CH 1

Slide 1-1
Accounting in Action
Financial Accounting, Seventh Edition
Slide 1-2
Study Objectives
1. 2. 3. 4. 5. 6. 7. 8. Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain generally accepted accounting principles and the measurement principle. Explain the monetary unit assumption and the economic entity assumption. State the accounting equation, and define its components. Analyze the effects of business transactions on the accounting equation. Understand the four financial statements and how they are prepared.
Slide 1-3
Accounting in Action
What is Accounting?
The Building Blocks of Accounting Ethics in financial reporting Generally accepted accounting principles Assumptions
The Basic Accounting Equation Assets Liabilities Stockholders equity
Using the Accounting Equation Transaction analysis Summary of transactions
Financial Statements
Three activities Who uses accounting data
Income statement Retained earnings statement Balance sheet Statement of cash flows
Slide 1-4
What is Accounting? The purpose of accounting is to:

(1)
identify, record, identify record and communicate the economic communicate events of an
(2) (3)
organization to interested users.
Slide 1-5
SO 1 Explain what accounting is.
What is Accounting?
Three Activities
Illustration 1-1 The activities of the accounting process
The accounting process includes the bookkeeping function.

Slide 1-6
SO 1 Explain what accounting is.
Who Uses Accounting Data

Internal Users Human Resources Management IRS Investors
Finance
There are two broad groups of users of financial information: internal users and external users.
Customers SEC
Labor Unions Creditors External Users
Marketing
Slide 1-7
SO 2 Identify the users and uses of accounting.

Common Questions Asked
1. Can we afford to give our employees a pay raise? 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? 6. Will the company be able to pay its short-term debts?
Slide 1-8
User Human Resources Investors Management Finance Marketing Creditors
SO 2 Identify the users and uses of accounting.
Discussion Question
Q1. Accounting is ingrained in our society and it is vital to our economic system. Do you agree? Explain.
Slide 1-9
Solution on notes page
SO 3 Understand why ethics is a fundamental business concept.
The Building Blocks of Accounting Ethics In Financial Reporting

Standards of conduct by which ones 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.
Slide 1-10
The Building Blocks of Accounting Ethics In Financial Reporting
Slide 1-11
The Building Blocks of Accounting
Review Question
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 1-12

Various users need financial information Financial Statements
Balance Sheet Income Statement Statement of Owners Equity Statement of Cash Flows Note Disclosure
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
Generally Accepted Accounting Principles (GAAP)
Slide 1-13
SO 4 Explain generally accepted accounting principles and the measurement principle.
The Building Blocks of Accounting Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)
http://www.sec.gov/
Public Company Accounting Oversight http://www.pcaobus.org/ Board (PCAOB) Securities and Exchange Commission (SEC)
http://www.fasb.org/
International Accounting Standards Board (IASB)

http://www.iasb.org/
Slide 1-14
SO 4

Measurement Principles
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.
Slide 1-15

Measurement Principles
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.
Slide 1-16

Assumptions
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.
Slide 1-17
Forms of Business Ownership
SO 5 Explain the monetary unit assumption and the economic entity assumption.
Forms of Business Ownership

Proprietorship
Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts.
Slide 1-18
Partnership
Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement
Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability
Review Question
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 1-19
Review Question
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.
Slide 1-20

Indicate whether each of the following statements presented below is true or false. 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
Slide 1-21

Indicate whether each of the following statements presented below is true or false. 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.
True
False
Slide 1-22
Slide 1-23
The Basic Accounting Equation

Stockholders Equity
Assets
Liabilities
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.
Slide 1-24
SO 6 State the accounting equation, and define its components.

