Top Banner
Chapter 1-1
53

Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Jan 02, 2016

Download

Documents

Ethan Howard
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-1

Page 2: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-2

CHAPTER CHAPTER 11

ACCOUNTING IN ACCOUNTING IN ACTIONACTION

Accounting Principles, Eighth Edition

Page 3: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-3

1. Explain what accounting is.

2. Identify the users and uses of accounting.

3. Understand why ethics is a fundamental business concept.

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

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

6. State the accounting equation, and define assets, liabilities, and owner’s equity.

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

8. Understand the four financial statements and how they are prepared.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Page 4: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-4

Accounting in ActionAccounting in ActionAccounting in ActionAccounting in Action

Ethics in Ethics in financial financial reportingreporting

Generally Generally accepted accepted accounting accounting principlesprinciples

AssumptionsAssumptions

What is What is

Accounting?Accounting?

What is What is

Accounting?Accounting?

The Building The Building

Blocks of Blocks of

AccountingAccounting

The Building The Building

Blocks of Blocks of

AccountingAccounting

The Basic The Basic

Accounting Accounting

EquationEquation

The Basic The Basic

Accounting Accounting

EquationEquation

Using the Using the Basic Basic

Accounting Accounting EquationEquation

Using the Using the Basic Basic

Accounting Accounting EquationEquation

Financial Financial

StatementsStatements

Financial Financial

StatementsStatements

Three Three activitiesactivities

Who uses Who uses accounting accounting datadata

AssetsAssets

LiabilitiesLiabilities

Owner’s Owner’s equityequity

Transaction Transaction analysisanalysis

Summary of Summary of transactionstransactions

Income Income statementstatement

Owner’s Owner’s equity equity statementstatement

Balance Balance sheetsheet

Statement of Statement of cash flowscash flows

Page 5: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-5

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

LO 1 Explain what accounting is.LO 1 Explain what accounting is.

The purpose of accounting is to:

(1)(1) identifyidentify, recordrecord, and communicatecommunicate the economic events of an

(2) organization to

(3) interested users.

Page 6: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-6

Three Activities

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

LO 1 Explain what accounting is.LO 1 Explain what accounting is.

Illustration 1-1Accounting process

The accounting process includes the bookkeeping function.

Page 7: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-7

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?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?

LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.

Customers

Internal Users

External Users

Page 8: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-8

The IRS (Internal revenue service) and

SEC (Securities and Exchange Commission)

require companies to retain records that can be audited.(تفحص)

Page 9: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-9

Common Questions Asked User

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?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?

LO 2 Identify the users and uses of accounting.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

Page 10: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-10

Discussion Question

LO 3 Understand why ethics is a fundamental business conceptLO 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?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?

Page 11: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-11

The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting

Ethics In Financial Reporting

LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.

Standards of conduct by which one’s 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.

Page 12: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-12

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.

Review QuestionReview Question

EthicsEthicsEthicsEthics

LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.

Page 13: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-13

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.

Review QuestionReview Question

EthicsEthicsEthicsEthics

LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.

Page 14: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-14

Various users need financial information

Various users need financial information

The accounting profession has

attempted to develop a set of standards that are generally accepted and universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Financial StatementsBalance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Generally Generally Accepted Accepted

Accounting Accounting Principles Principles

(GAAP)(GAAP)

Generally Generally Accepted Accepted

Accounting Accounting Principles Principles

(GAAP)(GAAP)

The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting

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

Page 15: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-15

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 LO 4 Explain generally accepted accounting principles and the

cost principle.cost principle.

The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting

http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/

Page 16: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-16

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 AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting

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

Page 17: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-17

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.

AssumptionsAssumptionsAssumptionsAssumptions

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

Forms of Business

Ownership

Page 18: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-18

Proprietorship

Partnership Corporation

Owned by two Owned by two or more or more persons.persons.

Often retail and Often retail and service-type service-type businessesbusinesses

Generally Generally unlimited unlimited personal personal liabilityliability

Partnership Partnership agreementagreement

Ownership Ownership divided into divided into shares of stockshares of stock

Separate legal Separate legal entity entity organized organized under state under state corporation lawcorporation law

Limited liabilityLimited liability

Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership

Generally Generally owned by one owned by one person.person.

Often small Often small service-type service-type businessesbusinesses

Owner receives Owner receives any profits, any profits, suffers any suffers any losses, and is losses, and is personally personally liable for all liable for all debts.debts.

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

Page 19: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-19

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.

AssumptionsAssumptionsAssumptionsAssumptions

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

Review QuestionReview Question

Page 20: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-20

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.

AssumptionsAssumptionsAssumptionsAssumptions

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

Review QuestionReview Question

Page 21: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-21

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.

