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Dec 26, 2015
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Accounting in Accounting in ActionAction
Accounting 201, Instructor: Judith PaquetteAccounting 201, Instructor: Judith Paquette
Financial Accounting, Seventh Edition
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Two Important StatementsTwo Important Statements
INCOME STATEMENTINCOME STATEMENT RevenueRevenue ExpensesExpenses Net Income Net Income or or Net LossNet Loss
BALANCE SHEETBALANCE SHEET AssetsAssets LiabilitiesLiabilities Stockholders’ Equity (can be negative, more on Stockholders’ Equity (can be negative, more on
this later)this later)
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RevenuesRevenues
The Amount Earned from Sales or Services
During the time period described at the top of the Income Statement
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ExpensesExpenses
The Costs incurred to generate Revenues
During the time period described at the top of the Income Statement
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The Bottom LineThe Bottom Line
If Revenues Exceed Expenses in the current period, it’s called “Net Income”
If Expenses Exceed Revenues in the current period, it’s called “Net Loss”
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
Income Statement
Reports the revenues and expenses for a specific period of time.Net income – revenues exceed expenses.Net loss – expenses exceed revenues.
Illustration 1-10Financial statements andtheir interrelationships
Slide 1-8
AssetsAssets
Things of Value, resourcesThings of Value, resources Owned by the CompanyOwned by the Company As a result of past transactionsAs a result of past transactions Will be used to generate future Will be used to generate future
revenuesrevenues
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LiabilitiesLiabilities
Amounts the business owes to creditorsAmounts the business owes to creditors Claims against the AssetsClaims against the Assets
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Owners’ EquityOwners’ Equity
What is owned, What is owned, “free and clear” “free and clear” of of debt by the company’s ownersdebt by the company’s owners
Who are the Who are the ownersowners?? Residual claimResidual claim against the Assets against the Assets After the creditors’ claims have been After the creditors’ claims have been
satisfiedsatisfied
Assets - Liabilities = Assets - Liabilities = Owners’ EquityOwners’ Equity Also called Also called Net WorthNet Worth
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
Balance Sheet
Illustration 1-10Financial statements andtheir interrelationships
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Define accounting, why important?Define accounting, why important? Users of accountingUsers of accounting Ethics Ethics Principles – GAAP, Measurement, Money, Principles – GAAP, Measurement, Money,
Economic EntityEconomic Entity Create transactionsCreate transactions Create Financial StatementsCreate Financial Statements
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Slide 1-14
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 Accounting Accounting
EquationEquation
Using the Using the 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
Retained Retained earnings earnings statementstatement
Balance Balance sheetsheet
Statement of Statement of cash flowscash flows
Accounting in ActionAccounting in ActionAccounting in ActionAccounting in Action
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Three Activities
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
The accounting process includes the bookkeeping function.
Illustration 1-1The activities of theaccounting process
SO 1 Explain what accounting is.
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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 DataWho Uses Accounting DataWho Uses Accounting DataWho Uses Accounting Data
SO 2 Identify the users and uses of accounting.
Customers
Internal Users
External Users
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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 DataWho Uses Accounting DataWho Uses Accounting DataWho Uses Accounting Data
SO 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
And Employees!!!!
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Discussion Question
SO 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.
Who Uses Accounting DataWho Uses Accounting DataWho Uses Accounting DataWho Uses Accounting Data
Solution on notes page
Slide 1-19
Proprietorship
Partnership Corporation
Owned by two or more persons.
Often retail and service-type businesses
Generally unlimited personal liability
Partnership agreement
Ownership divided into shares of stock
Separate legal entity organized under state corporation law
Limited liability
Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership
Generally owned by one person.
Often small service-type businesses
Owner receives any profits, suffers any losses, and is personally liable for all debts.SO 5 Explain the monetary unit assumption and the economic entity
assumption.
Slide 1-20
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 assumption and the economic entity assumption.
Review Question
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
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.
