Pertemuan 1

CHAPTER
FINANCIAL REPORTING AND

ACCOUNTING STANDARDS
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield
Slide
1-1
Financial
Financial Reporting
Reporting and
and Accounting
Accounting Standards
Standards
Global Markets
Financial
statements and
financial reporting
Accounting and
capital allocation
High-quality
standards
Objective of
Financial
Reporting
General-purpose
financial statements
Capital providers
Entity perspective
Decision-usefulness
Standard-Setting
Organizations
IOSCO
IASB
Hierarchy of IFRS
Financial
Reporting
Challenges
Political
environment
Expectations gap
Significant financial
reporting issues
Ethics
International
convergence
Slide
1-2
Global
Global Markets
Markets
World markets are becoming increasingly intertwined.
Top 20 Global Companies In Terms Of Sales
Slide
1-3
Global
Global Markets
Markets
Significant number of foreign companies are found on
national exchanges.
Illustration 1-2
International Exchange
Statistics
Slide
1-4
Global
Global Markets
Markets
Financial Statements and Financial Reporting
Characteristics of accounting are:
Slide
1-5
(1)
the identification, measurement, and communication

of financial information about
(2)
economic entities to
(3)
interested parties.
LO 1 Identify the major financial statements and other means of financial reporting.
Global
Global Markets
Markets
Economic Entity
Financial Statements
Additional Information
Financial
Information
Statement of
Financial Position
Presidents letter
Accounting?
Income Statement
or Statement of
Comprehensive
Income
Reports filed with

governmental
agencies
Statement of Cash
Flows
Forecasts
Identify
and
Measure
and
Communicate
Statement of
Changes in Equity
Note Disclosures
Slide
1-6
Prospectuses
News releases
Environmental
impact statements
Etc.
LO 1 Identify the major financial statements and other means of financial reporting.
Global
Global Markets
Markets
Accounting and Capital Allocation
Resources are limited. Efficient use of resources often
determines whether a business thrives.
Illustration 1-3
Capital Allocation Process
Slide
1-7
LO 2 Explain how accounting assists in the efficient use of scare resources.
Global
Global Markets
Markets
High Quality Standards
Globalization demands a single set of high-quality
international accounting standards. Some elements:
1.
Single set of high-quality accounting standards established by

a single standard-setting body.
2.
Consistency in application and interpretation.
3.
Common disclosures.
4.
Common high-quality auditing standards and practices.
5.
Common approach to regulatory review and enforcement.
6.
Education and training of market participants.

(Continued)
Slide
1-8
LO 3 Explain the need for high-quality standards.
Global
Global Markets
Markets
High Quality Standards
Globalization demands a single set of high-quality
international accounting standards. Some elements:
Slide
1-9
7.
Common delivery systems (e.g., eXtensible Business

Reporting LanguageXBRL).
8.
Common approach to corporate governance and legal

frameworks around the world
Slide
1-10
Objective
Objective of
of Financial
Financial Accounting
Accounting
Objective: Provide financial information about the reporting
entity that is useful to
present and potential equity investors,
lenders, and
other creditors
in making decisions in their capacity as capital providers.
Slide
1-11
LO 4 Identify the objectives of financial reporting.
Objective
Objective of
of Financial
Accounting
General-Purpose Financial Statements
Provide financial reporting information to a wide variety
of users.
Provide the most useful information possible at the
least cost.
Capital Providers (Investors)

Investors are the primary user group.
Slide
1-12
Objective
Objective of
of Financial
Accounting
Entity Perspective
Companies viewed as separate and distinct from their owners.
Decision-Usefulness
Investors are interested in assessing the companys
Slide
1-13
1.
ability to generate net cash inflows and
2.
managements ability to protect and enhance the

capital providers investments.
Objective
Objective of
of Financial
Accounting
Review Question
The objective of financial reporting places most

emphasis on:
a. reporting to capital providers.
b. reporting on stewardship.
c. providing specific guidance related to specific
needs.
d. providing information to individuals who are
experts in the field.
Slide
1-14
Objective
Objective of
of Financial
Accounting
Review Question
General-purpose financial statements are prepared

primarily for:
a. internal users.
b. external users.
c. auditors.
d. government regulators.
Slide
1-15
Standard-Setting
Standard-Setting Organizations
Organizations
Two Major Organizations:
International Accounting Standards Board (IASB)
Slide
1-16
Issues International Financial Reporting Standards

(IFRS).
Standards used on most foreign exchanges.
Standards used by foreign companies listing on U.S.

securities exchanges.
IFRS used in over 115 countries.
LO 5 Identify the major policy-setting bodies and

their role in the standard-setting process.
Standard-Setting
Organizations
Two Major Organizations:
Financial Accounting Standards Board (FASB)
Slide
1-17
Issues Statements of Financial Accounting

Standards (SFAS).
Required for all U.S.-based companies.

Standard-Setting
Organizations
International Organization of Securities
Commissions (IOSCO)
Does not set accounting standards.
Dedicated to ensuring that global

markets can operate in an efficient
and effective basis.
http://www.iosco.org/
Slide
1-18

Standard-Setting
Organizations
International Accounting Standards Board (IASB)
Composed of four organizations
Slide
1-19
International Accounting Standards

Committee Foundation (IASCF)
International Accounting Standards

Board (IASB)
Standards Advisory Council
International Financial Reporting

Interpretations Committee (IFRIC)
http://www.iasb.org

Standard-Setting
Organizations
Illustration 1-4
International Standard-Setting Structure
Slide
1-20

Standard-Setting
Organizations
Review Question
IFRS stands for:
Slide
1-21
a.
International Federation of Reporting Services.
b.
Independent Financial Reporting Standards.
c.
International Financial Reporting Standards.
d.
Integrated Financial Reporting Services.

