Accounting in Business Chapter 1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.
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Accounting in Business
Chapter 1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
1 - 3
Importance of Accounting
C1
For example, the sale by Apple of an iPhone.
Keep a chronological log of transactions.
Prepare reports such as financial statements.
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1 - 5
Users of Financial Information
C2
Accounting is called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Accounting serves many users who can
be divided into two groups: external users and internal users.
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Opportunities in Accounting
Accounting information is in all aspects of our lives. When we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.
6C2
NEED-TO-KNOW 1-1
Identify the following users of accounting information as either an (a) external or (b) internal user.
RegulatorCEOShareholderControllerExecutive EmployeeExternal AuditorProduction ManagerNonexecutive Employee
a) External userb) Internal usera) External userb) Internal userb) Internal usera) External userb) Internal usera) External user
External users of accounting information are NOT directly involved in running the organization.
Internal users of accounting information ARE directly involved in managing and operating an organization.
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Ethics – A Key Concept
C3
The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that
distinguish right from wrong. They are accepted standards of good and bad behavior.
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Fraud Triangle
C3
Three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization.
Envision a way to commit fraud with a low perceived
risk of getting caught
Fails to see the criminal nature of the fraud or
justifies the action
Must have some pressure to commit fraud, like unpaid bills
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Explain Generally Accepted Accounting Principles and Define and Apply Several
Accounting Principles.
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01-C4:
1 - 12
Generally Accepted Accounting Principles (GAAP)
C4
Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.
Relevant information affects decisions
of users.
Reliable information is trusted by users.
Comparable information is helpful in contrasting
organizations.
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International Standards
C4
In today’s global economy, there is increased demand by external users for comparability in accounting reports. This demand often arises when companies wish to raise money from lenders and
investors in different countries.
Differences between U.S. GAAP and IFRS are decreasing as theFASB and IASB pursue a convergence process aimed to achieve a
single set of accounting standards for global use.
International Accounting Standards Board (IASB)
An independent group (consisting of individuals
from many countries), issues International Financial
Reporting Standards (IFRS)
International Financial Reporting Standards (IFRS)
Identify preferred accounting practices
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Principles and Assumptions of Accounting
C4
General principles are the basic assumptions, concepts, and
guidelines for preparing financial statements. General principles stem
from long-used accounting practices.
Specific principles are detailed rules used in reporting business
transactions and events. Specific principles arise more often from the
rulings of authoritative groups.
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Accounting Principles
C4
Measurement Principle (or Cost Principle)
Accounting information is based on actual cost. Actual cost is
considered objective.
Expense Recognition Principle (or Matching Principle)
A company must record its expenses incurred to generate the revenue
reported.
Full Disclosure PrincipleA company is required to report the
details behind financial statements that would impact users’ decisions.
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.
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Accounting Assumptions
Monetary Unit AssumptionExpress transactions and events
in monetary, or money, units.
Business Entity AssumptionA business is accounted for
separately from other business entities, including its owner.
Time Period AssumptionPresumes that the life of a company
can be divided into time periods, such as months and years.
Going-Concern AssumptionReflects assumption that the
business will continue operating instead of being closed or sold.
C417
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Proprietorship, Partnership, and Corporation
Here are some of the major attributes of proprietorships, partnerships, and corporations:
C418
A business entity can take one of three legal forms: proprietorship, partnership, or corporation
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Sarbanes–Oxley (SOX)Congress passed the Sarbanes–Oxley Act to help curb financial abuses at
companies that issue their stock to the public. SOX requires that these public companies apply both accounting oversight and stringent internal controls.
The desired results include more transparency, accountability, and truthfulness in reporting transactions.
C419
Here are some recent accounting scandals.
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Dodd-Frank Wall Street Reform and Consumer Protection Act
This act was designed to:1. promote accountability and transparency in the
financial system,2. put an end to the notion of “too big to fail,” 3. protect the taxpayer by ending bailouts, and4. protect consumers from abusive financial services.
20C4
NEED-TO-KNOW (1-2) Part 1:Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.
Time periodFull disclosureRevenue recognition
MaterialityMeasurementBusiness entityGoing concernExpense recognition
21C3/C4
NEED-TO-KNOW Part 1:
that would impact users' decisions.Full disclosure principle A company must report the details behind financial statements
Disclosures are often in the footnotes to the financial statements.
Expense recognition principle Also called the matching principleGoverns the timing of expenses reported on the income statement.Expenses are recognized in the same time period as the revenues they help generate.
