Accounting in Business Chapter 1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.

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

01-C1:Explain the Purpose and

Importance of Accounting.

2

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.

3

01-C2:Identify Users and Uses of, andOpportunities in, Accounting.

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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.

7

01-C3:Explain Why Ethics

Are Crucial to Accounting.

8

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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

10

Explain Generally Accepted Accounting Principles and Define and Apply Several

Accounting Principles.

11

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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Conceptual Framework and Convergence

C414

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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

1 - 19

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.

1 - 20

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.

25

NEED-TO-KNOW Part 2

01-A1:Define and Interpret the

Accounting Equation and Each of Its Components.

26

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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

1 - 28

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)

= ++ - + -

28

01-P1:Analyze Business Transactions

Using the Accounting Equation.

29

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. . .



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:



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



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


Now, let’s look at transactions involving revenues, expenses and dividends.

P1

The accounts involved are:(1) Cash (asset) (2) Revenues (equity)


Provided consulting services to a customer and received $4,200 cash right away.

P1

Assets = Liabilities +


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




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




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

45

01-P2:Identify and Prepare Basic

Financial Statements and Explain How They Interrelate.

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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.

48

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

49

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

1 - 50

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.

50

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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).

52

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Global ViewStatus of IFRS Adoption

53

01-A2:Compute and Interpret Return

on Assets.

54

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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 =

55

01-A3 (Appendix 1A):Explain the Relation

Between Return and Risk.

56

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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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58

01-C5 (Appendix 1B):Identify and Describe theThree Major Activities of

Organizations.

1 - 59

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.

59

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C5


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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C5


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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C562

1 - 63

End of Chapter 1

63

Accounting in Business Chapter 1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written.

Documents

accounting reports

goal of accounting

accounting information

importance of accounting

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external user b internal

comparable information