Solution on notes page
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AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholderStockholder
’s Equity’s EquityStockholderStockholder
’s Equity’s Equity= +
Provides the underlying framework for recording and summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership claims.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
SO 6 State the accounting equation, and define its components.
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Some Common Balance Sheet Some Common Balance Sheet AccountsAccounts
ASSETS LIABILITIESSTOCKHOLDERS' EQUITY
Cash Notes Payable Common Stock
Accounts Receivable Accounts Payable Retained Earnings
Prepaid Rent Current Portion of Long term debt
Prepaid Insurance Unearned Revenue
Land Long Term Debt
Building
Equipment
Note: Retained Earnings is a "twilight zone" account and includes: Revenue-Expenses – Dividends for the life of the company
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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 State the accounting equation, and define its components.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
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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
SO 6 State the accounting equation, and define its components.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
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Dividends are the distribution of cash or other assets to stockholders.
Dividends reduce retained earnings. However, dividends are not an expense.
Illustration 1-6
SO 6 State the accounting equation, and define its components.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
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Some Common Income Statement Some Common Income Statement AccountsAccounts
Revenue ExpensesService Revenue Salaries Expense
Sales Revenue Advertising Expense
Consulting Fees Earned Utilities Expense
Commissions Earned Rent Expense
Supplies Expense
Travel Expense
Dividends are NOT expenses
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Classification
Classify the following items as issuance of
stock, dividends, revenues, or expenses.
Solution on notes page
1. Rent expense
2. Service revenue
3. Dividends
4. Salaries expense
SO 6 State the accounting equation, and define its components.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
Then indicate whether each item increases or decreases
stockholders’ equity. Effect on Equity
Expense Decrease
Revenue Increase
Dividends Decrease
Expense Decrease
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Using The Accounting EquationUsing The Accounting EquationUsing The Accounting EquationUsing The Accounting Equation
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 Analyze the effects of business transactions on the accounting equation.
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Illustration: Are the following events recorded in the accounting records?
Event
Purchase computer.
Criterion
Is the financial position (assets, liabilities, or owner’s equity) of the company
changed?
SO 7 Analyze the effects of business transactions on the accounting equation.
Discuss product
design with customer.
Pay rent.
Record/ Don’t Record
Using The Accounting EquationUsing The Accounting EquationUsing The Accounting EquationUsing The Accounting Equation
Illustration 1-7
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A really big example. . . A really big example. . .
Let’s do the books for Softbyte, a start up Let’s do the books for Softbyte, a start up companycompany
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Transaction (1). Investment by Stockholders.Transaction (1). Investment by Stockholders. Ray and Barbara Neal decides to open a computer programming service which he names Softbyte. On September 1, 2011, they invest $15,000 cash in exchange for common stock. The effect of this transaction on the basic equation is:
Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
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Transaction (2). Purchase of Equipment for Cash.Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.
Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (3). Purchase of Supplies on Credit.Transaction (3). Purchase of Supplies on Credit. Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (4). Services Provided for Cash.Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (5). Purchase of Advertising on Credit.Transaction (5). Purchase of Advertising on Credit. Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (6). Services Provided for Cash and Transaction (6). Services Provided for Cash and Credit.Credit. Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (7). Payment of Expenses.Transaction (7). Payment of Expenses. Softbyte pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (8). Payment of Accounts Payable.Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (9). Receipt of Cash on Account.Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Transaction (10). Dividends.Transaction (10). Dividends. The corporation pays a dividend of $1,300 in cash.
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Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Summary of TransactionsSummary of TransactionsIllustration 1-9Tabular summary ofSoftbyte transactions
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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
Retained Earnings Statemen
t
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
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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
SO 8 Understand the four financial statements and how they are prepared.
Review QuestionReview QuestionNet income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Solution on notes page
Slide 1-44
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
Income Statement
Reports the revenues and expenses for a specific period of time.Net income – revenues exceed expenses.Net loss – expenses exceed revenues.
