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Chapter

Accounting in Action

Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

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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 accounting standards and the measurement principles. 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.

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Accounting in Action

What is Accounting?

The Building Blocks of Accounting Ethics in financial reporting Accounting standards Assumptions

The Basic Accounting Equation Assets Liabilities Equity

Using the Accounting Equation Transaction analysis Summary of transactions

Financial Statements

Three activities Who uses accounting data?

Income statement Retained earnings statement Statement of financial position Statement of cash flows

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What is Accounting?
The purpose of accounting:
(1)

to identify record and communicate the economic identify, record, events of an

(2) (3)

organization to interested users.

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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.

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SO 1 Explain what accounting is.

What is Accounting?
Who Uses Accounting Data
Internal Users
Human Resources Taxing Authorities Labor Unions Management Customers Creditors Marketing Regulatory Agencies

External Users

Finance

Investors

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SO 2 Identify the users and uses of accounting.

What is Accounting?
Common Questions Asked
1. Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Should any product lines be eliminated? 4. Is cash sufficient to pay dividends to shareholders? 5. What price for our product will maximize net income? 6. Will the company be able to pay its debts?
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User Human Resources Investors Management Finance Marketing Creditors

SO 2 Identify the users and uses of accounting.

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 (USA), Parmalat (ITA), Satyam Computer Services (IND), AIG (USA), and others. Effective financial reporting depends on sound ethical behavior.
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SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Ethics In Financial Reporting

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SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting

Accounting Standards
International Accounting Standards Board (IASB)
http://www.iasb.org/ International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

http://www.fasb.org/ Generally Accepted Accounting Principles (GAAP)

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SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting

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, market value is often subjective. Fair value information may be more useful.

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SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting

Measurement Principles
Fair Value Principle indicates that assets and liabilities should be reported at fair value.
In determining which measurement principle to use, companies weigh the factual nature of cost figures versus the relevance of fair value. Only in situations where assets are actively traded, such as investment securities, is the fair value principle applied.

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SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting

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.
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Forms of Business Ownership

SO 5 Explain the monetary unit assumption and the economic entity assumption.

The Building Blocks of Accounting

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.
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Partnership
Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement

Corporation
Ownership divided into shares Separate legal entity organized under state corporation law Limited liability

SO 5 Explain the monetary unit assumption and the economic entity assumption.

The Building Blocks of Accounting

Review Question
A business organized as a separate legal entity under state law having ownership divided into shares is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship.

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Solution on notes page

SO 5 Explain the monetary unit assumption and the economic entity assumption.

The Building Blocks of Accounting

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. Shareholders in a corporation enjoy limited legal liability as compared to partners in a partnership.

True False True

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Solution on notes page

SO 5 Explain the monetary unit assumption and the economic entity assumption.

The Building Blocks of Accounting

Indicate whether each of the following statements presented below is true or false. 4. The primary accounting standard-setting body outside the United States is the International Accounting Standards Board (IASB). 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

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Solution on notes page

SO 5 Explain the monetary unit assumption and the economic entity assumption.

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Answer on notes page

SO 5 Explain the monetary unit assumption and the economic entity assumption.

The Basic Accounting Equation

Assets Liabilities Equity

Provides the underlying framework for recording and summarizing economic events. Applies to all economic entities regardless of size.

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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Assets Liabilities Equity

Provides the underlying framework for recording and summarizing economic events.

Assets
Resources a business owns. Provide future services or benefits. Cash, Inventory, Equipment, etc.
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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Assets Liabilities Equity

Provides the underlying framework for recording and summarizing economic events.

Liabilities
Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc.
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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Assets Liabilities Equity

Provides the underlying framework for recording and summarizing economic events.

Equity
Ownership claim on total assets. Referred to as residual equity. Share capital and retained earnings.
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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Illustration 1-7

Revenues result from business activities entered into for the purpose of earning income. Generally results from selling merchandise, performing services, renting property, and lending money.
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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Illustration 1-7

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.
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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Illustration 1-7

Dividends are the distribution of cash or other assets to shareholders. Reduce retained earnings Not an expense

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SO 6

State the accounting equation, and define its components.

The Basic Accounting Equation

Classify the following items as issuance of shares, dividends, revenues, or expenses. Then indicate whether each item increases or decreases equity. Effect on Equity Classification 1. Rent expense 2. Service revenue 3. Dividends 4. Salaries expense
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Expense Revenue Dividends Expense

Decrease Increase Decrease Decrease

SO 6

State the accounting equation, and define its components.

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.

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SO 7

Analyze the effects of business transactions on the accounting equation.

Using The Accounting Equation

Illustration: Are the following events recorded in the accounting records? Illustration 1-8 Event
Purchase computer. Discuss product design with customer. Pay rent.

Criterion

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

Record/ Dont Record

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SO 7

Analyze the effects of business transactions on the accounting equation.

Using The Accounting Equation

Transaction Analysis

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SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Transaction (1). Investment by Shareholders. 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 capital shares. The effect of this transaction on the basic equation is:

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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.

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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
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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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.

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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
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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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Transaction (6). Services Provided for Cash and 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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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
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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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.

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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
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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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Transaction (10). Dividends. The corporation pays a dividend of $1,300 in cash.

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Solution on notes page

SO 7

Analyze the effects of business transactions on the accounting equation.

Transactions Analysis
Summary of Transactions
Illustration 1-10 Tabular summary of Softbyte transactions

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SO 7

Analyze the effects of business transactions on the accounting equation.

Financial Statements
Companies prepare four financial statements from the summarized accounting data:

Income Statement

Retained Earnings Statement

Statement of Financial Position

Statement of Cash Flows

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SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

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 1-43

SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Income Statement

Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Illustration 1-11 Financial statements and Net loss expenses exceed revenues. their interrelationships
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SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Net income is needed to determine the ending balance in retained earnings.

Illustration 1-11 Financial statements and their interrelationships

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SO 8

Financial Statements

Retained Earnings Statement

Statement indicates the reasons why retained earnings has increased or decreased during the period.

Illustration 1-11 Financial statements and their interrelationships

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SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

The ending balance in retained earnings is needed in preparing the statement of financial position

Illustration 1-11 Financial statements and their interrelationships Slide 1-47

SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Balance Sheet

Illustration 1-11 Financial statements and their interrelationships

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SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Illustration 1-11 Financial statements and their interrelationships

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Financial Statements
Statement of Cash Flows
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?

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SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Statement of Cash Flows

Illustration 1-11 Financial statements and their interrelationships

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SO 8 Understand the four financial statements and how they are prepared.

Financial Statements

Review Question
Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Retained earnings statement. d. Statement of cash flows.

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SO 8 Understand the four financial statements and how they are prepared.

Career Opportunities
Public accounting Private accounting

APPENDIX
Government Forensic accounting

Show me the Money

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SO 9 Explain the career opportunities in accounting.

Copyright
Copyright 2011 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.

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