Standard-Setting
Organizations
Review Question
The major key players on the international side are

the:
Slide
1-22
a.
IASB and FASB.
b.
SEC and FASB.
c.
IOSCO and the SEC.
d.
IASB and IOSCO.

Standard-Setting
Organizations
Review Question
Which body from the U.S. side is similar to the IASB?
Slide
1-23
a.
SEC.
b.
FASB.
c.
FASC.
d.
FAF.

Due
Due Process
Process
The IASB due process has the following elements:
Slide
1-24
1.
Independent standard-setting board;
2.
Thorough and systematic process for developing

standards;
3.
Engagement with investors, regulators, business leaders,

and the global accountancy profession at every stage of
the process; and
4.
Collaborative efforts with the worldwide standard-setting

community.
Due
Due Process
Process
Illustration 1-4
International
Standard-Setting
Structure
Slide
1-25

Due
Due Process
Process
Review Question
Accounting standard-setters use the following process in
establishing international standards:
Slide
1-26
a.
Research, exposure draft, discussion paper, standard.
b.
Discussion paper, research, exposure draft, standard.
c.
Research, preliminary views, discussion paper,

standard.
d.
Research, discussion paper, exposure draft, standard.

Types
Types of
of Pronouncements
Pronouncements
Issued by the IASB:
International Financial Reporting Standards.
Framework for financial reporting.
International financial reporting interpretations.
Slide
1-27

Types
Types of
of Pronouncements
Pronouncements
Hierarchy of IFRS
Companies first look to:
Slide
1-28
1.
International Financial Reporting Standards;
2.
International Accounting Standards; and
3.
Interpretations originated by the International Financial

Reporting Interpretations Committee (IFRIC) or the
former Standing Interpretations Committee (SIC).
LO 6 Explain the meaning of IFRS.
Types
Types of
of Pronouncements
Pronouncements
Review Question
IFRS is comprised of:
Slide
1-29
a.
International Financial Reporting Standards and FASB

financial reporting standards.
b.
International Financial Reporting Standards, International

Accounting Standards, and international accounting
interpretations.
c.
International Accounting Standards and international

accounting interpretations.
d.
FASB financial reporting standards and International

Accounting Standards.
LO 6 Explain the meaning of IFRS.
Financial
Financial Reporting
Reporting Challenges
Challenges
IFRS in a Political Environment
Slide
1-30
Illustration 1-6
User Groups that Influence the
Formulation of Accounting Standards
LO 7 Describe the challenges facing financial reporting.
Financial
Financial Reporting
Challenges
The Expectations Gap
What the public thinks accountants should do vs. what
accountants think they can do.
Significant Financial Reporting Issues
Slide
1-31
Non-financial measurements
Forward-looking information
Sort assets
Timeliness
Financial
Financial Reporting
Challenges
Ethics in the Environment of Financial Accounting
Companies that concentrate on maximizing the bottom
line, facing the challenges of competition, and
stressing short-term results place accountants in an
environment of conflict and pressure.
IFRS does not always provide an answer.
Doing the right thing is not always easy or obvious.
Slide
1-32
Financial
Financial Reporting
Challenges
International Convergence
In 2002 the IASB and the FASB formalized their commitment
to the convergence of U.S. GAAP and international
standards. The Boards agreed to:
Slide
1-33
1.
Make their existing financial reporting standards fully

converged as soon as practicable, and
2.
Coordinate their future work programs to ensure that

once achieved, convergence is maintained.
Financial
Financial Reporting
Challenges
Review Question
The expectations gap is:
Slide
1-34
a.
what financial information management provides and

what users want.
b.
what the public thinks accountants should do and what

accountants think they can do.
c.
what the governmental agencies want from standardsetting and what the standard-setters provide.
d.
what the users of financial statements want from the

government and what is provided.
CHAPTER
CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING
IFRS Edition
Slide
1-35
Conceptual
Conceptual Framework
Framework For
For Financial
Financial Reporting
Reporting
Conceptual
Framework
Need
Development
Overview
First Level: Basic

Objective
Second Level:
Fundamental
Concepts
Qualitative
characteristics
Basic elements
Third Level:
Recognition,
Measurement, and
Disclosure
Concepts
Basic assumptions
Basic principles
Constraints
Summary of the
structure
Slide
1-36
Conceptual Framework establishes the concepts
that underlie financial reporting.
Need for a Conceptual Framework