Stockholders Equity
Assets
Liabilities
Provides the underlying framework for recording and summarizing economic events.
Assets
Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc.
Slide 1-25

Stockholders Equity
Assets
Liabilities
Liabilities
Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc.
Slide 1-26

Stockholders Equity
Assets
Liabilities
Stockholders Equity
Ownership claim on total assets. Referred to as residual equity. Common stock and retained earnings.
Slide 1-27

Illustration 1-6
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.
Slide 1-28

Illustration 1-6
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.
Slide 1-29

Illustration 1-6
Dividends are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings. However, dividends are not an expense.
Slide 1-30

Classify the following items as issuance of stock, dividends, revenues, or expenses. Then indicate whether each item increases or decreases stockholders equity. Classification 1. Rent expense 2. Service revenue 3. Dividends 4. Salaries expense
Slide 1-31 Solution on notes page
Effect on Equity Decrease Increase Decrease Decrease
Expense Revenue Dividends Expense
Using The Accounting Equation Transactions are a businesss 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.
Slide 1-32
SO 7 Analyze the effects of business transactions on the accounting equation.
Using The Accounting Equation

Q1Q1-16: Are the following events recorded in the accounting records? Event
Supplies are purchased on account. An employee is hired. The president of the company dies.
Criterion
Is the financial position (assets, liabilities, or owners equity) of the company changed?
Record/ Dont Record

Slide 1-33
Using The Accounting Equation
Discussion Question
Q1-19. In February 2011, Paula King invested an additional $10,000 in Hardy Company. Hardys accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not?
Slide 1-34
Transactions Analysis
Slide 1-35
P1P1-1A: Barones Repair Shop was started on May 1. Prepare a tabular analysis of the following transactions for the month of May. 1. Invested $10,000 cash to start the repair shop.
1. +10,000
+10,000
Slide 1-36
2. Purchased equipment for $5,000 cash.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-37 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
3. Paid $400 cash for May office rent.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-38 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
3. Paid $500 cash for supplies.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-39 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
5. Incurred $250 of advertising costs, on account.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-40 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
6. Received $5,100 from customers for repair service.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-41 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
7. Declared and paid a $1,000 cash dividend.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-42 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
8. Paid part-time employee salaries of $2,000.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-43 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
9. Paid utility bills $140.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-44 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
10. Provided $750 of repair services on account.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-45 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
11. Collected $120 cash for services previously billed.
1. +10,000 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. +120 $6,180 Slide 1-46 +5,100 -1,000 -2,000 -140 +750 -120 $630 $12,310 $500 $5,000 $250 -5,000 -400 -500 +500 +250 +5,000
+10,000
-400
-250 +5,100 -1,000 -2,000 -140 +750
$10,000
$5,850 $12,310
$2,790
$1,000
SO 7
Companies prepare four financial statements from the summarized accounting data:
Income Statement
Retained Earnings Statement
Balance Sheet
Statement of Cash Flows
Slide 1-47
SO 8 Understand the four financial statements and how they are prepared.
Review Question
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.
Solution on notes page Slide 1-48
Income Statement
Barones Repair Shop Income Statement
For the Month Ended May 31, 2010
Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues.
Revenues: Service revenue Expenses: Salary expense Rent expense Utility expense Advertising expense Total expenses Net income $ 5,850 2,000 400 140 250 2,790 $ 3,060
Slide 1-49
Income Statement
Barones Repair Shop Income Statement

Barones Repair Shop Retained Earnings Statement
Revenues: Service revenue Expenses: Salary expense Rent expense Utility expense Advertising expense Total expenses Net income $ 5,850 2,000 400 140 250 2,790 $ 3,060
Beginning balance, May 1 Add: Net income Less: Dividends Ending balance, May 31
3,060 3,060 1,000
$ 2,060
Net income is needed to determine the ending balance in the retained earnings account.
Slide 1-50
Statement indicates the reasons why retained earnings has increased or decreased during the period.
3,060 3,060 1,000
$ 2,060
Slide 1-51
Balance Sheet
Barones Repair Shop Balance Sheet May 31, 2010 Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities Accounts payable Owner's Equity Common stock Retained earnings Total liab. & equity
Slide 1-52