Principles: Govern the amount and/or timing of information to be reported in financial statements.
Measurement principle Also called the cost principleCost is measured on a cash or equal-to-cash basis.
Governs valuation of assets and liabilities on the balance sheet.
Revenue recognition principle Governs the timing of revenues recognized on the income statement.Revenue is recognized when earned.
22C3/C4
NEED-TO-KNOW Part 1:
Assumptions: Generally related to the financial statement headings.
Going concern assumption
Monetary unit assumption
Time period assumption
Business entity assumption
Presumption that the business will continue operating instead of being closed or sold.We can express transactions and events in monetary units. (i.e., Dollars, Pesos, Euros)Presumes that the life of a company can be divided into time periods, and that useful reports can be prepared for those periods.A business is accounted for separately from other business entities, including its owner(s).
Accounting constraints: Reasonableness of information to be reported.
Materiality
Benefits exceed cost
Only information that would influence the decisions of a reasonable person needs to be disclosed.Materiality is a function of the nature of the item and/or dollar amount.
The benefits of the information disclosed must be greater than the costs of providing the information.
23C3/C4
NEED-TO-KNOW Part 1: AnswersIdentify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.
Time PeriodFull DisclosureRevenue Recognition
a) Principle
c) Constrainta) Principleb) Assumptionb) Assumptiona) Principleb) Assumption
a) Principle
MaterialityMeasurementBusiness EntityGoing ConcernExpense Recognition
Accounting TodayAccounting Today
36,000$
7,800$ 6,500
800 2,200
17,300 18,700$
26,000$ 10,000$ 21,000 10,400 49,000 10,000 105,400
116,400$ 116,400$ Total assets Total liabilities & equity
Land Stockholder's EquityOffice equipment Common stock
Cash Accounts payableAccounts receivableOffice supplies
Balance SheetDecember 31, 2014
Assets Liabilities
Total expensesNet income (loss)
Miscellaneous expense
Income StatementFor Month Ended December 31, 2014
Revenues:Consulting fees earned
Expenses:Rent expenseSalaries expenseTelephone expense
Footnotes to financial statements
24C3/C4
Retained earnings 1,000Total equity 106,400
• Need Part 2 of the Need to Know activity. • Complete the following table with either a yes
or a no regarding the attributes of a partnership and a corporation.
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NEED-TO-KNOW Part 2
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Transaction Analysis and the Accounting Equation
The Accounting Equation
Expanded Accounting Equation:
A1 Net Income 27
Liabilities EquityAssets = +
Equity
Assets = Liabilities + Contributed Capital + Retained Earnings
= Liabilities + Common Stock - Dividends + Revenues - Expenses
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NEED-TO-KNOW (1-3)
Use the accounting equation to compute the missing financial statement amounts.
Assets Liabilities EquityBose $150 $30 $120Vogue $400 $100 $300
= += += +
Use the expanded accounting equation to compute the missing financial statement amounts.
Assets Liabilities EquityCommon
StockDividends Revenues Expenses
Nikon $200 $80 $120 $100 $0 $60 ($40)YouTube $400 $160 $240 $220 ($10) $120 ($90)
= ++ - + -
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Transaction Analysis
The accounts involved are:(1) Cash (asset)(2) Common Stock (equity)
Chas Taylor invests $30,000 cash to start a company.
P1
Let’s use the Accounting Equation:
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock
(1) 30,000$ 30,000$
30,000$ -$ -$ -$ -$ 30,000$
30,000$ = 30,000$
Chas Taylor invests $30,000 cash to start the business, Fast Forward.
P1
The accounts involved are:(1) Cash (asset)(2) Supplies (asset)
Let’s try another transaction. .
Company purchased supplies paying $2,500 cash.
P1
Transaction AnalysisCompany purchased supplies paying
$2,500 cash. . .
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock
(1) 30,000$ 30,000$ (2) (2,500) 2,500$
27,500$ 2,500$ -$ -$ -$ 30,000$
30,000$ = 30,000$
Accounting Equation must remain in
balance!!
P1
The accounts involved are:(1) Cash (asset) (2) Equipment (asset)
Let’s try another transaction. . .
Purchased equipment for $26,000 cash.
P1
Using the Accounting Equation:
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock
(1) 30,000$ 30,000$ (2) (2,500) 2,500$ (3) (26,000) 26,000$
1,500$ 2,500$ 26,000$ -$ -$ 30,000$
30,000$ = 30,000$
Purchased equipment for $26,000 cash.
