Wey_AP_8e_Ch01_Revised

8/9/2019 Wey_AP_8e_Ch01_Revised

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Chapter

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Chapter

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CHAPTERCHAPTER11

ACCOUNTING INACCOUNTING IN

ACTIONACTION

Accounting Principles, Eighth Edition


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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 owners equity.

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

8. Understand the four financial statements and how they areprepared.

Study ObjectivesStudy Objectives


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Chapter

1-4

Accountingin ActionAccountingin Action

Ethics inEthics in

financialfinancial

reportingreporting

GenerallyGenerally

acceptedaccepted

accountingaccounting

principlesprinciplesAssumptionsAssumptions

What isWhat is

Accounting?Accounting?

The BuildingThe Building

Blocks ofBlocks of

AccountingAccounting

The BasicThe Basic


EquationEquation

Using theUsing the

BasicBasic


EquationEquation

FinancialFinancial

StatementsStatements

ThreeThree

activitiesactivities

Who usesWho uses

accountingaccounting

datadata

AssetsAssets

LiabilitiesLiabilities

OwnersOwners

equityequity

TransactionTransaction

analysisanalysis

Summary ofSummary of

transactionstransactions

IncomeIncome

statementstatement

OwnersOwners

equityequity

statementstatement

BalanceBalance

sheetsheet

Statement ofStatement of

cash flowscash flows


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Chapter

1-5

Whatis Accounting?Whatis Accounting?

LO 1 Explain whataccountingis.LO 1 Explain whataccountingis.

The purpose of accountingisto:

(1)(1) identifyidentify, recordrecord, andcommunicatecommunicate theeconomicevents of an

(2) organizationto

(3) interestedusers.


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Chapter

1-6

Three Activities

Whatis Accounting?Whatis Accounting?

LO 1 Explain whataccountingis.LO 1 Explain whataccountingis.

Illustration 1-1Accounting process

The accounting process includesthe bookkeeping function.


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Chapter

1-7

Management

Therearetwo broadgroupsof usersof

financialinformation:internalusersandexternalusers.

HumanResources

IRS

LaborUnions

SEC

Marketing

Finance

Investors

Creditors

Who Uses Accounting Data?Who Uses Accounting Data?

LO 2 Identifytheusersandusesof accounting.LO 2 Identifytheusersandusesof accounting.

Customers

Internal Users

ExternalUsers


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Chapter

1-8

Common Questions Asked User

1. Can we afford to give ouremployees 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 paydividends to the stockholders?

5. What price for our productwill maximize net income?


LO 2 Identifytheusersandusesofaccounting.LO 2 Identifytheusersandusesofaccounting.

6. Will the company be able topay its short-term debts?

Investors

Management

Finance

Marketing

Creditors


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Chapter

1-9

Discussion Question

LO 3 Understand whyethicsisafundamental businessconceptLO 3 Understand whyethicsisafundamental businessconcept.

Q1. Accounting is ingrained in our society and it is

vital to our economic system. Do you agree? Explain.

See notes page for discussion



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Chapter

1-10

The Building Blocks of AccountingThe Building Blocks of Accounting

Ethics InFinancial Reporting

LO 3 Understand why ethicsisafundamental business conceptLO 3 Understand why ethicsisafundamental business concept.

Standards of conduct by which ones actions arejudged 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 soundethical behavior.


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Chapter

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Ethics are the standards of conduct by which one'sactions are judged as:

a. right or wrong.b. honest or dishonest.

c. fair or not fair.

d. all of these options.

Review QuestionReview Question

EthicsEthics

LO 3 Understandwhyethicsisafundamental business conceptLO 3 Understandwhyethicsisafundamental business concept.


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Chapter

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Ethics are the standards of conduct by which one'sactions are judged as:

a. right or wrong.b. honest or dishonest.

c. fair or not fair.

d. all of these options.


EthicsEthics

LO 3 Understandwhyethicsisafundamental business conceptLO 3 Understandwhyethicsisafundamental business concept.


