chapter 1 accounting in action

5/18/2018 chapter 1 ACCOUNTING IN ACTION

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Chapter

1

Accounting in Action

Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso


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1. Explain what accounting is.

2. Identify the users and uses of accounting.

3. Understand why ethics is a fundamental business concept.

4. Explain accounting standards and the measurement principles.

. Explain the monetary unit assumption and the economic entity

assumption.

!. "tate the accounting e#uation$ and define its components.

%. Analy&e the effects of business transactions on the accountinge#uation.

'. Understand the four financial statements and how they are

prepared.

Study ObjectivesStudy Objectives

Study ObjectivesStudy Objectives


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Ethics inEthics infinancialfinancialreportingreporting

AccountingAccounting

standardsstandards

AssumptionsAssumptions

What isWhat is

Accounting?Accounting?

What isWhat is

Accounting?Accounting?

The BuildingThe Building

Blocks ofBlocks of


The BuildingThe Building

Blocks ofBlocks of


The BasicThe Basic


EquationEquation

The BasicThe Basic


EquationEquation

Using theUsing theAccountingAccounting

EquationEquation

Using theUsing theAccountingAccounting

EquationEquation

FinancialFinancial

StateentsStateents

FinancialFinancial

StateentsStateents

(hree(hreeacti)itiesacti)ities

*ho uses*ho usesaccountingaccounting

data+data+

AssetsAssets

,iabilities,iabilities

E#uityE#uity

(ransaction(ransactionanalysisanalysis

"ummary of"ummary oftransactionstransactions

IncomeIncomestatementstatement

-etained-etainedearningsearnings

statementstatement

"tatement of"tatement of

financialfinancialpositionposition

"tatement of"tatement ofcash flowscash flows

Accounting in ActionAccounting in Action

Accounting in ActionAccounting in Action


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What is Accounting?What is Accounting?


SO 1 Explain what accounting is.

The "u#"ose of accounting$

1/ to identif%identif%$ #eco#d#eco#d$ and counicatecounicatethe economic

e)ents of an

2/ organi&ation to

3/ interested users.


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Th#ee Acti'ities



(he accounting process includes

the boo00eeping function.

(llust#ation 1-1

(he acti)ities of theaccounting process

SO 1 Explain what accounting is.


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*anageent

+uan

,esou#cesTaing

Autho#ities

.a/o#Unions

,egulato#%

Agencies

*a#keting

Finance

(n'esto#s

0#edito#s

SO !denti"y the users and uses o" accounting.

0ustoe#s

(nte#nal

Use#s

Ete#nal

Use#s

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

Who Uses Accounting ata


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ommon uestions As0ed User1. an we afford to gi)e our

employees a pay raise+ +uan ,esou#ces

2. id the company earn asatisfactory income+

3. "hould any product lines beeliminated+

4. Is cash sufficient to paydi)idends to shareholders+

. *hat price for our product willmaximi&e net income+

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

SO !denti"y the users and uses o" accounting.

!. *ill the company be able topay its debts+

(n'esto#s

*anageent

Finance

*a#keting

0#edito#s


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#he $uilding $loc%s o" Accounting#he $uilding $loc%s o" Accounting#he $uilding $loc%s o" Accounting#he $uilding $loc%s o" Accounting

Ethics (n Financial ,e"o#ting

SO & 'nderstand why ethics is a "unda(ental business concept.

"tandards of conduct by which ones actions are 5udged

as right or wrong$ honest or dishonest$ fair or not fair$

are Ethics.

-ecent financial scandals include6 EnronU"A/$

7armalatI(A/$ "atyam omputer "er)ices I8/$AI9

U"A/$ and others.

Effecti)e financial reporting depends on sound ethical

beha)ior.


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Ethics (n Financial ,e"o#ting

SO & 'nderstand why ethics is a "unda(ental business concept.


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Ethics are the standards of conduct by which one:sactions are 5udged as6

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

c. fair or not fair.

d. all of these options.