Accounting Equation still remains in
balance!!
P1
The accounts involved are:(1) Supplies (asset)(2) Accounts Payable (liability)
Transaction AnalysisPurchased supplies of $7,100 on account.
P1
Using the Accounting Equation
Assets = Liabilities + Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock
(1) 30,000$ 30,000$ (2) (2,500) 2,500$ (3) (26,000) 26,000$ (4) 7,100 7,100$
1,500$ 9,600$ 26,000$ 7,100$ -$ 30,000$
37,100$ = 37,100$
Purchased Supplies of $7,100 on account.
Accounting Equation still remains in balance!!
P1
The accounts involved are:(1) Cash (asset) (2) Revenues (equity)
Transaction Analysis
Provided consulting services to a customer and received $4,200 cash right away.
P1
Assets = Liabilities +
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock Revenue
Bal. 1,500$ 9,600$ 26,000$ 7,100$ 30,000$ (5) 4,200 4,200$
5,700$ 9,600$ 26,000$ 7,100$ -$ 30,000$ 4,200$
41,300$ = 41,300$
Equity
Transaction AnalysisProvided consulting services to a customer
and received $4,200 cash right away.
P1
The accounts involved are:(1) Cash (asset)(2) Rent expense (equity)
(3) Salaries expense (equity)
Transaction AnalysisPaid rent of $1,000 and
salaries of $700 to employees.
But, total Equity decreases, because
expenses reduce equity.
Remember that the balance in the Expense accounts
actually increase.
P1
Transaction Analysis
Assets = Liabilities +
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock Revenue Expenses
Bal. 5,700$ 9,600$ 26,000$ 7,100$ 30,000$ 4,200$ (6) (1,000) (1,000) (7) (700) (700)$
4,000$ 9,600$ 26,000$ 7,100$ -$ 30,000$ 4,200$ (1,700)$
39,600$ = 39,600$
Equity
Remember that expenses decrease equity.
Paid rent of $1,000 and salaries of $700 to employees.
P1
The accounts involved are:(1) Cash (asset)(2) Dividends (equity)
Transaction AnalysisDividends of $200 are paid to shareholders.
Remember that the Dividend account actually
increases (just like our Expenses account . . . )
But, total Equity decreases because
dividends cause equity to go down !!
P1
Transaction Analysis
Assets = Liabilities +
Cash Supplies EquipmentAccounts Payable
Notes Payable
Common Stock Dividends Revenue Expenses
Bal. 5,700$ 9,600$ 26,000$ 7,100$ 30,000$ 4,200$ (6) (1,000) 3,000$ (1,000)$ (7) (700) (700)$ (8) (200) (200)$
3,800$ 9,600$ 26,000$ 7,100$ -$ 30,000$ (200)$ 7,200$ (1,700)$
39,400$ =
Equity
39,400$
Remember that dividends decrease equity.
Dividends of $200 are paid to shareholders.
P1
NEED-TO-KNOW (1-4)
Jan. 1 Jamsetji invested $4,000 cash in the Tata Company in exchange of common stock.Jan. 5 The company purchased $2,000 of equipment on credit.Jan. 14 The company provided $540 of services for a client on credit.Jan. 21 The company paid $250 cash for an employee’s salary
Assume Tata began operations on January 1 and completed the following transactions during its first month of operations.
Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment; Accounts Payable; Common Stock; Dividends; Revenues; and Expenses.
LiabilitiesCash Accounts
ReceivableEquipment Accounts
Payable+ Common
Stock- Dividends + Revenues- Expenses
Jan. 1 $4,000 $4,000Jan. 5 $2,000 $2,000Jan. 14 $540 $540Jan. 21 ($250) ($250)
$3,750 $540 $2,000 $2,000 $4,000 $0 $540 ($250)
+ EquityAssets =
Total Assets $6,290Total Liabilities 2,000Total Equity $4,290
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Financial StatementsThe four financial statements and their purposes are:1. 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.
2. Statement of retained earnings— explains changes in equity from net income (or loss) and from any dividends over a period of time.
3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time.
4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time.
P247
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NEED-TO-KNOW (1-5)
Income Statement Statement of Retained Earnings Balance SheetAssets Detail of AssetsLiabilities Detail of LiabilitiesEquity:
+ Common stock Beginning Retained Earnings- Dividends
- Dividends+ Ending Retained Earnings
+ Revenues Detail of Revenues ± Net income (loss)
- Expenses Detail of Expenses Ending Retained EarningsNet income (loss)
Prepare the (a) income statement, (b) statement of retained earnings, and (c) balance sheet, for Apple using the following condensed data from its fiscal year ended September 28, 20X3.