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

Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership

Review QuestionReview Question

Page 22: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-22

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.

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

Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership

Review QuestionReview Question

Page 23: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-23

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity

Owner’s Owner’s EquityEquity

= +

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 EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation

LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.

Page 24: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-24

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity

Owner’s Owner’s EquityEquity

= +

Provides the underlying framework for recording and summarizing economic events.

The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation

LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.

Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.

AssetAssetssAssetAssetss

Page 25: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-25

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity

Owner’s Owner’s EquityEquity

= +

Provides the underlying framework for recording and summarizing economic events.

The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation

LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.

Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

LiabilitiLiabilitiesesLiabilitiLiabilitieses

Page 26: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-26

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwner’s Owner’s EquityEquity

Owner’s Owner’s EquityEquity

= +

Provides the underlying framework for recording and summarizing economic events.

The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation

LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.

Ownership claim on total assets.

Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship or Partnership).

Owner’s Owner’s EquityEquityOwner’s Owner’s EquityEquity

Page 27: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-27

Owners’ EquityOwners’ EquityOwners’ EquityOwners’ 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 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.

Page 28: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-28

Owners’ EquityOwners’ EquityOwners’ EquityOwners’ 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 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.

Page 29: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-29

Using The Basic Accounting Using The Basic Accounting EquationEquationUsing The Basic Accounting Using The Basic Accounting EquationEquation

Transactions are a business’s 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 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.

Page 30: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-30

Q1-15:Q1-15: Are the following events recorded in the accounting records?

Event

Supplies are

purchased on account.

Criterion

Is the financial position (assets, liabilities, or owner’s equity) of the company

changed?

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

An employee is hired.

Owner withdraws cash for

personal use.

Record/ Don’t Record

Transactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)

Page 31: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-31

Discussion Question

Q18. In February 2008, Paula King invested

an additional $10,000 in her business, King’s

Pharmacy, which is organized as a

proprietorship. King’s 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

TransactionsTransactionsTransactionsTransactions

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

Page 32: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-32

P1-1A:P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May.

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

Barone, Capital

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

+ + = +

1. Invested $10,000 cash to start the repair shop.

Investment

Assets Liabilities Equity

Page 33: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-33

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

Barone, Capital

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

2. Purchased equipment for $5,000 cash.

-5,0002. +5,000

+ + = +

Investment

Assets Liabilities Equity

Page 34: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-34

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

3. Paid $400 cash for May office rent.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

Barone, Capital

Investment

Assets Liabilities Equity

Page 35: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-35

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

4. Received $5,100 from customers for repair service.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e

Barone, Capital

Investment

Assets Liabilities Equity

Page 36: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-36

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

5. Withdrew $1,000 cash for personal use.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings

Barone, Capital

Investment

Assets Liabilities Equity

Page 37: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-37

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

6. Paid part-time employee salaries of $2,000.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense

Barone, Capital

Investment

Assets Liabilities Equity

Page 38: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-38

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

7. Incurred $250 of advertising costs, on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense

+2507. -250 Expense

Barone, Capital

Investment

Assets Liabilities Equity

Page 39: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-39

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

8. Provided $750 of repair services on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense

+2507. -250 Expense+7508. +750 Revenu

e

Barone, Capital

Investment

Assets Liabilities Equity

Page 40: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-40

Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)

+10,000

1. +10,000

CashAccounts

Receivable Equipment

Accounts Payable

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

9. Collected $120 cash for services previously billed.

-5,0002. +5,000

+ + = +

-4003. -400 Expense+5,1004. +5,100 Revenu

e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense

+2507. -250 Expense+7508. +750 Revenu

e+1209. -120

Barone, Capital

Investment

Assets Liabilities Equity

6,820 + 630 + 5,000 = 250 + 12,200

Page 41: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-41

Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:

Balance Sheet

Income Statemen

t

Statement of Cash

Flows

Owner’s Equity

Statement

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Page 42: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-42

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.

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Review QuestionReview Question

Page 43: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-43

Income Statement

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Reports the revenues and expenses for a specific period of time.

Net income – revenues exceed expenses.

Net loss – expenses exceed revenues.

Revenues:

S ervice revenue 5,850$

Expenses:

S alary expense 2,000

Rent expense 400

Adver tising expense 250

T otal expenses 2,650

Net income 3,200$

Barone’s Repair Shop

I ncome Statement

For the Month Ended May 31, 2008

Page 44: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-44

Revenues:

S ervice revenue 5,850$

Expenses:

S alary expense 2,000

Rent expense 400

Adver tising expense 250

T otal expenses 2,650

Net income 3,200$

Barone’s Repair Shop

I ncome Statement

For the Month Ended May 31, 2008

Income Statement

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Barone' s, Capital May 1 -$

Add: I nvestment 10,000

N et income 3,200

13,200

Less: Drawings 1,000

Barone' s, Capital May 31 12,200$

Barone’s Repair Shop

Owner' s Equity Statement

For the Month Ended May 31, 2008

Owner’s Equity Statement

Net income is needed to determine the ending balance in owner’s

equity.