Ethics are the standards of conduct by which one:sactions are 5udged as6

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

c. fair or not fair.

d. all of these options.

,e'ie5 6uestion

SO & 'nderstand why ethics is a "unda(ental business concept."olution onnotes page



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International ;inancial -eporting "tandards I;-"/

SO ) Explain accounting standards and the (easure(ent principles.

;inancial Accounting "tandards


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0ost 7#inci"le 8+isto#ical9> dictates that companies record

assets at their cost.

Issues6

-eported at cost when purchased and also o)er the time the

asset is held.

ost easily )erified$ mar0et )alue is often sub5ecti)e.

;air )alue information may be more useful.


*easu#eent 7#inci"les



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Fai# :alue 7#inci"le> indicates that assets and liabilities should

be reported at fair )alue.

In determining which measurement principle to use$ companies

weigh the factual nature of cost figures )ersus the rele)ance of

fair )alue.

?nly in situations where assets are acti)ely traded$ such asin)estment securities$ is the fair )alue principle applied.


*easu#eent 7#inci"les



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*oneta#% Unit Assu"tion> include in the accounting records

only transaction data that can be expressed in terms of money.

Econoic Entit% Assu"tion> re#uires that acti)ities of theentity be 0ept separate and distinct from the acti)ities of its

owner and all other economic entities.

7roprietorship.

7artnership.

orporation.

Fo#s of Business

;5ne#shi"

Assu"tions


SO * Explain the (onetary unit assu(ption and the econo(ic entity assu(ption.


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7#o"#ieto#shi" 7a#tne#shi" 0o#"o#ation

?wned by two or

more persons.

?ften retail and

ser)ice@type

businesses

9enerally unlimited

personal liability

7artnership

agreement

?wnership di)ided

into shares

"eparate legal

entity organi&ed

under state

corporation law

,imited liability

9enerally owned

by one person.

?ften small

ser)ice@type

businesses

?wner recei)es

any profits$ suffers

any losses$ and is

personally liable for

all debts.

SO * Explain the (onetary unit assu(ption and the econo(ic entity assu(ption.



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ombining the acti)ities of ellogg and 9eneral Billswould )iolate the

a. cost principle.

b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

ombining the acti)ities of ellogg and 9eneral Billswould )iolate the

a. cost principle.

b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

,e'ie5 6uestion

SO * Explain the (onetary unit assu(ptionand the econo(ic entity assu(ption.


"olution onnotes page


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A business organi&ed as a separate legal entity understate law ha)ing ownership di)ided into shares is a

a. proprietorship.b. partnership.

c. corporation.

d. sole proprietorship.

SO * Explain the (onetary unit assu(ptionand the econo(ic entity assu(ption.

,e'ie5 6uestion



A business organi&ed as a separate legal entity understate law ha)ing ownership di)ided into shares is a

a. proprietorship.b. partnership.

c. corporation.

d. sole proprietorship.


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(rue

;alse

(rue

Indicate whether each of the followingstatements presented below is true or false.

"olution onnotes page SO * Explain the (onetary unit assu(ptionand the econo(ic entity assu(ption.


1. (he three steps in the accounting process are

identification$ recording$ and communication.

2. (he two most common types of external users

are in)estors and company officers.

3. "hareholders in a corporation en5oy limited legal

liability as compared to partners in a partnership.


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;alse

(rue

Indicate whether each of the followingstatements presented below is true or false.

"olution onnotes page SO * Explain the (onetary unit assu(ptionand the econo(ic entity assu(ption.


4. (he primary accounting standard@setting body

outside the United "tates is the International

Accounting "tandards


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Slide1-21 SO * Explain the (onetary unit assu(ption and the econo(ic entity assu(ption.

Answer on notes pageAnswer on notes page


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AssetsAssetsAssetsAssets .ia/ilities.ia/ilities.ia/ilities.ia/ilities Equit%Equit%Equit%Equit%< =

7ro)ides the unde#l%ing f#ae5o#kfor recording andsummari&ing economic e)ents.