Illustration 1-10Financial statements andtheir interrelationships
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements Net income is needed to determine the ending balance in retained
earnings.
Illustration 1-10Financial statements andtheir interrelationships
SO 8SO 8
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Financial Financial StatementStatementss
Financial Financial StatementStatementss
The ending balance in retained earnings is needed in preparing the balance sheet
Illustration 1-10Financial statements andtheir interrelationships
SO 8 Understand the four financial statements and how they are prepared.
Slide 1-47
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
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?
Statement of Cash Flows
Slide 1-48
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
Statement of Cash Flows
Illustration 1-10Financial statements andtheir interrelationships
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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 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.
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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 concept.
Slide 1-52
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 Question
SO 3 Understand why ethics is a fundamental business concept.Solution on notes page
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
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.
Slide 1-53
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
SO 4 Explain generally accepted accounting principles and the
measurement principle.
Slide 1-54
Organizations Involved in Standard Setting:
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
http://www.sec.gov/
SO 4
Securities and Exchange Commission (SEC)
Public Company Accounting Oversight Board (PCAOB)http://www.pcaobus.org/
Securities and Exchange Commission (SEC)http://www.fasb.org/
International Accounting Standards Board (IASB)
http://www.iasb.org/
Slide 1-55
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
Measurement Principles
SO 4 Explain generally accepted accounting principles and the
measurement principle.
Slide 1-56
Fair Value Principle – indicates that assets and
liabilities should be reported at fair value (the price
received to sell an asset or settle a liability).
FASB indicates that most assets must follow the cost
principle because market values are not
representationally faithful.
Only in situations where assets are actively traded, such
as investment securities, is the fair value principle
applied.
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
measurement principle.
Measurement Principles
Slide 1-57
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.
Forms of Business
Ownership
Assumptions
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
SO 5 Explain the monetary unit assumption and the economic entity assumption.
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Public accounting
Private accounting
SO 9 Explain the career opportunities in accounting.
Career OpportunitiesCareer OpportunitiesCareer OpportunitiesCareer Opportunities APPENDIX
Government
Forensic accounting
“Show me the Money”
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End of Chapter 1End of Chapter 1
Prepare an Outline for Chapters 1 and 2Prepare an Outline for Chapters 1 and 2 Sit in your teams next classSit in your teams next class Continue with StatementsContinue with Statements
Slide 1-61
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.
Review Question
SO 5 Explain the monetary unit assumption and the economic entity assumption.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
Solution on notes page
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.
Slide 1-62
Indicate whether each of the following statements presented below is true or false.
Solution on notes page
SO 5 Explain the monetary unit assumption and the economic entity assumption.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
1. The three steps in the accounting process are
identification, recording, and communication.
2. The two most common types of external users
are investors and company officers.
3. Congress passed the Sarbanes-Oxley Act of
2002 to reduce unethical behavior and
decrease the likelihood of future corporate
scandals.
True
False
True
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False
True
Indicate whether each of the following statements presented below is true or false.
Solution on notes page
SO 5 Explain the monetary unit assumption and the economic entity assumption.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
4. The primary accounting standard-setting body
in the United States is the Financial Accounting
Standards Board (FASB).
5. The cost principle dictates that companies
record assets at their cost. In later periods,
however, the fair value of the asset must be
used if fair value is higher than its cost.
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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
SO 8 Understand the four financial statements and how they are prepared.
Review QuestionReview Question
Solution on notes page.
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.
Slide 1-67
Discussion Question
Q1-20. “A company’s net income appears
directly on the income statement and the
retained earnings, and it is included indirectly in
the company’s balance sheet.” Do you agree?
Explain.
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
Solution on notes page
Slide 1-68
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, according to an analysis of data from the Department of Education’s National Postsecondary Student Aid Study. That does not include any debt that their parents might incur.
Ethics: Managing Personal Financial Reporting
Slide 1-69
Colleges are required to audit the FAFSA forms of at
least one-third of their students; some audit 100%.