Rule-making should build on and relate to an
established body of concepts.
Enables IASB to issue more useful and consistent
pronouncements over time.
Slide
1-37
LO 1 Describe the usefulness of a conceptual framework.
Development of a Conceptual Framework
IASB and FASB are working on a joint project to
develop a common conceptual framework
Framework will build on existing IASB and FASB
frameworks.
Project has identified the objective of financial
reporting (Chapter 1) and the qualitative
characteristics of decision-useful financial reporting
information.
Slide
1-38
LO 2 Describe efforts to construct a conceptual framework.
Overview of the Conceptual Framework
Three levels:
First Level = Basic objective
Second Level = Qualitative characteristics and
elements of financial statements
Third Level = Recognition, measurement, and
disclosure concepts
Slide
1-39
LO 2 Describe efforts to construct a conceptual framework.
ASSUMPTIONS
PRINCIPLES
1.
Economic entity
1.
Measurement
1.
Cost
2.
Going concern
2.
Revenue recognition
2.
Materiality
3.
Monetary unit
3.
Expense recognition
4.
Periodicity
4.
Full disclosure
5.
Accrual
QUALITATIVE
CHARACTERISTICS
1.
2.
Illustration 2-7
Framework for Financial
Reporting
Slide
1-40
CONSTRAINTS
Third
level
ELEMENTS
Fundamental
qualities
1.
Enhancing
qualities
3.
2.
4.
5.
Assets
Liabilities
Equity
Income
Expenses
OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
Second level
First level
LO 2 Describe efforts to construct

a conceptual framework.
First Level: Basic Objective

OBJECTIVE
To provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions in their
capacity as capital providers.
Slide
1-41
Provided by issuing general-purpose financial statements.
Assumption is that users have reasonable knowledge of business

and financial accounting matters to understand the information.
LO 3 Understand the objectives of financial reporting.
Second Level: Fundamental Concepts

Qualitative Characteristics of Accounting
Information
IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more
useful) information from inferior (less useful)
information for decision-making purposes.
Slide
1-42
LO 4 Identify the qualitative characteristics of accounting information.
Illustration 2-2
Hierarchy of Accounting
Qualities
Slide
1-43

Fundamental Quality - Relevance
Relevance is one of the two fundamental qualities that make
accounting information useful for decision-making.
Slide
1-44

Fundamental Quality Faithful Representation
Faithful representation means that the numbers and
descriptions match what really existed or happened.
Slide
1-45

Enhancing Qualities
Distinguish more-useful information from less-useful
information.
Slide
1-46
ASSUMPTIONS
PRINCIPLES
1.
Economic entity
1.
Measurement
1.
Cost
2.
Going concern
2.
Revenue recognition
2.
Materiality
3.
Monetary unit
4.
Periodicity
5.
Accrual
1.
2.
Illustration 2-7
Framework for Financial
Reporting
Third
level
Basic
Elements
Basic
Elements
Full disclosure
3.
Expense recognition
4.
QUALITATIVE
CHARACTERISTICS
Slide
1-47
CONSTRAINTS
ELEMENTS
Fundamental
qualities
1.
Enhancing
qualities
3.
2.
4.
5.
Assets
Liabilities
Equity
Income
Expenses
OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential
equity investors,
lenders, and other
creditors in their
capacity as capital
Providers.
Second level
First level
LO 4
Second Level: Basic Elements
Slide
1-48
LO 5 Define the basic elements of financial statements.

Exercise 2-4: Identify the qualitative characteristic(s) to be used
given the information provided.
Characteristics
(a)
(b)
(c)
(d)
Slide
1-49
Qualitative characteristic being

employed when companies in the
same industry are using the same
accounting principles.
Relevance
Quality of information that confirms

users earlier expectations.
Neutrality
Imperative for providing comparisons

of a company from period to period.
Timeliness
Ignores the economic consequences

of a standard or rule.
Understandability
Faithful representation
Predictive value
Confirmatory value
Completeness
Verifiability
Comparability
LO 5

Characteristics
(e)
(f)
(g)
Requires a high degree of consensus

among individuals on a given
measurement.
Relevance
Predictive value is an ingredient of this

fundamental quality of information.
Confirmatory value
Qualitative characteristics that

enhance both relevance and faithful
representation.
Completeness
Predictive value
Neutrality
Timeliness
Verifiability
Understandability
Comparability
Slide
1-50
LO 5

Characteristics
(h)
(i)
(j)
Neutrality and completeness are

ingredients of this fundamental quality
of accounting information.
Relevance
Two fundamental qualities that make

accounting information useful for
decision-making purposes.
Confirmatory value
Issuance of interim reports is an

example of what enhancing
ingredient?
Timeliness
Predictive value
Neutrality
Completeness
Verifiability
Understandability
Comparability
Slide
1-51
LO 5
Third Level: Recognition, Measurement, and

Disclosure Concepts
These concepts explain how companies should recognize,
measure, and report financial elements and events.
Recognition, Measurement, and Disclosure Concepts
ASSUMPTIONS
PRINCIPLES
CONSTRAINTS
1.
Economic entity
1.
Measurement
1.
Cost
2.
Going concern
2.
Revenue recognition
2.
Materiality
3.
Monetary unit
3.
Expense recognition
4.
Periodicity
4.
Full disclosure
5.
Accrual
Illustration 2-7
Framework for
Financial Reporting
Slide
1-52
LO 6 Describe the basic assumptions of accounting.
Third Level: Assumptions

Basic Assumptions
Economic Entity company keeps its activity separate from
its owners and other business unit.
Going Concern - company to last long enough to fulfill
objectives and commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activities into
time periods.
Accrual Basis of Accounting transactions are recorded in
the periods in which the events occur.
Slide
1-53
Third Level: Assumptions

E2-8: Identify which basic assumption of accounting is best
described in each item below.
The economic activities of FedEx Corporation
(USA) are divided into 12-month periods for the
purpose of issuing annual reports.
Periodicity
(b)
Total S.A. (FRA) does not adjust amounts in its

financial statements for the effects of inflation.
Monetary
Unit
(c)
Barclays (GBR) reports current and non-current

classifications in its statement of financial
position.
Going Concern
The economic activities of Tokai Rubber

Industries (JPN) and its subsidiaries are merged
for accounting and reporting purposes.
Economic
Entity
(a)
(d)
Slide
1-54
Third Level: Principles

Principles
Measurement
Cost is generally thought to be a faithful representation of the
amount paid for a given item.
Fair value is the amount for which an asset could be exchanged,
a liability settled, or an equity instrument granted could be
exchanged, between knowledgeable, willing parties in an arms
length transaction.
IASB has taken the step of giving companies the option to use fair
value as the basis for measurement of financial assets and
financial liabilities.
Slide
1-55
LO 7 Explain the application of the basic principles of accounting.