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Chapter

1-13

Various usersneed financialinformation

The accounting professionhas attempted to develop

a set of standards thatare generally acceptedand universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Owners EquityStatement of Cash FlowsNote Disclosure

GenerallyAcceptedGenerallyAccepted

AccountingAccountingPrinciples (GAAP)Principles (GAAP)

The Building BlocksofAccountingThe Building BlocksofAccounting

LO 4 Explaingenerallyacceptedaccountingprinciplesandthecostprinciple.LO 4 Explaingenerallyacceptedaccountingprinciplesandthecostprinciple.


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Chapter

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Organizations Involvedin Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board(IASB)

LO 4 Explaingenerallyacceptedaccounting principlesandthe cost principle.LO 4 Explaingenerallyacceptedaccounting principlesandthe cost principle.


http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/


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Chapter

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Cost Principle (Historical) dictates that companiesrecord assets at their cost.

Issues:

Reported at cost when purchased and also over thetime the asset is held.

Cost easily verified, whereas market value is oftensubjective.

Fair value information may be more useful.


LO 4 Explaingenerallyacceptedaccounting principlesandthe cost principle.LO 4 Explaingenerallyacceptedaccounting principlesandthe cost principle.


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Monetary Unit Assumption include in theaccounting records only transaction data that can beexpressed in terms of money.

EconomicEntity Assumption requires thatactivities of the entity be kept separate and distinctfrom the activities of its owner and all other economicentities.

Proprietorship.

Partnership.

Corporation.

AssumptionsAssumptions

LO 5 Explainthe monetary unitassumptionLO 5 Explainthe monetary unitassumption

andthe economic entity assumption.andthe economic entity assumption.

FormsofBusiness Ownership


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Proprietorship Partnership Corporation

Owned by two orOwned by two ormore persons.more persons.

Often retail andOften retail andserviceservice--typetypebusinessesbusinesses

GenerallyGenerally

unlimitedunlimitedpersonal liabilitypersonal liability

PartnershipPartnershipagreementagreement

OwnershipOwnershipdivided intodivided into

shares of stockshares of stock

Separate legalSeparate legalentity organizedentity organizedunder stateunder statecorporation lawcorporation law

Limited liabilityLimited liability

Forms of Business OwnershipForms of Business Ownership

Generally ownedGenerally ownedby one person.by one person.

Often smallOften smallserviceservice--typetypebusinessesbusinesses

Owner receivesOwner receives

any profits,any profits,suffers anysuffers anylosses, and islosses, and ispersonally liablepersonally liablefor all debts.for all debts.

LO 5 ExplainthemonetaryunitassumptionLO 5 Explainthemonetaryunitassumption

andthe economic entityassumption.andthe economic entityassumption.


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Chapter

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Combining the activities of Kellogg and GeneralMills would violate the

a. cost principle.b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.






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Chapter

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Combining the activities of Kellogg and GeneralMills would violate the

a. cost principle.b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.






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Chapter

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A business organized as a separate legal entityunder state law having ownership divided into

shares of stock is aa. proprietorship.

b. partnership.

c. corporation.d. sole proprietorship.






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Chapter

1-21

A business organized as a separate legal entityunder state law having ownership divided into

shares of stock is aa. proprietorship.

b. partnership.

c. corporation.d. sole proprietorship.






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Chapter

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AssetsAssets LiabilitiesLiabilitiesOwnersOwners

EquityEquity= +

Provides the underlying framework for recording andsummarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownershipclaims.

The Basic Accounting EquationThe Basic Accounting Equation

LO 6LO 6 Statetheaccountingequation, anddefineStatetheaccountingequation, anddefine

assets, liabilities, andownersequity.assets, liabilities, andownersequity.


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Chapter

1-23

AssetsAssets LiabilitiesLiabilities OwnersOwnersEquityEquity

= +





Resources a business owns.Provide future services or benefits.

Cash, Supplies, Equipment, etc.

AssetsAssets


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Chapter

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= +





Claims against assets (debts and obligations).Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

LiabilitiesLiabilities


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Chapter

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= +





Ownership claim on total assets.Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship orPartnership).