Applies to all economic entities regardless of si&e.

#he $asic Accounting E+uation#he $asic Accounting E+uation#he $asic Accounting E+uation#he $asic Accounting E+uation

SO , State the accounting e+uation- and de"ine its co(ponents.


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AssetsAssetsAssetsAssets



-esources a business owns.7ro)ide future ser)ices or benefits.

ash$ In)entory$ E#uipment$ etc.

Assets

.ia/ilities.ia/ilities.ia/ilities.ia/ilities Equit%Equit%Equit%Equit%< =



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laims against assets debts and obligations/.reditors @ party to whom money is owed.

Accounts payable$ 8otes payable$ etc.


.ia/ilities

AssetsAssetsAssetsAssets .ia/ilities.ia/ilities.ia/ilities.ia/ilities< =

Equit%Equit%Equit%Equit%


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?wnership claim on total assets.-eferred to as residual e#uity.

"hare capital and retained earnings.


Equit%

AssetsAssetsAssetsAssets .ia/ilities.ia/ilities.ia/ilities.ia/ilities Equit%Equit%Equit%Equit%< =


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,e'enuesresult from business acti)ities entered into for the purpose

of earning income.

9enerally results from selling merchandise$ performing ser)ices$

renting property$ and lending money.

(llust#ation 1-)




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E"ensesare the cost of assets consumed or ser)ices used in the

process of earning re)enue.

ommon expenses are salaries expense$ rent expense$ utilities

expense$ tax expense$ etc.

(llust#ation 1-)




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i'idends are the distribution of cash or other assets to shareholders.

-educe retained earnings

8ot an expense



(llust#ation 1-)


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lassification

lassify the following items as issuance ofshares$ di)idends$ re)enues$ or expenses.


1. -ent expense

2. "er)ice re)enue

3. i)idends

4. "alaries expense



(hen indicate whether each item increases or decreases e#uity.

Effect on E#uity

Expense ecrease

-e)enue Increase

i)idends ecrease

Expense ecrease


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'sing #he Accounting E+uation'sing #he Accounting E+uation'sing #he Accounting E+uation'sing #he Accounting E+uation

T#ansactionsare a businesss economic e)entsrecorded by accountants.

Bay be external or internal.

8ot all acti)ities represent transactions.

Each transaction has a dual effecton the accounting

e#uation.

SO Analy/e the e""ects o" business transactions on the accounting e+uation.


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(llust#ation$ Are the following e)ents recorded in theaccounting records+

E'ent7urchasecomputer.

0#ite#ion Is the financial position assets$ liabilities$ ore#uity/ of the company changed+

iscussproduct

design with

customer.

7ay rent.

,eco#d>

ont ,eco#d


(llust#ation 1-



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Slide1-32 SO Analy/e the e""ects o" business transactions on the accounting e+uation.


T#ansaction Anal%sis


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T#ansaction 819@ (n'estent /% Sha#eholde#s@T#ansaction 819@ (n'estent /% Sha#eholde#s@ -ay and


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T#ansaction 829@ 7u#chase of Equi"ent fo# 0ash@T#ansaction 829@ 7u#chase of Equi"ent fo# 0ash@ "oftbytepurchases computer e#uipment for D%$CCC cash.

#ransactions Analysis#ransactions Analysis#ransactions Analysis#ransactions Analysis

"olution onnotes page SO Analy/e the e""ects o" business transactions

on the accounting e+uation.


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T#ansaction 839@ 7u#chase of Su""lies on 0#edit@T#ansaction 839@ 7u#chase of Su""lies on 0#edit@ "oftbytepurchases for D1$!CC from Acme "upply ompany computer

paper and other supplies expected to last se)eral months.