Revenue Recognition - revenue is to be recognized when it
is probable that future economic benefits will flow to the company
and reliable measurement of the amount of revenue is possible.
Illustration 2-3
Timing of Revenue Recognition
Slide
1-56

Expense Recognition - outflows or using up of assets
or incurring of liabilities (or a combination of both) during a
period as a result of delivering or producing goods and/or
rendering services.
Illustration 2-4
Expense Recognition
Let the expense follow the revenues.

Slide
1-57

Full Disclosure providing information that is of sufficient
importance to influence the judgment and decisions of an
informed user.
Provided through:
Notes to the Financial Statements
Supplementary information
Slide
1-58

BE2-9: Identify which basic principle of accounting is best
described in each item below.
Revenue
(a) Parmalat (ITA) reports revenue in its income
Recognitio
statement when it is earned instead of when the
n
cash is collected.
(b) Google (USA) recognizes depreciation expense for
a machine over the 2-year period during which that
machine helps the company earn revenue.
Expense
Recognitio
n
(c) KC Corp. (USA) reports information about pending

lawsuits in the notes to its financial statements.
Full
Disclosure
(d) Fuji Film (JPN) reports land on its balance sheet at

the amount paid to acquire it, even though the
estimated fair market value is greater.
Measurement
Slide
1-59
Third Level: Constraints

Constraints
Cost the cost of providing the information must be weighed
against the benefits that can be derived from using it.
Materiality - an item is material if its inclusion or omission

would influence or change the judgment of a reasonable
person.
Slide
1-60
LO 8 Describe the impact that constraints have on

reporting accounting information.
Third Level: Constraints

E2-11: What accounting constraints are illustrated by the
items below?
(a) Willis Company does not disclose any
information in the notes to the financial
statements unless the value of the information
to users exceeds the expense of gathering it.
(b) Beckham Corporation expenses the cost of
wastebaskets in the year they are acquired.
Slide
1-61
Cost
Materiality
LO 8 Describe the impact that constraints have on

reporting accounting information.
CHAPTER
THE ACCOUNTING
INFORMATION SYSTEM
IFRS Edition
Slide
1-62
The
The Accounting
Accounting Information
Information System
System
Accounting
Information System
Basic terminology
Debits and credits
Accounting equation
Financial statements
and ownership
structure
Slide
1-63
The Accounting
Cycle
Identifying and recording
Journalizing
Posting
Trial balance
Adjusting entries
Adjusted trial balance
Preparing financial
statements
Closing
Post-closing trial balance
Reversing entries
Summary
Financial
Statements For
Merchandisers
Income statement
Statement of retained
earnings
Statement of financial
position
Closing entries
Accounting
Information System
System
Accounting Information System (AIS)
Collects and processes transaction data.
Disseminates the information to interested parties.
Slide
1-64
Accounting
Information System
System
Helps management answer such questions as:
How much and what kind of debt is outstanding?
Were sales higher this period than last?
What assets do we have?
What were our cash inflows and outflows?
Did we make a profit last period?
Are any of our product lines or divisions operating at a loss?
Can we safely increase our dividends to shareholders?
Is our rate of return on net assets increasing?
Slide
1-65
Basic
Basic Terminology
Terminology
Slide
1-66
Event
Journal
Transaction
Posting
Account
Trial Balance
Real Account
Adjusting Entries
Nominal Account
Ledger
Closing Entries
LO 1 Understand basic accounting terminology.
Debits
Debits and
and Credits
Credits
An Account shows the effect of transactions on a
given asset, liability, equity, revenue, or expense
account.
Double-entry accounting system (two-sided effect).
Recording done by debiting at least one account and
crediting another.
DEBITS must equal CREDITS.
Slide
1-67
LO 2 Explain double-entry rules.
Debits
Debits and
and Credits
Credits
Account
An arrangement that shows the

effect of transactions on an
account.
Debit = Left
Credit = Right
An Account can
be illustrated in a
T-Account form.
Slide
1-68
Account Name
Debit / Dr.
Credit / Cr.
Debits
Debits and
and Credits
Credits
If Debit entries are greater than Credit entries, the
account will have a debit balance.
Account Name
Debit / Dr.
Transaction #1
$10,000
Transaction #3
8,000
Balance
Slide
1-69
Credit / Cr.
$3,000
Transaction #2
$15,000
Debits
Debits and
and Credits
Credits
If Credit entries are greater than Debit entries, the
account will have a credit balance.
Account Name
Transaction #1
Balance
Slide
1-70
Debit / Dr.
Credit / Cr.
$10,000
$3,000
Transaction #2
8,000
Transaction #3
$1,000
Debits
Debits and
and Credits
Credits Summary
Summary
Normal
Normal
Balance
Balance
Debit
Debit
Debit / Dr.
Normal
Normal
Balance
Balance
Credit
Credit
Assets
Credit / Cr.
Normal Balance
Chapter
3-24
Equity
Credit / Cr.
Debit / Dr.
Liabilities
Debit / Dr.
Credit / Cr.
Normal Balance
Normal Balance
Chapter
3-23
Expense
Debit / Dr.
Revenue
Chapter
3-25
Credit / Cr.
Debit / Dr.
Normal Balance
Chapter
3-27
Slide
1-71
Credit / Cr.
Normal Balance
Chapter
3-26
Debits
Debits and
and Credits
Credits Summary
Summary
Statement of Financial Position
Asset = Liability + Equity
Income Statement
Revenue - Expense =
Debit
Credit
Slide
1-72
The
The Accounting
Accounting Equation
Equation
Relationship among the assets, liabilities and equity of a
business:
Illustration 3-3
The equation must be in balance after every transaction.

