction Analysis

Purchased equipment for $15,000 cash.

A2

Page 33: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Purchased equipment for $15,000 cash.

A2

Page 34: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The accounts involved are:

(1) Supplies (asset)

(2) Equipment (asset)

(3) Accounts Payable (liability)

Transaction Analysis

Purchased Supplies of $200 and Equipment of $1,000 on account.

A2

Page 35: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Purchased Supplies of $200 and Equipment of $1,000 on account.

A2

Page 36: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

The accounts involved are:

(1) Cash (asset)

(2) Notes payable (liability)

Borrowed $4,000 from 1st American Bank.

A2

Page 37: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Borrowed $4,000 from 1st American Bank.

A2

Page 38: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

The balances so far appear below. Note that the Balance Sheet Equation is still in balance.

A2

Page 39: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Now, let’s look at transactions involving revenue, expenses and

withdrawals.

A2

Page 40: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

Transaction Analysis

Provided consulting services receiving $3,000 cash.

A2

Page 41: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Provided consulting services receiving $3,000 cash.

A2

Page 42: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Salaries expense (equity)

Transaction Analysis

Paid salaries of $800 to employees.

Remember that the balance in the salaries expense account actually increases.

But, equity decreases because expenses reduce equity.

A2

Page 43: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Remember that expenses decrease equity.

Paid salaries of $800 to employees.

A2

Page 44: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Withdrawals (equity)

Transaction Analysis

A withdrawal of $500 is made by the owner.

Remember that the withdrawal account actually increases.

But, total equity decreases because the withdrawal reduces equity.

A2

Page 45: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Transaction Analysis

Remember that withdrawals decrease equity.

A withdrawal of $500 is made by the owner.

A2

Page 46: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Financial Statements

Let’s prepare the Financial Statements reflecting the transactions we have recorded.

1. Income Statement

2. Statement of Owner’s Equity

3. Balance Sheet

4. Statement of Cash Flows

1. Income Statement

2. Statement of Owner’s Equity

3. Balance Sheet

4. Statement of Cash Flows

P1

Page 47: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Net income is the difference between Revenues and Expenses.

Net income is the difference between Revenues and Expenses.

The income statement describes a company’s revenues and expenses along

with the resulting net income or loss over a period of time due to earnings activities.

The income statement describes a company’s revenues and expenses along

with the resulting net income or loss over a period of time due to earnings activities.

Income StatementP1

Page 48: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Scott CompanyStatement of Owner's Equity

For Month Ended December 31, 2007

Capital, December 1, 2007 -$ Plus: Investments by Owner 20,000$

Net Income 2,200 22,200 22,200

Less: Withdrawals by owner 500Capital, December 31, 2007 21,700$

The net income of $2,200 increases Owner's Equity by $2,200.

The net income of $2,200 increases Owner's Equity by $2,200.

Statement of Owner’s EquityP1

Page 49: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

The Balance Sheet describes a company’s financial position

at a point in time.

The Balance Sheet describes a company’s financial position

at a point in time.

Balance SheetP1

Page 50: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

Statement of Cash FlowsP1

Page 51: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

ROA is viewed as an indicator of operating

efficiency.

ROA is viewed as an indicator of operating

efficiency.

Return on Assets (ROA)

Net incomeAverage total assets

Return onassets

=

A3

Page 52: Fundamental Accounting Principles

© The McGraw-Hill Companies, Inc., 2007McGraw-Hill/Irwin

End of Chapter 1