(Compare that to the IRS, which audits a very small
percentage of tax returns.) Thus, if you lie on your
financial aid forms, there’s a very good chance you’ll
get caught.
Slide 1-71
Consider the following and decide what action you would take: Suppose you have $4,000 in cash and $4,000 in credit card bills. The more cash and other assets that you have, the less likely you are to get financial aid. Also, if you have a lot of consumer debt (credit card bills), schools are not more likely to loan you money. To increase your chances of receiving aid, should you use the cash to pay off your credit card bills, and therefore make yourself look “worse off” to the financial aid decision makers?YES: You are playing within the rules. You are not hiding assets. You are restructuring your assets and liabilities to best conform with the preferences that are built into the federal aid formulas. NO: You are engaging in a transaction solely to take advantage of a loophole in the federal aid rules. You are potentially depriving someone who is actually worse off than you from receiving aid.
Slide 1-72
Copyright © 2010 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
Slide 1-73
Discussion Question
Q1-19. In February 2011, 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?
SO 7 Analyze the effects of business transactions on the accounting equation.
Solution on notes page
Using The Accounting EquationUsing The Accounting EquationUsing The Accounting EquationUsing The Accounting Equation
Slide 1-74
AssetsAssetsAssetsAssets
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Assets
LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholderStockholder
’s Equity’s EquityStockholderStockholder
’s Equity’s Equity= +
SO 6 State the accounting equation, and define its components.
Slide 1-75
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
SO 6 State the accounting equation, and define its components.
Liabilities
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholderStockholder
’s Equity’s EquityStockholderStockholder
’s Equity’s Equity= +
Slide 1-76
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
Ownership claim on total assets.
Referred to as residual equity.
Common stock and retained earnings.
SO 6 State the accounting equation, and define its components.
Stockholders’ Equity
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesStockholderStockholder
’s Equity’s EquityStockholderStockholder
’s Equity’s Equity= +
Slide 1-77
Transactions AnalysisTransactions AnalysisTransactions AnalysisTransactions Analysis
SO 7 Analyze the effects of business transactions on the accounting equation.
Slide 1-78
But the Balance Sheet doesn’t tell the But the Balance Sheet doesn’t tell the whole story….whole story….
The Balance Sheet describes what we have
But not how we got it!
Slide 1-79
Introducing…..The Income StatementIntroducing…..The Income Statement
What do you think THIS statement is?
Slide 1-80
The Income Statement tells how the The Income Statement tells how the company’s performance changed the net company’s performance changed the net
assets….assets….
Revenues are transactions which resulted in an inflow of net assets
Expenses are transactions which resulted in an outflow of net assets
Slide 1-81
Think of it as a Business Think of it as a Business Sink!Sink!
Net Income means that Assets are flowing into the Business (Revenues)
Faster than they’re flowing out of the business (Expenses)
The Asset Level in the Sink is Rising!
Slide 1-82
Net LossNet Loss
Net Loss means that the assets are flowing out of the business (Expenses)
Faster than they’re flowing into the business (Revenues)
The Asset Level in the Sink is Dropping!
Slide 1-83
The Balance SheetThe Balance Sheet
Describes the financial position of a Describes the financial position of a company at a specific point in timecompany at a specific point in time
Three Components of the Balance SheetThree Components of the Balance SheetAssetsAssetsLiabilitiesLiabilitiesOwners’ EquityOwners’ Equity
Slide 1-84
Want more Equity?Want more Equity?
You’ll need to…..You’ll need to…..
Invest MoreInvest More – Increases the – Increases the Contributed Contributed CapitalCapital portion of Equity portion of Equity
Earn MoreEarn More – Running a successful – Running a successful business increases the business increases the Retained Retained EarningsEarnings portion of Equity portion of Equity
Slide 1-85
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.
Statement indicates the reasons why retained earnings has increased or decreased during the period.
Retained Earnings Statement
Illustration 1-10Financial statements andtheir interrelationships