Accounting in Action: Accounting Principles, Ninth Edition

Accounting in Action
Chapter 1-1
Accounting Principles, Ninth Edition
Study Objectives
1. 2. 3. 4. 5. 6. 7. Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain generally accepted accounting principles and the cost principle. Explain the monetary unit assumption and the economic entity assumption. State the accounting equation, and define its components. Analyze the effects of business transactions on the accounting equation.
8.
Understand the four financial statements and how they are prepared.
Chapter 1-2
Accounting in Action
Using the Basic Accounting Equation Transaction analysis Summary of transactions
What is Accounting?
The Building Blocks of Accounting Ethics in financial reporting Generally accepted accounting principles Assumptions
The Basic Accounting Equation Assets Liabilities Owners equity
Financial Statements
Three activities Who uses accounting data
Income statement Owners equity statement
Balance sheet
Statement of cash flows
Chapter 1-3
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 1-4
SO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1 Accounting process
The accounting process includes the bookkeeping function.

Chapter 1-5
SO 1 Explain what accounting is.
Who Uses Accounting Data?

Internal Users Management IRS
Human Resources
Finance
Investors
There are two broad groups of users of financial information: internal users and external users.
Customers SEC
Labor Unions Creditors External Users
Marketing
Chapter 1-6
SO 2 Identify the users and uses of accounting.

Common Questions Asked
1. Can we afford to give our employees a pay raise? 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? 6. Will the company be able to pay its short-term debts?
Chapter 1-7
User
Human Resources
Investors
Management
Finance
Marketing
Creditors
SO 2 Identify the users and uses of accounting.
Discussion Question
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 1-8
SO 3 Understand why ethics is a fundamental business concept.
The Building Blocks of Accounting

Ethics In Financial Reporting
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 passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound ethical behavior.

Chapter 1-9
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 1-10

Various users need financial information Financial Statements
Balance Sheet Income Statement Statement of Owners Equity Statement of Cash Flows Note Disclosure
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
Generally Accepted Accounting Principles (GAAP)
Chapter 1-11
SO 4 Explain generally accepted accounting principles and the cost principle.

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 1-12

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.
Chapter 1-13
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.
Corporation.
Chapter 1-14
Forms of Business Ownership

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

Proprietorship
Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts.
Chapter 1-15
Partnership
Owned by two or more persons. Often retail and service-type businesses
Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability
Generally unlimited personal liability

Partnership agreement
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 1-16
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 1-17
The Basic Accounting Equation

Assets Liabilities 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.
Chapter 1-18
SO 6 State the accounting equation, and define its components.

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 1-19

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 1-20

Provides the underlying framework for recording and summarizing economic events. Owners Equity Ownership claim on total assets.
Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship or Partnership).
Chapter 1-21
Owners 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 1-22
Owners 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 1-23
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.
Chapter 1-24
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 Event
Supplies are purchased on account. An employee is hired.
withdraws cash for personal use.
Criterion
Is the financial position (assets, liabilities, or owners equity) of the company changed?
Record/ Dont Record

Chapter 1-25
Transactions
Discussion Question
Q1-18: 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?
Chapter 1-26
Transactions Analysis
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:
Chapter 1-27
Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
Chapter 1-28
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 1-29
Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.
Chapter 1-30
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 1-31
Transaction (6). Services Provided for Cash and 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 1-32
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 1-33
Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.
Chapter 1-34
Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
Chapter 1-35
Transaction (10). Withdrawal of Cash by Owner. Ray Neal withdraws $1,300 in cash from the business for his personal use.
Chapter 1-36
Summary of Transactions
Illustration 1-8 Tabular summary of Softbyte transactions
Chapter 1-37
Companies prepare four financial statements from the summarized accounting data:
Income Statement
Owners Equity Statement
Balance Sheet
Statement of Cash Flows
Chapter 1-38
SO 8 Understand the four financial statements and how they are prepared.
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 1-39
Income Statement
Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Illustration 1-9 Financial statements and Net loss expenses exceed revenues. their interrelationships
Chapter 1-40
Net income is needed to determine the ending balance in owners equity.
Illustration 1-9 Financial statements and their interrelationships
Chapter 1-41
Owners Equity Statement
Statement indicates the reasons why owners equity has increased or decreased during the period.
Chapter 1-42
The ending balance in owners equity is needed in preparing the balance sheet
Chapter 1-43
Balance Sheet
Chapter 1-44
Chapter 1-45
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?
Chapter 1-46
Chapter 1-47
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 1-48
Discussion Question
Q1-19: A companys net income appears directly on
the income statement and the owners equity statement, and it is included indirectly in the
companys balance sheet. Do you agree? Explain.

Chapter 1-49
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 1-50
SO 9 Explain the career opportunities in accounting.
Copyright
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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Accounting in Action

Accounting Principles, Ninth Edition

The Basic Accounting Equation Assets Liabilities Owners equity

Three activities Who uses accounting data

Income statement Owners equity statement

SO 1 Explain what accounting is.

The accounting process includes the bookkeeping function.

SO 1 Explain what accounting is.

Who Uses Accounting Data?

Labor Unions Creditors External Users

SO 2 Identify the users and uses of accounting.

Who Uses Accounting Data?

SO 2 Identify the users and uses of accounting.

Who Uses Accounting Data?

See notes page for discussion

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Effective financial reporting depends on sound ethical behavior.

SO 3 Understand why ethics is a fundamental business concept.

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Generally Accepted Accounting Principles (GAAP)

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

The Building Blocks of Accounting

Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB) http://www.iasb.org/

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

The Building Blocks of Accounting

Fair value information may be more useful.

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

Economic Entity Assumption requires that

Forms of Business Ownership

Forms of Business Ownership

Generally unlimited personal liability

b. economic entity assumption.

Forms of Business Ownership

The Basic Accounting Equation

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

The Basic Accounting Equation

Provide future services or benefits.

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

The Basic Accounting Equation

Creditors - party to whom money is owed.

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

The Basic Accounting Equation

Referred to as residual equity.

Using The Basic Accounting Equation

Not all activities represent transactions.

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

withdraws cash for personal use.

Record/ Dont Record

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

Kings accountant, Lance Jones, recorded this

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

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

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

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

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

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