$ 6,180 630 500 5,000 $ 12,310 $ 250 10,000 2,060 $ 12,310
3,060 3,060 1,000
$ 2,060
The ending balance in retained earnings is needed in preparing the balance sheet
Balance Sheet
Slide 1-53
$ 6,180 630 500 5,000 $ 12,310 $ 250 10,000 2,060 $ 12,310
Reports the assets, liabilities, and stockholders equity at a specific date. Assets listed at the top, followed by liabilities and stockholders equity. Total assets must equal total liabilities and stockholders equity.
Balance Sheet
Slide 1-54

Barones Repair Shop Statement of Cash Flows
Cash flow from operating activities

$ 6,180 630 500 5,000 $ 12,310 $ 250 10,000 2,060 $ 12,310
Cash receipts from revenues $ 5,220 Cash paid for expenses (3,040) Cash provided by operations 2,180 Cash flow from investing activitites Purchase of equipment (5,000) Cash flow from financing activities Issuance of common stock Dividend paid Cash provided by financing Net increase in cash Cash balance, May 1 Cash balance, May 31 10,000 (1,000) 9,000 6,180 $ 6,180
SO 8
Information for a specific period of time. Answers the following:
1. Where did cash come

Barones Repair Shop Statement of Cash Flows
Cash flow from operating activities
from?
2. What was cash used
Cash receipts from revenues $ 5,220 Cash paid for expenses (3,040) Cash provided by operations 2,180 Cash flow from investing activitites Purchase of equipment (5,000) Cash flow from financing activities Issuance of common stock Dividend paid Cash provided by financing Net increase in cash Cash balance, May 1 Cash balance, May 31 10,000 (1,000) 9,000 6,180 $ 6,180
for?
3. What was the change
in the cash balance?
Slide 1-55
SO 8
Slide 1-56
Review Question
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.
Solution on notes page. Slide 1-57
Discussion Question
Q1-20. A companys net income appears directly on the income statement and the retained earnings, and it is included indirectly in the companys balance sheet. Do you agree? Explain.
Solution on notes page Slide 1-58
Ethics: Managing Personal Financial Reporting
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 Educations National Postsecondary Student Aid Study. That does not include any debt that their parents might incur.
Slide 1-59
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, theres a very good chance youll get caught.
Slide 1-60
Slide 1-61
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 1-62
Career Opportunities
Public accounting Private accounting Show me the Money
APPENDIX
Government Forensic accounting
Slide 1-63
SO 9 Explain the career opportunities in accounting.
Copyright
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.
Slide 1-64

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Slide 1-1

The Basic Accounting Equation Assets Liabilities Stockholders equity

Using the Accounting Equation Transaction analysis Summary of transactions

Three activities Who uses accounting data

What is Accounting? The purpose of accounting is to:

organization to interested users.

SO 1 Explain what accounting is.

Illustration 1-1 The activities of the accounting process

The accounting process includes the bookkeeping function.

SO 1 Explain what accounting is.

Who Uses Accounting Data

Labor Unions Creditors External Users

SO 2 Identify the users and uses of accounting.

Who Uses Accounting Data

User Human Resources Investors Management Finance Marketing Creditors

SO 2 Identify the users and uses of accounting.

Who Uses Accounting Data

Solution on notes page

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting Ethics In Financial Reporting

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting Ethics In Financial Reporting

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Solution on notes page

SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Generally Accepted Accounting Principles (GAAP)

SO 4 Explain generally accepted accounting principles and the measurement principle.

The Building Blocks of Accounting Organizations Involved in Standard Setting:

International Accounting Standards Board (IASB)

The Building Blocks of Accounting

SO 4 Explain generally accepted accounting principles and the measurement principle.

The Building Blocks of Accounting

The Building Blocks of Accounting

Forms of Business Ownership

Forms of Business Ownership

The Building Blocks of Accounting

Solution on notes page

The Building Blocks of Accounting

Solution on notes page

The Building Blocks of Accounting

True False True

Solution on notes page

The Building Blocks of Accounting

Solution on notes page

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation

Effect on Equity Decrease Increase Decrease Decrease