For every Debit there must be a Credit.
Slide
1-73
Double-Entry
Double-Entry System
System Illustration
Illustration
1.
Owners invest $40,000 in exchange for share capital
Assets
+ 40,000
Slide
1-74
Liabilities
Equity
+ 40,000
Double-Entry
Double-Entry System
System Illustration
Illustration
2. Disburse $600 cash for secretarial wages.
Assets
- 600
Liabilities
Equity
- 600
(expense)
Slide
1-75
Double-Entry
Double-Entry System
System Illustration
Illustration
3. Purchase office equipment priced at $5,200, giving a
10 percent promissory note in exchange.
Assets
+ 5,200
Slide
1-76
Liabilities
Equity
+ 5,200
Double-Entry
Double-Entry System
System Illustration
Illustration
4. Received $4,000 cash for services rendered.
Assets
+ 4,000
Liabilities
Equity
+ 4,000
(revenue)
Slide
1-77
Double-Entry
Double-Entry System
System Illustration
Illustration
5. Pay off a short-term liability of $7,000.
Assets
- 7,000
Slide
1-78
Liabilities
Equity
- 7,000
Double-Entry
Double-Entry System
System Illustration
Illustration
6. Declared a cash dividend of $5,000.
Assets
Liabilities
+ 5,000
Slide
1-79
Equity
- 5,000
Double-Entry
Double-Entry System
System Illustration
Illustration
7. Convert a long-term liability of $80,000 into ordinary
shares.
Assets
Liabilities
- 80,000
Slide
1-80
Equity
+ 80,000
Double-Entry
Double-Entry System
System Illustration
Illustration
8. Pay cash of $16,000 for a delivery van.
Assets
Liabilities
Equity
- 16,000
+ 16,000
Note
Notethat
thatthe
theaccounting
accountingequation
equationequality
equalityisis
maintained
maintainedafter
afterrecording
recordingeach
eachtransaction.
transaction.
Slide
1-81
Financial
Statements and
and Ownership
Ownership Structure
Structure
Ownership structure dictates the types of accounts that
are part of the equity section.
Proprietorship
Proprietorship or
or
Partnership
Partnership
Capital
account
Drawing account
Corporation
Corporation
Share
capital
Share
premium
Dividends
Retained
Slide
1-82
Earnings
Financial
Statements and
and Ownership
Ownership Structure
Structure
Statement of Financial Position
Illustration 3-4
Equity
Share Capital
(Investment
(Investment by
by shareholders)
shareholders)
Retained Earnings
(Net
(Net income
income retained
retained in
in business)
business)
Net income or Net loss

Dividends
(Revenues
(Revenues less
less expenses)
expenses)
Income Statement
Retained Earnings Statement

Slide
1-83
The
The Accounting
Accounting Cycle
Cycle
Illustration 3-6
Transactions
9. Reversing entries
1. Journalization
8. Post-closing trail balance
2. Posting
7. Closing entries
3. Trial balance
6. Financial Statements
Work
Sheet
4. Adjustments
5. Adjusted trial balance

Slide
1-84
LO 3 Identify steps in the accounting cycle.
Identify
Identify and
and Recording
Recording Transactions
Transactions
What to Record?
An item should be recognized in the financial
statements if it is an element, is measurable,
and is relevant and a
faithful representation.
Slide
1-85
LO 3 Identify steps in the accounting cycle.
1.
1. Journalizing
Journalizing
General Journal a chronological record of transactions.
Journal Entries are recorded in the journal.
September 1: Shareholders invested $15,000 cash in the
corporation in exchange for ordinary shares.
Illustration 3-7
Slide
1-86
LO 4 Record transactions in journals, post to

ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
Posting the process of transferring amounts from the journal
to the ledger accounts.
Illustration 3-7
Illustration 3-8
Slide
1-87

2.
2. Posting
Posting
Posting Transferring amounts from journal to ledger.
Illustration 3-8
Slide
1-88
LO 4
2.
2. Posting
Posting
Expanded Example
The purpose of transaction analysis is
(1)
to identify the type of account involved, and
(2)
to determine whether a debit or a credit is required.
Keep in mind that every journal entry affects one or more of the
following items: assets, liabilities, equity, revenues, or expense.
Slide
1-89

2.
2. Posting
Posting
1. October 1: Shareholders invest $100,000 cash in an
advertising venture to be known as Pioneer Advertising
Agency Inc.
Illustration 3-9
Oct. 1
Cash
100,000
Share capital - ordinary

Cash
Debit
100,000
Slide
1-90
Credit
100,000
Share Capital - Ordinary

Debit
Credit
100,000

2.
2. Posting
Posting
2. October 1: Pioneer Advertising purchases office equipment
costing $50,000 by signing a 3-month, 12%, $50,000 note
payable.
Illustration 3-10
Oct. 1
Office equipment
Notes payable
Office Equipment
Debit
Credit
50,000
Slide
1-91
50,000
50,000
Notes Payable
Debit
Credit
50,000