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Accounts payable $22,367 Investments and other assets $163,042Other liabilities 61,084 Land and equipment 16,597Cost of sales (expense) 119,724 Selling and other expense 14,149Cash 14,259 Accounts receivable 13,102Retained Earnings, Sept. 29, 20X2 101,289 Net income 37,037Dividends in fiscal year 20X3 34,070 Retained Earnings, Sept. 28, 20X3 104,256Revenues 170,910 Common stock 19,293
Common stock
1 - 49NEED-TO-KNOW
Retained Earnings, Sept. 28, 20X3 $104,256
Total liabilities 83,451
Common Stock 19,293
Total assets $207,000 Total liabilities and equity $207,000
APPLEIncome Statement
For Fiscal Year Ended September 28, 20X3
APPLEStatement of Retained Earnings
For Fiscal Year Ended September 28, 20X3
Equity
APPLEBalance Sheet
September 28, 20X3
$22,367
Revenues $170,910 Retained Earnings, Sept. 29, 20X2 $101,289
Less: Dividends (34,070)
Assets
ExpensesCost of sales (expense) $119,724
Cash $14,259 Accounts payableOther liabilities 61,084
Liabilities
Plus: Net income 37,037
Total expenses 133,873Selling and other expense 14,149
Net income $37,037
Accounts receivable 13,102Land and equipment 16,597Investments and other assets 163,042
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Accounts payable $22,367 Investments and other assets $163,042Other liabilities 61,084 Land and equipment 16,597Cost of sales (expense) 119,724 Selling and other expense 14,149Cash 14,259 Accounts receivable 13,102Retained Earnings, Sept. 29, 20X2 101,289 Net income 37,037Dividends in fiscal year 20X3 34,070 Retained Earnings, Sept. 28, 20X3 104,256Revenues 170,910 Common stock 19,293
Retained earnings 104,256Total equity 123,549
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Global View
Basic Principles of U.S. GAAP and IFRS
Both include broad and similar guidance for accounting. Neither specifies particular account names nor the detail
required. IFRS does require reporting of certain minimum line and
other minimum disclosures that U.S. GAAP does not. GAAP requires disclosures for the current and prior two
years for the income statement, statement of cash flows, and statement of retained earnings (equity)
IFRS requires disclosures for the current and prior year.
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Global ViewTransaction Analysis of U.S. GAAP and IFRS
Both apply transaction analysis identically (as shown in this chapter). Although some variations exist in revenue and expense recognition and other principles, all of the transactions in this chapter are accounted for identically under these two systems.
U.S. GAAP is sometimes considered more “rules-based” whereas IFRS is more principles-based, particularly in deciding how to account for certain transactions. U.S. GAAP—more focused on strictly following the accounting
rules. IFRS—more focused on a review of the situation and how
accounting can best reflect it.51
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Global ViewFinancial Statements
Both U.S. GAAP and IFRS prepare the same four basic financial statements. To illustrate, a condensed version of Samsung’s income statement follows (numbers are in thousands of U.S. dollars).
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Return on Assets
A2
Return on assets (ROA) is stated in ratio form as net income divided by the average total assets invested.
Net incomeAverage total assets
Return on assets =
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Appendix 1A Return and Risk Analysis
A3
Many different returns may be
reported.
ROA
Interest return on savings accounts.
Interest return on corporate bonds.
Risk is the uncertainty about the return we will
earn.
The lower the risk, the lower our expected return.
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Appendix 1B Business Activities and the Accounting Equation
C5
Three major types of business activities:
Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans.
Owner financing—resources contributed by the owner along with any income the owner leaves in the organization.
Nonowner financing—resources contributed by creditors (lenders).
Financial management —the task of planning how to obtain these resources and to set the right mix between owner and creditor financing.
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Appendix 1B Business Activities and the Accounting Equation
C5
Three major types of business activities:
Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.
Asset management—determining the amount and type of assets for operations.
Assets—invested amounts. Liabilities—creditors’ claims. Equity—owner’s claim.
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Appendix 1B Business Activities and the Accounting Equation
C5
Three major types of business activities:
Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services.
Strategic management —the process of determining the right mix of operating activities for the type of organization, its plans, and its market.
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