2. Chapter 1-1

3. Chapter 1-2 CHAPTER 1 ACCOUNTING IN ACTION Accounting Principles, Eighth Edition

4. Chapter 1-3 Accounting in Action Ethics in financial reporting Generally accepted accounting principles Assumptions What is Accounting? The Building Blocks of Accounting The Basic Accounting Equation Using the Basic Accounting Equation Financial Statements Three activities Who uses accounting data AssetsLiabilities Owner’s equity Transaction analysis Summary of transactions Income statement Owner’s equity statement Balance sheet Statement of cash flows

5. Chapter 1-4 Three Activities What is Accounting? LO 1 Explain what accounting is. Illustration 1-1 Accounting process The accounting process includes the bookkeeping function.

6. Chapter 1-5 Management There are two broad groups of users of financial information: internal users and external users. Human Resources IRS Labor Unions SEC Marketing Finance Investors Creditors Who Uses Accounting Data? LO 2 Identify the users and uses of accounting. Customers Internal Users External Users

7. Chapter 1-6 Common Questions AskedUser 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? Who Uses Accounting Data? LO 2 Identify the users and uses of accounting. 6. Will the company be able to pay its short-term debts? Investors Management Finance Marketing Creditors

8. Chapter 1-7

9. Chapter 1-8

10. Chapter 1-9 The Building Blocks of Accounting Ethics In Financial Reporting LO 3 Understand why ethics is a fundamental business concept LO 3 Understand why ethics is a fundamental business concept. Standards of conduct by which one’s 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.EnronHealthSouth Effective financial reporting depends on sound ethical behavior.

11. Chapter 1-10 Various users need financial information The accounting profession has developed standards. Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle.

12. Chapter 1-11 Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) LO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting http://www.fasb.org/ http://www.sec.gov/ http://www.iasb.org/

13. Chapter 1-12 Cost Principle (Historical) – dictates that companies record assets at their cost. $30,000 $ ? New6 years old Issues: Reported at cost when purchased and also over the time the asset is held. Cost easily verified, whereas market value is often subjective. The Building Blocks of Accounting LO 4 Explain generally accepted accounting principles and the cost principle.

14. Chapter 1-13 Question #6 from homework Question asked: Purchased land for $90,000 on Dec 10, 2008 Purchased land for $90,000 on Dec 10, 2008 Value increased to $93,000 on Dec 31, 2008 Value increased to $93,000 on Dec 31, 2008 What amount should be reported on the balance sheet on Dec 31, 2008? What amount should be reported on the balance sheet on Dec 31, 2008?Answer:

15. Chapter 1-14 Monetary Unit Assumption – accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption – activities of the entity must be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship. Partnership. Corporation. AssumptionsAssumptions LO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership

16. Chapter 1-15 ProprietorshipPartnership Corporation Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Forms of Business Ownership Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts. LO 5 Explain the monetary unit assumption and the economic entity assumption.

17. Chapter 1-16 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. The Basic Accounting Equation LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity. ASSETS = LIABILITIES + OWNERS EQUITY Or ASSETS – LIABILITIES = OWNERS EQUITY

18. Chapter 1-17 AssetsAssetsLiabilitiesLiabilities Owner’s Equity - = They are used in carrying out such activities as production, consumption and exchange. The Basic Accounting Equation - Assets LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity. Resources a business owns. Provide future services or benefits. Cash, Supplies, Prepaid…, Equipment, etc.

19. Chapter 1-18 Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation - Liabilities LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity. Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. AssetsAssetsLiabilitiesLiabilities Owner’s Equity - =

20. Chapter 1-19 The Basic Accounting Equation - OE LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity. Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). AssetsAssetsLiabilitiesLiabilities Owner’s Equity - =

21. Chapter 1-20 The Basic Accounting Equation - OE LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity. Subdivisions of Owner’s Equity: 1. Capital or Investments by Owner (+) 2. Drawing (-) 3. Revenues (+) 4. Expenses (-) AssetsAssetsLiabilitiesLiabilities Owner’s Equity - =

22. Chapter 1-21 Owners’ Equity – Investments & Drawings LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity. Investments - are the assets the owner puts in the business INVESTMENTS BY OWNERS ARE A BUILDING BLOCK Investments increase owner’s equity Drawings - are withdrawals of cash or other assets by the owner for personal use. Drawings decrease owner’s equity

23. Chapter 1-22 Owners’ Equity - Revenue 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. usually result in an increase in an asset, such as ______? Illustration 1-6 LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity.