2.
2. Posting
Posting
3. October 2: Pioneer Advertising receives a $12,000 cash
advance from KC, a client, for advertising services that are
expected to be completed by December 31.
Illustration 3-11
Oct. 2
Cash
12,000
Unearned service revenue

Cash
Debit
100,000
12,000
Slide
1-92
Credit
12,000
Unearned Service Revenue

Debit
Credit
12,000

2.
2. Posting
Posting
4. October 3: Pioneer Advertising pays $9,000 office rent, in
cash, for October.
Illustration 3-12
Oct. 3
Rent expense
9,000
Cash
9,000
Cash
Debit
100,000
12,000
Slide
1-93
Credit
9,000
Rent Expense
Debit
Credit
9,000

2.
2. Posting
Posting
5. October 4: Pioneer Advertising pays $6,000 for a one-year
insurance policy that will expire next year on September 30.
Oct. 4
Prepaid insurance
6,000
Cash
6,000
Cash
Debit
100,000
12,000
Slide
1-94
Illustration 3-13
Credit
9,000
6,000
Prepaid Insurance
Debit
Credit
6,000

2.
2. Posting
Posting
6. October 5: Pioneer Advertising purchases, for $25,000 on
account, an estimated 3-month supply of advertising
materials from Aero Supply.
Illustration 3-14
Oct. 5
Advertising supplies
Accounts payable
Advertising Supplies
Debit
Credit
25,000
Slide
1-95
25,000
25,000
Accounts Payable
Debit
Credit
25,000

2.
2. Posting
Posting
7. October 9: Pioneer Advertising signs a contract with a local
newspaper for advertising inserts (flyers) to be distributed
starting the last Sunday in November. Pioneer will start work
on the content of the flyers in November. Payment of
$7,000 is due following delivery of the Sunday papers
containing the flyers.
Illustration 3-15
Slide
1-96

2.
2. Posting
Posting
8. October 20: Pioneer Advertisings board of directors
declares and pays a $5,000 cash dividend to shareholders.
Oct. 20
Dividends
5,000
Cash
5,000
Cash
Debit
100,000
12,000
Slide
1-97
Illustration 3-16
Credit
9,000
6,000
5,000
Dividends
Debit
Credit
5,000

2.
2. Posting
Posting
9. October 26: Employees are paid every four weeks. The
total payroll is $2,000 per day. The pay period ended on
Friday, October 26, with salaries of $40,000 being paid.
Oct. 26
Salaries expense
40,000
Cash
40,000
Cash
Debit
100,000
12,000
Slide
1-98
Illustration 3-17
Credit
9,000
6,000
5,000
40,000
Salaries Expense
Debit
Credit
40,000

2.
2. Posting
Posting
10. October 31: Pioneer Advertising receives $28,000 in cash
and bills Copa Company $72,000 for advertising services
of $100,000 provided in October.
Illustration 3-18
Oct. 31
Cash
Accounts receivable
Service revenue
Cash
Debit
100,000
12,000
28,000
Slide
1-99
80,000
Credit
9,000
6,000
5,000
40,000
Accounts Receivable
Debit
Credit
72,000
28,000
72,000
100,000
Service Revenue
Debit
Credit
100,000
3.
3. Trial
Trial Balance
Balance
Illustration 3-19
Trial Balance
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.
Slide
1-100

4.
4. Adjusting
Adjusting Entries
Entries
Makes it possible to:
Report on the statement of financial position the
appropriate assets, liabilities, and equity at the statement
date.
Report on the income statement the proper revenues and
expenses for the period.
Slide
1-101
Revenues are recorded in the period in which they are

earned.
earned
Expenses are recognized in the period in which they are

incurred.
incurred
LO 5 Explain the reasons for preparing adjusting entries.
Types
Types of
of Adjusting
Adjusting Entries
Entries
Illustration 3-20
Slide
1-102
Deferrals
Accruals
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or recorded.
Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Deferrals are
either
prepaid
expenses
or
unearned
revenues.
Slide
1-103
Illustration 3-21
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Payment of cash that is recorded as an asset because
service or benefit will be received in the future.
Cash Payment
BEFORE
Expense Recorded
Prepayments often occur in regard to:

insurance
supplies
advertising
Slide
1-104
rent
purchasing buildings and
equipment
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Supplies. Pioneer purchased advertising supplies costing
$25,000 on October 5. Prepare the journal entry to record the
purchase of the supplies.
Oct. 5
25,000
Cash
Debit
Credit
25,000
Slide
1-105
25,000
Cash
Debit
Credit
25,000
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Supplies. An inventory count at the close of business on
October 31 reveals that $10,000 of the advertising supplies are
still on hand.
Oct. 31
Advertising supplies expense
15,000
Debit
Credit
25,000
15,000
15,000
Expense
Debit
Credit
15,000
10,000
Slide
1-106
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Statement
Presentation:
Illustration 3-35
Advertising
supplies identifies
that portion of the
assets cost that
will provide future
economic benefit.
Slide
1-107
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Statement
Presentation:
Illustration 3-34
Advertising
expense identifies
that portion of the
assets cost that
expired in
October.
Slide
1-108
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire
insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Oct. 4
Prepaid insurance
6,000
Cash
Prepaid Insurance
Debit
Credit
6,000
Slide
1-109
6,000
Cash
Debit
Credit
6,000
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Insurance. An analysis of the policy reveals that $500 ($6,000 /
12) of insurance expires each month. Thus, Pioneer makes the
following adjusting entry.
Oct. 31
Insurance expense
500
Prepaid insurance
Prepaid Insurance
Debit
Credit
6,000
500
500
Insurance Expense
Debit
Credit
500
5,500
Slide
1-110
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Statement
Presentation:
Illustration 3-35
Prepaid Insurance
identifies that
portion of the
assets cost that
will provide future
economic benefit.
Slide
1-111
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Statement
Presentation:
Illustration 3-34
Insurance
expense identifies
that portion of the
assets cost that
expired in
October.
Slide
1-112
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Depreciation. Pioneer Advertising estimates depreciation on its
office equipment to be $400 per month. Accordingly, Pioneer
recognizes depreciation for October by the following adjusting
entry.
Oct. 31
Depreciation expense
400
Accumulated depreciation
Depreciation Expense
Debit
Credit
400
Slide
1-113
400
Accumulated Depreciation
Debit
Credit
400
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Statement
Presentation:
Illustration 3-35
Accumulated
Depreciationis a
contra asset
account.
Slide
1-114
Adjusting
Adjusting Entries
Entries for
for Prepaid
Prepaid Expenses
Expenses
Statement
Presentation:
Illustration 3-34
Depreciation
expense identifies
that portion of the
assets cost that
expired in
October.
Slide
1-115
Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Receipt of cash that is recorded as a liability because the
revenue has not been earned.
Cash Receipt
BEFORE
Revenue Recorded
Unearned revenues often occur in regard to:

rent
airline tickets
school tuition
Slide
1-116
magazine subscriptions
customer deposits
Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Unearned Revenue. Pioneer Advertising received $12,000 on
October 2 from KC for advertising services expected to be
completed by December 31. Show the journal entry to record
the receipt on Oct. 2nd.
Oct. 2
Cash
12,000

Cash
Debit
12,000
Slide
1-117
Credit
12,000

Debit
Credit
12,000
Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Unearned Revenues. Analysis reveals that Pioneer earned
$4,000 of the advertising services in October. Thus, Pioneer
makes the following adjusting entry.
Oct. 31
4,000
Service revenue
Service Revenue
Debit
Credit
100,000
4,000
4,000
Debit
Credit
4,000
12,000
8,000
Slide
1-118
Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Statement
Presentation:
Illustration 3-35
Unearned service
revenue identifies
that portion of the
liability that has
not been earned.
Slide
1-119
Adjusting
Adjusting Entries
Entries for
for Unearned
Unearned Revenues
Revenues
Statement
Presentation:
Illustration 3-34
Service revenue
represents that
portion of the
liability that was
earned in October.
Slide
1-120
Adjusting
Adjusting Entries
Entries for
for Accruals
Accruals
Accruals are
either
accrued
revenues or
accrued
expenses.
Slide
1-121
Illustration 3-27
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Revenues earned but not yet received in cash or recorded.
Adjusting entry results in:
Revenue Recorded
BEFORE
Cash Receipt
Accrued revenues often occur in regard to:

rent
interest
services performed
Slide
1-122
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Accrued Revenues. In October Pioneer earned $2,000 for
advertising services that it did not bill to clients before October
31. Thus, Pioneer makes the following adjusting entry.
Oct. 31
Accounts receivable
Service revenue
Accounts Receivable
Debit
Credit
Slide
1-123
2,000
2,000
Service Revenue
Debit
Credit
72,000
2,000
100,000
4,000
2,000
74,000
106,000
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Revenues
Revenues
Illustration 3-34
Statement
Presentation
Slide
1-124
Illustration 3-35
LO 5
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Expense Recorded
BEFORE
Cash Payment
Accrued expenses often occur in regard to:

rent
interest
Slide
1-125
salaries
taxes
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. The note
requires interest at an annual rate of 12 percent. Three factors
determine the amount of the interest accumulation:
Slide
1-126
Illustration 3-29
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Accrued Interest. Pioneer signed a three-month, 12%, note
payable in the amount of $50,000 on October 1. Prepare the
adjusting entry on Oct. 31 to record the accrual of interest.
Oct. 31
Interest expense
500
Interest payable
Interest Expense
Debit
Credit
500
Slide
1-127
500
Interest Payable
Debit
Credit
500
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Illustration 3-34
Statement
Presentation
Slide
1-128
Illustration 3-35
LO 5
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Accrued Salaries. At October 31, the salaries for these days