Page 45: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-45

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Barone' s, Capital May 1 -$

Add: I nvestment 10,000

N et income 3,200

13,200

Less: Drawings 1,000

Barone' s, Capital May 31 12,200$

Barone’s Repair Shop

Owner' s Equity Statement

For the Month Ended May 31, 2008

Owner’s Equity Statement

Statement indicates the reasons why owner’s equity has increased or decreased during the period.

Page 46: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-46

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Barone' s, Capital May 1 -$

Add: I nvestment 10,000

N et income 3,200

13,200

Less: Drawings 1,000

Barone' s, Capital May 31 12,200$

Barone’s Repair Shop

Owner' s Equity Statement

For the Month Ended May 31, 2008

Owners’ Equity Statement

Assets

Cash 6,820$

Accounts receivable 630

Equipment 5,000

T otal assets 12,450$

Liabilities

Accounts payable 250$

Owner' s Equity

Barone' s, capital 12,200

T otal liab. & equity 12,450$

Balance Sheet

Barone’s Repair Shop

May 31, 2008

The ending balance in owner’s equity is needed in preparing the

balance sheet

Balance Sheet

Page 47: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-47

Balance Sheet

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Reports the assets, liabilities, and owner’s equity at a specific date.

Assets listed at the top, followed by liabilities and owner’s equity.

Total assets must equal total liabilities and owner’s equity.

Assets

Cash 6,820$

Accounts receivable 630

Equipment 5,000

T otal assets 12,450$

Liabilities

Accounts payable 250$

Owner' s Equity

Barone' s, capital 12,200

T otal liab. & equity 12,450$

Balance Sheet

Barone’s Repair Shop

May 31, 2008

Page 48: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-48

Balance Sheet

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Assets

Cash 6,820$

Accounts receivable 630

Equipment 5,000

T otal assets 12,450$

Liabilities

Accounts payable 250$

Owner' s Equity

Barone' s, capital 12,200

T otal liab. & equity 12,450$

Balance Sheet

Barone’s Repair Shop

May 31, 2008Cash fl ow f rom operating activities

Cash receipts f rom revenues 5,220$

Cash paid f or expenses (2,400)

Cash provided by operations 2,820

Cash fl ow f rom investing activitites

Purchase of equipment (5,000)

Cash fl ow f rom fi nancing activities

I nvestment by owners 10,000

Drawings by owners (1,000)

Cash provided by fi nancing 9,000

Net increase in cash 6,820

Cash balance, May 1 -

Cash balance, May 31 6,820$

Statement of Cash Flows

Barone’s Repair Shop

For the Month Ended May 31, 2008

Statement of Cash Flows

Page 49: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-49

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Cash fl ow f rom operating activities

Cash receipts f rom customers 5,220$

Cash paid f or expenses (2,400)

Cash provided by operations 2,820

Cash fl ow f rom investing activities

Purchase of equipment (5,000)

Cash fl ow f rom fi nancing activities

I nvestment by owners 10,000

Drawings by owners (1,000)

Cash provided by fi nancing 9,000

Net increase in cash 6,820

Cash balance, May 1 -

Cash balance, May 31 6,820$

Statement of Cash Flows

Barone’s Repair Shop

For the Month Ended May 31, 2008

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?

Page 50: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-50

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.

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Review QuestionReview Question

Page 51: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-51

Discussion Question

Q19. “A company’s net income appears

directly on the income statement and the

owner’s equity statement, and it is included

indirectly in the company’s balance sheet.”

Do you agree? Explain.

See notes page for discussion

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.

Page 52: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-52

Forensic AccountingCareers with insurance companies and law offices to conduct investigations into theft and fraud.

Opportunities in GovernmentCareers with the IRS, the FBI, the SEC, and in public colleges and universities.

Private AccountingCareers in industry working in cost accounting, budgeting, accounting information systems, and taxation.

LO 9 Explain the career opportunities in accounting.LO 9 Explain the career opportunities in accounting.

Accounting Career OpportunitiesAccounting Career OpportunitiesAccounting Career OpportunitiesAccounting Career Opportunities

Public AccountingCareers in auditing and taxation serving the general public.

Page 53: Chapter 1-1. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition.

Chapter 1-53

Copyright © 2008 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.

CopyrightCopyrightCopyrightCopyright