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T#ansaction 849@ Se#'ices 7#o'ided fo# 0ash@T#ansaction 849@ Se#'ices 7#o'ided fo# 0ash@ "oftbyterecei)es D1$2CC cash from customers for programming ser)ices

it has pro)ided.




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T#ansaction 8!9@ 7u#chase of Ad'e#tising on 0#edit@T#ansaction 8!9@ 7u#chase of Ad'e#tising on 0#edit@ "oftbyterecei)es a bill for D2C from the aily 8ews for ad)ertising but

postpones payment until a later date.




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T#ansaction 8&9@ Se#'ices 7#o'ided fo# 0ash and 0#edit@T#ansaction 8&9@ Se#'ices 7#o'ided fo# 0ash and 0#edit@"oftbyte pro)ides D3$CC of programming ser)ices for

customers. (he company recei)es cash of D1$CC from

customers$ and it bills the balance of D2$CCC on account.




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T#ansaction 8)9@ 7a%ent of E"enses@T#ansaction 8)9@ 7a%ent of E"enses@ "oftbyte pays thefollowing Expenses in cash for "eptember6 store rent D!CC$

salaries of employees DCC$ and utilities D2CC.

"olution onnotes page SO Analy/e the e""ects o" business transactionson the accounting e+uation.


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T#ansaction 89@ 7a%ent of Accounts 7a%a/le@T#ansaction 89@ 7a%ent of Accounts 7a%a/le@ "oftbytepays its D2C aily 8ews bill in cash.



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T#ansaction 89@ ,ecei"t of 0ash on Account@T#ansaction 89@ ,ecei"t of 0ash on Account@ "oftbyterecei)es D!CC in cash from customers who had been billed for

ser)ices Fin (ransaction !/G.



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T#ansaction 819@ i'idends@T#ansaction 819@ i'idends@ (he corporation pays a di)idendof D1$3CC in cash.



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Sua#% of T#ansactionsSua#% of T#ansactions

(llust#ation 1-1

(abular summary of"oftbyte transactions



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ompanies prepare four financial statements from thesummari&ed accounting data6

ompanies prepare four financial statements from thesummari&ed accounting data6

"tatementof ;inancial

7osition

Income"tatement

"tatementof ash;lows

-etainedEarnings

"tatement

0inancial State(ents0inancial State(ents0inancial State(ents0inancial State(ents

SO 'nderstand the "our "inancial state(ents and how they are prepared.


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8et income will result during a time period when6

a. assets exceed liabilities.

b. assets exceed re)enues.

c. expenses exceed re)enues.

d. re)enues exceed expenses.

8et income will result during a time period when6

a. assets exceed liabilities.

b. assets exceed re)enues.

c. expenses exceed re)enues.

d. re)enues exceed expenses.


,e'ie5 6uestion,e'ie5 6uestion




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0inancial State(ents0inancial State(ents0inancial State(ents0inancial State(ents (ncoe Stateent

-eports the re)enues and expenses for a specific period of time.

8et income > re)enues exceed expenses.

8et loss > expenses exceed re)enues.(llust#ation 1-11

;inancial statements andtheir interrelationships


0i i l St t t0i i l St t t8et income is needed to determine the


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0inancial State(ents0inancial State(ents0inancial State(ents0inancial State(ents8et income is needed to determine theending balance in retained earnings.

(llust#ation 1-11


SO SO


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"tatement indicates the reasons whyretained earnings has increased or

decreased during the period.

,etained Ea#ningsStateent

(llust#ation 1-11




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0inancial0inancial

State(entsState(ents

0inancial0inancial


(he endingbalance inretained

earnings isneeded inpreparing thestatement offinancial position

(llust#ation 1-11




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0inancial State(ents0inancial State(ents0inancial State(ents0inancial State(ents Balance Sheet


(llust#ation 1-11;inancial statements andtheir interrelationships


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0inancial0inancial


0inancial0inancial


(llust#ation 1-11



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Information for a specific period of time.