represent an accrued expense and a related liability to Pioneer.
The employees receive total salaries of $10,000 for a five-day
work week, or $2,000 per day.
Slide
1-129
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Accrued Salaries. Employees receive total salaries of $10,000
for a five-day work week, or $2,000 per day. Prepare the
adjusting entry on Oct. 31 to record accrual for salaries.
Oct. 31
Salaries expense
Salaries payable
Salaries Expense
Debit
Credit
40,000
6,000
6,000
6,000
Salaries Payable
Debit
Credit
6,000
46,000
Slide
1-130
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Illustration 3-34
Statement
Presentation
Slide
1-131
Illustration 3-35
LO 5
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Accrued Salaries. On November 23, Pioneer will again pay total
salaries of $40,000. Prepare the entry to record the payment of
salaries on November 23.
Nov. 23
Salaries payable
6,000
Salaries expense
34,000
Cash
40,000
Salaries Expense
Debit
Credit
34,000
Slide
1-132
Salaries Payable
Debit
Credit
6,000
6,000
Adjusting
Adjusting Entries
Entries for
for Accrued
Accrued Expenses
Expenses
Bad Debts. Assume Pioneer reasonably estimates a bad debt
expense for the month of $1,600. It makes the adjusting entry for
bad debts as follows.
Illustration 3-32
Slide
1-133
5.
5. Adjusted
Adjusted Trial
Trial Balance
Balance
Shows the balance
of all accounts,
after adjusting
entries, at the end
of the accounting
period.
Slide
1-134
LO 5
Illustration 3-33
6.
6. Preparing
Preparing Financial
Statements
Financial
FinancialStatements
Statementsare
areprepared
prepareddirectly
directlyfrom
from the
the
Adjusted
AdjustedTrial
TrialBalance.
Balance.
Income
Statement
Slide
1-135
Retained
Earnings
Statement
Statement
of Financial
Position
LO 6 Prepare financial statement from the adjusted trial balance.
6.
6. Preparing
Preparing Financial
Statements
Illustration 3-34
Slide
1-136
LO 6
6.
6. Preparing
Preparing Financial
Statements
Illustration 3-35
Slide
1-137
LO 6
7.
7. Closing
Closing Entries
Entries
To reduce the balance of the income statement
(revenue and expense) accounts to zero.
To transfer net income or net loss to equity.
Statement of financial position (asset, liability, and
equity) accounts are not closed.
Dividends are closed directly to the Retained
Earnings account.
Slide
1-138
LO 7 Prepare closing entries.
7.
7. Closing
Closing Entries
Entries
Illustration 3-36
Slide
1-139
LO 7
7.
7. Closing
Closing
Entries
Entries
Slide
1-140
LO 7
Illustration 3-37
8.
8. Post-Closing
Post-Closing Trial
Trial Balance
Balance
Illustration 3-38
Slide
1-141
9.
9. Reversing
Reversing Entries
Entries
After preparing the financial statements and
closing the books, a company may reverse
some of the adjusting entries before
recording the regular transactions of the next
period.
Slide
1-142
Accounting
Accounting Cycle
Cycle Summarized
Summarized
Slide
1-143
1.
Enter the transactions of the period in appropriate journals.
2.
Post from the journals to the ledger (or ledgers).
3.
Take an unadjusted trial balance (trial balance).
4.
Prepare adjusting journal entries and post to the ledger(s).
5.
Take a trial balance after adjusting (adjusted trial balance).
6.
Prepare the financial statements from the second trial balance.
7.
Prepare closing journal entries and post to the ledger(s).
8.
Take a trial balance after closing (post-closing trial balance).
9.
Prepare reversing entries (optional) and post to the ledger(s).

Financial
Statements for
for aa Merchandising
Merchandising Company
Company
Illustration 3-39
Slide
1-144
LO 7
Financial
Statements of
of aa Merchandising
Company
Illustration 3-40
Slide
1-145
Financial
Statements of
of aa Merchandising
Company
Illustration 3-41
Slide
1-146
LO 7

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CHAPTER

FINANCIAL REPORTING AND

the identification, measurement, and communication

Reports filed with

LO 2 Explain how accounting assists in the efficient use of scare resources.

Single set of high-quality accounting standards established by

Consistency in application and interpretation.

Common high-quality auditing standards and practices.

Common approach to regulatory review and enforcement.

Education and training of market participants.

LO 3 Explain the need for high-quality standards.

Common delivery systems (e.g., eXtensible Business

Common approach to corporate governance and legal

LO 3 Explain the need for high-quality standards.

LO 3 Explain the need for high-quality standards.

LO 4 Identify the objectives of financial reporting.

Capital Providers (Investors)

LO 4 Identify the objectives of financial reporting.

ability to generate net cash inflows and

managements ability to protect and enhance the

LO 4 Identify the objectives of financial reporting.

The objective of financial reporting places most

LO 4 Identify the objectives of financial reporting.

General-purpose financial statements are prepared

LO 4 Identify the objectives of financial reporting.

Issues International Financial Reporting Standards

Standards used on most foreign exchanges.

Standards used by foreign companies listing on U.S.

IFRS used in over 115 countries.

LO 5 Identify the major policy-setting bodies and

Issues Statements of Financial Accounting

Required for all U.S.-based companies.

LO 5 Identify the major policy-setting bodies and

Does not set accounting standards.

Dedicated to ensuring that global

LO 5 Identify the major policy-setting bodies and

International Accounting Standards

International Accounting Standards

Standards Advisory Council

International Financial Reporting

LO 5 Identify the major policy-setting bodies and

LO 5 Identify the major policy-setting bodies and

IFRS stands for:

International Federation of Reporting Services.

Independent Financial Reporting Standards.

International Financial Reporting Standards.

Integrated Financial Reporting Services.

LO 5 Identify the major policy-setting bodies and

The major key players on the international side are

IASB and FASB.

SEC and FASB.

IOSCO and the SEC.

IASB and IOSCO.

LO 5 Identify the major policy-setting bodies and

Which body from the U.S. side is similar to the IASB?

LO 5 Identify the major policy-setting bodies and

Independent standard-setting board;

Thorough and systematic process for developing

Engagement with investors, regulators, business leaders,

Collaborative efforts with the worldwide standard-setting

LO 5 Identify the major policy-setting bodies and

Research, exposure draft, discussion paper, standard.

Discussion paper, research, exposure draft, standard.