Owners EquityOwners Equity


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Chapter

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Revenuesresult 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 6LO 6 Statetheaccounting equation, anddefineStatetheaccounting equation, anddefine

assets, liabilities, andowners equity.assets, liabilities, andowners equity.


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Chapter

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Expensesare 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 6LO 6 Statetheaccounting equation, anddefineStatetheaccounting equation, anddefine

assets, liabilities, andowners equity.assets, liabilities, andowners equity.


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Chapter

1-28

Using The Basic Accounting EquationUsing The Basic Accounting Equation

Transactionsare a businesss economic eventsrecorded by accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dualeffecton theaccounting equation.

LO 7LO 7 Analyzetheeffects of businesstransactionsAnalyzetheeffects of businesstransactions

ontheaccountingequation.ontheaccountingequation.


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Chapter

1-29

Q1Q1--15:15: Are the following events recorded in theaccounting records?

EventSupplies arepurchased

on account.

Criterion Is the financial position (assets, liabilities, orowners equity) of the company changed?

LO 7LO 7 Analyzetheeffectsof businesstransactionsAnalyzetheeffectsof businesstransactions

ontheaccountingequation.ontheaccountingequation.

An employeeis hired.

Ownerwithdrawscash for

personal use.

Record/DontRecord

Transactions (Question?)Transactions (Question?)


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Chapter

1-30

Discussion Question

Q18. In February 2008, Paula King invested an

additional $10,000 in her business, Kings

Pharmacy, which is organized as a proprietorship.

Kings accountant, Lance Jones, recorded this

receipt as an increase in cash and revenues. Is

this treatment appropriate? Why or why not?


TransactionsTransactions

LO 7LO 7 Analyzethe effects of businesstransactionsAnalyzethe effects of businesstransactions

ontheaccounting equation.ontheaccounting equation.


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Chapter

1-31

P1P1--1A:1A: Barones Repair Shop was started on May 1 byNancy. Prepare a tabular analysis of the followingtransactions for the month of May.

Transactions (Problem)Transactions (Problem)

+10,0001. +10,000

CashAccounts

Receivable EquipmentAccountsPayable

Barone,Capital



+ + = +

1. Invested $10,000 cashto starttherepair shop.

Investment

Assets Liabilities Equity


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Chapter

1-32


+10,0001. +10,000

CashAccounts


Barone,Capital



2. Purchased equipmentfor$5,000 cash.

-5,0002. +5,000

+ + = +

Investment



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Chapter

1-33


+10,0001. +10,000

CashAccounts




3. Paid $400 cashforMay officerent.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

Barone,Capital

Investment



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Chapter

1-34


+10,0001. +10,000

CashAccounts




4. Received $5,100from customersforrepair service.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

Barone,Capital

Investment



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Chapter

1-35


+10,0001. +10,000

CashAccounts




5. Withdrew $1,000 cashforpersonaluse.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

Barone,Capital

Investment



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Chapter

1-36


+10,0001. +10,000

CashAccounts




6. Paidpart-time employee salaries of $2,000.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

Barone,Capital

Investment



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Chapter

1-37


+10,0001. +10,000

CashAccounts




7. Incurred $250 ofadvertising costs, onaccount.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

+2507. -250 Expense

Barone,Capital

Investment



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Chapter

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+10,0001. +10,000

CashAccounts




8. Provided $750 ofrepair services onaccount.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

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

Barone,Capital

Investment



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Chapter

1-39


+10,0001. +10,000

CashAccounts




9. Collected $120 cashfor servicespreviously billed.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

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

+1209. -120

Barone,Capital

Investment


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


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Chapter

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Companies prepare four financial statements fromthe summarized accounting data:

BalanceSheet

IncomeStatement

Statementof CashFlows

OwnersEquity

Statement

FinancialStatementsFinancialStatements

LO 8 Understandthefourfinancial statementsandhowtheyare prepared.LO 8 Understandthefourfinancial statementsandhowtheyare prepared.


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Chapter

1-41

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.





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Chapter

1-42

Income Statement

Financial StatementsFinancial Statements


Reports the revenuesand expenses for a

specific period of time.

Net income revenuesexceed expenses.