24. Chapter 1-23 Owners’ Equity - Expenses 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. Illustration 1-6 LO 6 State the accounting equation, and define assets, liabilities, and owner’s equity.

25. Chapter 1-24 Using The Basic Accounting Equation Transactions are a business’s 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. LO 7 Analyze the effects of business transactions on the accounting equation.

26. Chapter 1-25 Only transactions that involve change in assets/liabilities/OE is recorded. Event Supplies are purchased on account. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? LO 7 Analyze the effects of business transactions on the accounting equation. An employee is hired. Owner withdraws cash for personal use. Record/ Don’t Record Transactions -

27. Chapter 1-26 Discussion Question Q18. In February 2008, Paula King invested an additional $10,000 in her business, King’s Pharmacy, which is organized as a proprietorship. King’s accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not? See notes page for discussion TransactionsTransactions LO 7 Analyze the effects of business transactions on the accounting equation.

28. Chapter 1-27 Transactions (Problem in Notes) Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++=+ Assets LiabilitiesEquity Totals Description 1.

29. Chapter 1-28 Transactions (Problem in Notes) Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Totals Description 1.

30. Chapter 1-29 P1-1A: P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 1. Invested $10,000 cash to start the repair shop. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

31. Chapter 1-30 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 2. Purchased equipment for $5,000 cash. 2. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

32. Chapter 1-31 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 3. Paid $400 cash for May office rent. 2. 3. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

33. Chapter 1-32 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 4. Received $5,100 from customers for repair service. 2. 3. 4. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

34. Chapter 1-33 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 5. Withdrew $1,000 cash for personal use. 2. 3. 4. 5. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

35. Chapter 1-34 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 6. Paid part-time employee salaries of $2,000. 2. 3. 4. 5. 6. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

36. Chapter 1-35 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 7. Incurred $250 of advertising costs, on account. 2. 3. 4. 5. 6. 7. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

37. Chapter 1-36 Transactions (Problem) 1. LO 7 Analyze the effects of business transactions on the accounting equation. 8. Provided $750 of repair services on account. 2. 3. 4. 5. 6. 7. 8. Cash Accounts Receivable Equipment Accounts Payable Barone, Capital ++-= Assets LiabilitiesEquity Description

38. Chapter 1-37 Transactions (Problem) 1. Cash Accounts Receivable Equipment Accounts Payable LO 7 Analyze the effects of business transactions on the accounting equation. 9. Collected $120 cash for services previously billed. 2. ++ =- 3. 4. 5. 6. 7. 8. 9. Barone, Capital Assets LiabilitiesEquity 6,820 + 630 + 5,000 - 250 = 12,200

39. Chapter 1-38 Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement Financial Statements LO 8 Understand the four financial statements and how they are prepared.

40. Chapter 1-39 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. Financial Statements LO 8 Understand the four financial statements and how they are prepared. Review Question

41. Chapter 1-40 Income Statement Financial Statements LO 8 Understand the four financial statements and how they are prepared. Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues.

42. Chapter 1-41 Income Statement Financial Statements LO 8 Understand the four financial statements and how they are prepared. Owner’s Equity Statement Net income is needed to determine the ending balance in owner’s equity.

43. Chapter 1-42 Financial Statements LO 8 Understand the four financial statements and how they are prepared. Owner’s Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period.

44. Chapter 1-43 Financial Statements LO 8 Understand the four financial statements and how they are prepared. Owners’ Equity Statement The ending balance in owner’s equity is needed in preparing the balance sheet Balance Sheet

45. Chapter 1-44 BAL ance Sheet Financial Statements LO 8 Understand the four financial statements and how they are prepared. Reports the assets, liabilities, and owner’s equity at a specific date. Assets listed at the top, followed by liabilities and owner’s equity. Total assets must equal total liabilities and owner’s equity.

46. Chapter 1-45 Balance Sheet Financial Statements LO 8 Understand the four financial statements and how they are prepared. Statement of Cash Flows

47. Chapter 1-46 Financial Statements LO 8 Understand the four financial statements and how they are prepared. 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?

48. Chapter 1-47 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. Financial Statements LO 8 Understand the four financial statements and how they are prepared. Review Question

49. Chapter 1-48 Discussion Question Q19. “A company’s net income appears directly on the income statement and the owner’s equity statement, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain. See notes page for discussion Financial Statements LO 8 Understand the four financial statements and how they are prepared.

50. Chapter 1-49 Forensic Accounting Careers with insurance companies and law offices to conduct investigations into theft and fraud. Opportunities in Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities. Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation. LO 9 Explain the career opportunities in accounting. Accounting Career Opportunities Public Accounting Careers in auditing and taxation serving the general public.

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