Answers the following6

1. *here did cash come from+

2. *hat was cash used for+

3. *hat was the change in the cash balance+

Stateent of 0ash Flo5sStateent of 0ash Flo5s



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0inancial State(ents0inancial State(ents0inancial State(ents0inancial State(ents Stateent of 0ash Flo5s

(llust#ation 1-11;inancial statements andtheir interrelationships



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Slide1-!4 SO 'nderstand the "our "inancial state(ents and how they are prepared.

Answer onAnswer on

notes pagenotes page


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*hich of the following financial statements is preparedas of a specific date+

a.


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(n 22 the U@S@ 0ong#ess issued the Sa#/anes-;le% Act 8S;9

5hich andated ce#tain inte#nal cont#ols fo# la#ge "u/lic

co"anies listed on U@S@ echanges@ e/ate a/out inte#national

co"anies 8non-U@S@9 ado"ting S;-t%"e standa#ds cente#s on5hethe# the /enefits eceed the costs@ The conce#n is that the

highe# costs of S; co"liance a#e aking the U@S@ secu#ities

a#kets less co"etiti'e@

Financial f#auds ha'e occu##ed at co"anies such as Sat%a

0o"ute# Se#'ices 8(C9 7a#alat 8(TA9 and ,o%al Ahold 8C.9@

The% ha'e also occu##ed at la#ge U@S@ co"anies such as En#on

Wo#ld0o and A(D@


Unde#standing U@S@ DAA7Unde#standing U@S@ DAA7Unde#standing U@S@ DAA7Unde#standing U@S@ DAA7

ey ifferencesey ifferences


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(F,S tends to /e less detailed in its accounting and disclosu#e

#equi#eents than DAA7@ This diffe#ence in a""#oach has #esulted

in a de/ate a/out the e#its of "#inci"les-/ased 8(F,S9 'e#sus

#ules-/ased 8DAA79 standa#ds@U@S@ #egulato#s ha'e #ecentl% eliinated the need fo# fo#eign

co"anies that t#ade sha#es in U@S@ a#kets to #econcile thei#

accounting 5ith DAA7@

DAA7 is /ased on a conce"tual f#ae5o#k that is siila# to that

used to de'elo" (F,S@





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The th#ee coon fo#s of /usiness o#ganiGation that a#e

"#esented in the cha"te# "#o"#ieto#shi"s "a#tne#shi"s and

co#"o#ations a#e also found in the United States@ Because the

choice of /usiness o#ganiGation is influenced /% facto#s such aslegal en'i#onent ta #ates and #egulations and deg#ee of

ent#e"#eneu#is the #elati'e use of each fo# 5ill 'a#% ac#oss

count#ies@

T#ansaction anal%sis is /asicall% the sae unde# (F,S and DAA7

/ut as %ou 5ill see in late# cha"te#s the diffe#ent standa#ds a%

i"act ho5 t#ansactions a#e #eco#ded@





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,oo0ing to the ;uture,oo0ing to the ;uture


Accounting in ActionBoth the (ASB and the FASB a#e ha#d at 5o#k de'elo"ing standa#ds

that 5ill lead to the eliination of aHo# diffe#ences in the 5a%

ce#tain t#ansactions a#e accounted fo# and #e"o#ted@ 0onside# fo#

ea"le that as a #esult of a Hoint "#oHect on the conce"tualf#ae5o#k the definitions of the ost fundaental eleents

8assets lia/ilities equit% #e'enues and e"enses9 a% actuall%

change@ +o5e'e# 5hethe# the (ASB ado"ts inte#nal cont#ol

"#o'isions siila# to those in S; #eains to /e seen@


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7u/lic accounting

7#i'ate accounting

SO 2 Explain the career opportunities in accounting.

Career OpportunitiesCareer OpportunitiesCareer OpportunitiesCareer Opportunities A77EC(

Do'e#nent

Fo#ensic accounting

Sho5 e

the *one%


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chapter 1 accounting in action

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