Chapter 1-1 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 stockholders’ equity. 7. Analyze the effects of business transactions on the accounting equation. 8. Understand the four financial statements and how they are prepared. Study Objectives Study Objectives
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Chapter 1-1
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 stockholders’ 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
Chapter 1-2
Accounting In Action
Accounting In Action
Financial Accounting, Sixth Edition
Chapter Chapter 11Chapter Chapter 11
Chapter 1-3
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
StatementsStatementsFinancial Financial
StatementsStatements
Three Three activitiesactivities
Who uses Who uses accounting accounting datadata
AssetsAssets
LiabilitiesLiabilities
Stockholders' Stockholders' equityequity
Transaction Transaction analysisanalysis
Summary of Summary of transactionstransactions
Income Income statementstatement
Statement of Statement of retained retained earningsearnings
Balance Balance sheetsheet
Statement of Statement of cash flowscash flows
Chapter 1-4
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
SO 1 Explain what accounting is.SO 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.
Chapter 1-5
Three Activities
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
SO 1 Explain what accounting is.SO 1 Explain what accounting is.
Illustration 1-1Accounting process
The accounting process includes the bookkeeping function.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
Ethics In Financial Reporting
SO 3 Understand why ethics is a fundamental business conceptSO 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 passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound ethical behavior.
Chapter 1-10
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
SO 3 Understand why ethics is a fundamental business conceptSO 3 Understand why ethics is a fundamental business concept.
Chapter 1-11
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 StatementRetained Earnings StatementStatement of Cash FlowsNote Disclosure
Financial StatementsBalance SheetIncome StatementRetained Earnings StatementStatement 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
SO 4 Explain generally accepted accounting principles and the SO 4 Explain generally accepted accounting principles and the cost principle.cost principle.
Chapter 1-12
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
Financial Accounting Standards Board (FASB)
International Accounting Standards Board (IASB)SO 4 Explain generally accepted accounting principles and the SO 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/
Chapter 1-13
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
SO 4 Explain generally accepted accounting principles and the SO 4 Explain generally accepted accounting principles and the cost principle.cost principle.
Chapter 1-14
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
SO 5 Explain the monetary unit SO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Forms of Business
Ownership
Chapter 1-15
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 liabilitypersonal liability
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 owned Generally owned by one person.by one 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 liable personally liable for all debts.for all debts.
SO 5 Explain the monetary unit SO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Chapter 1-16
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
SO 5 Explain the monetary unit SO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Review QuestionReview Question
Chapter 1-17
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.
SO 5 Explain the monetary unit SO 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
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ equity.
Chapter 1-19
Provides the underlying framework for recording and summarizing economic events.
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ equity.
Chapter 1-20
Provides the underlying framework for recording and summarizing economic events.
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ equity.
Chapter 1-21
Provides the underlying framework for recording and summarizing economic events.
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ 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
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ equity.
Chapter 1-23
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.
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ equity.
Chapter 1-24
Dividends are the distribution of cash or other assets to stockholders.
Dividends reduce retained earnings, however dividends are not an expense.
SO 6 SO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and define assets, liabilities, and stockholders’ equity.stockholders’ equity.
Chapter 1-25
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.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
Chapter 1-26
Question:Question: Are the following events recorded in the accounting records?
Event
Supplies are
purchased on account.
Criterion
Is the financial position (assets, liabilities, or stockholders’ equity) of the company
changed?
SO 7 SO 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.
Dividends are paid to
stockholders’.
Record/ Don’t Record
TransactionsTransactionsTransactionsTransactions
Chapter 1-27
Discussion Question
Q18. In February 2008, Paula King invested
an additional $10,000 in Hardy Company.
Hardy’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
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
Chapter 1-28
Stockholders’ Equity
P1-1A:P1-1A: Barone’s Repair Shop was started on May. Prepare a tabular analysis of the following transactions for the month of May.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
+ + = +
1. Stockholders invested $10,000 cash to start the repair shop.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
-5,0002. +5,000
-4003. -400
Stockholders’ Equity
CashAccounts
Receivable Equipment
Accounts Payable
Common Stock+ + = +
Assets Liabilities
Retained Earnings
+5,1004. +5,100
4. Received $5,100 from customers for repair service.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
-5,0002. +5,000
-4003. -400
Stockholders’ Equity
CashAccounts
Receivable Equipment
Accounts Payable
Common Stock+ + = +
Assets Liabilities
Retained Earnings
+5,1004. +5,100
-1,0005. -1,000
-2,0006. -2,000
Expense
7. Incurred $250 of advertising costs, on account.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
-5,0002. +5,000
-4003. -400
Stockholders’ Equity
CashAccounts
Receivable Equipment
Accounts Payable
Common Stock+ + = +
Assets Liabilities
Retained Earnings
+5,1004. +5,100
-1,0005. -1,000
-2,0006. -2,000
Revenue
+250 -2507.
8. Provided repair services on account to customers $750.
SO 7 SO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
-5,0002. +5,000
-4003. -400
Stockholders’ Equity
CashAccounts
Receivable Equipment
Accounts Payable
Common Stock+ + = +
Assets Liabilities
Retained Earnings
+5,1004. +5,100
-1,0005. -1,000
-2,0006. -2,000
+250 -2507.
+7508. +750
9. Collected $120 cash for services previously billed.
+1209. -120
+
Chapter 1-37
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
SO 8 Understand the four financial statements and how they are SO 8 Understand the four financial statements and how they are prepared.prepared.
Chapter 1-48
Ethics: Managing Personal Financial ReportingWhen students need money for school, they often apply for financial aid. Why do the Department of Education and your school want this information?
Bottom line: The worse off you look financially, the more likely you are to get money.
Question: Should you intentionally make yourself look worse off than you are?
All About YouAll About YouAll About YouAll About You
Chapter 1-49
Some Facts:
After adjusting for inflation, private-college tuition and fees have increased 37% over the past decade; public-college tuition has risen 54%.
Two-thirds (65.6%) of undergraduate students graduate with some debt.
Among graduating seniors, the average debt load is $19,202.
All About YouAll About YouAll About YouAll About You
Chapter 1-50
All About YouAll About YouAll About YouAll About You
Source: College Board, Princeton Review, as reported in “College Admissions: Is Gate Open or Closed?,” Wall Street Journal, March 25, 2006, p. A7.
Chapter 1-51
To increase your chances of receiving aid, should you use available cash to pay off your credit card bills, and therefore make yourself look “worse off” to the financial aid decision makers?
All About YouAll About YouAll About YouAll About You
What Do You Think?What Do You Think?
YES: You are simply restructuring your assets and liabilities to best conform with the preferencesthat are built into the federal aid formulas.
NO: You are taking advantage of a loophole in the federal aid rules and potentially depriving someone who is actually worse off than you from receiving aid.