Net loss expensesexceed revenues.

Revenues:

ervice revenue

Expenses:

alar expense

Rent expense

dvertisin expense

otal expenses

Net income

Barones Repair Shop

Income Statement

For the Month Ended May 31, 2008


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Chapter

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Revenues:

Service revenue 5,850$

Expenses:

Salary expense 2,000

Rent expense 400

Advertising expens 250

Total expenses 2,650

Net income 3,200$

Barones Repair Shop

Income Statement


Income Statement


LO8 Understand the four financialstatements and howthey are prepared.LO8 Understand the four financialstatements and howthey are prepared.

Barone's, CapitalMay 1 -$

Add: Investment 10,000

Net income 3,200

13,200

Less: Drawings 1,000

Barone's, CapitalMay 31 12,200$

Barones Repair Shop

Owner's Equity Statement


Owners EquityStatement

Net income is needed to determinethe ending balance in owners equity.


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Chapter

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arone's apital May


Net income 3,200

13,200


Barone' apital May 31 12,200$

Barones Repair Shop




Statement indicates thereasons why owners

equityhas increased ordecreased during theperiod.


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Chapter

1-45



arone s

apital

ay


Net income 3,200

13,200


Barone's, Capital May 31 12,200$

Barones Repair Shop




AssetsCash 6,820$

Accounts receivabl 630

Equipment 5,000

Total assets 12,450$

Liabilities

Accounts payable 250$Owner's Equity

Barone's, capital 12,200

Total liab. & equity 12,450$

Balance Sheet

Barones Repair Shop

May 31, 2008

The ending balance in owners equity isneeded in preparing the balance sheet

Balance Sheet


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Chapter

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Balance Sheet

Financial StatementsFinancial Statements


Reports the assets,liabilities, and ownersequity at a specific date.

Assets listed at the top,followed by liabilitiesand owners equity.

Total assets must equaltotal liabilities andowners equity.

AssetsCash ,

Accounts recei able

quipment ,

Total assets 1 ,

Liabilities

Accounts payableOwner's Equit

arone s, capital 1 ,

Total liab. & equity 1 ,

Balance Sheet

Barones Repair Shop

May 31, 2008


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Chapter

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Cashflowfrom operatin acti ities

Cash receipts from customers 5,220$

Cash paid for expenses (2,400)

Cash provided by operations 2,820

C

Purchase of equipment (5,000)

C

Investment by owners 10,000

Drawings by owners (1,000)Cash provided by financing 9,000

6,820

C -

C 6,820$

C

CInformation for aspecific period of time.

Answers the following:

1. Where did cash comefrom?

2. What was cash usedfor?

3. What was the changein the cash balance?


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Chapter

1-49

Which of the following financial statements isprepared as of a specific date?

a. Balance sheet.b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.





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Chapter

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Discussion Question

Q19. A companys net income appears directly

on the income statement and the owners equity

statement, and it is included indirectly in thecompanys balance sheet. Do you agree? Explain.





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Chapter

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ForensicAccountingCareerswithinsurancecompaniesandlawofficestoconductinvestigationsintotheftand fraud.

Opportunitiesin GovernmentCareerswiththe IRS, theFBI, the SEC, andinpubliccollegesanduniversities.

PrivateAccounting

Careersinindustry workingincostaccounting, budgeting,accountinginformationsystems, andtaxation.

LO 9 Explainthecareeropportunitiesinaccounting.LO 9 Explainthecareeropportunitiesinaccounting.

AccountingCareerOpportunitiesAccountingCareerOpportunities

PublicAccountingCareersinauditingandtaxationservingthegeneralpublic.


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Chapter

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Copyright 2008 John Wiley Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Act withoutthe express written permission of the copyright owner isunlawful. Request for further information should be addressed

to the Permissions Department, John Wiley Sons, Inc. Thepurchaser may make back-up copies for his/her own use onlyand not for distribution or resale. The Publisher assumes noresponsibility for errors, omissions, or damages, caused by theuse of these programs or from the use of the informationcontained herein.

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Wey_AP_8e_Ch01_Revised

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