Chapter 1-1 Accounting in Action Accounting Principles, Ninth Edition

Chapter 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 cost 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. Study Objectives

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

Chapter 1-4 What is Accounting? SO 1 Explain what accounting is. The purpose of accounting is to: (1) identifyrecordcommunicate (1) identify, record, and communicate the economic events of an (2) organization to (3) interested users.

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

Chapter 1-6 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? SO 2 Identify the users and uses of accounting. Customers Internal Users External Users

Chapter 1-7 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? SO 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

Chapter 1-8 The Building Blocks of Accounting Ethics In Financial Reporting SO 3 Understand why ethics is a fundamental business concept SO 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. Congress passed Sarbanes-Oxley Act of Effective financial reporting depends on sound ethical behavior.

Chapter 1-9 Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. 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 SO 4 Explain generally accepted accounting principles and the cost principle.

Chapter 1-10 Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) International Accounting Standards Board (IASB) SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting

Chapter 1-11 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. The Building Blocks of Accounting SO 4 Explain generally accepted accounting principles and the cost principle.

Chapter 1-12 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. AssumptionsAssumptions SO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership

Chapter 1-13 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. SO 5 Explain the monetary unit assumption and the economic entity assumption.

Chapter 1-14 AssetsAssetsLiabilitiesLiabilities Owner’s Equity = + 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 SO 6 State the accounting equation, and define its components.

Chapter 1-15 AssetsAssetsLiabilitiesLiabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. AssetsAssets SO 6 State the accounting equation, and define its components.

Chapter 1-16 AssetsAssetsLiabilitiesLiabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. LiabilitiesLiabilities SO 6 State the accounting equation, and define its components.

Chapter 1-17 AssetsAssetsLiabilitiesLiabilities Owner’s Equity = + Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation Ownership claim on total assets. Referred to as residual equity. Capital, Drawings, etc. (Proprietorship or Partnership). Owner’s Equity SO 6 State the accounting equation, and define its components.

Chapter 1-18 Owners’ Equity 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. Illustration 1-6 SO 6 State the accounting equation, and define its components.

Chapter 1-19 Owners’ Equity 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 SO 6 State the accounting equation, and define its components.

Chapter 1-20 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. SO 7 Analyze the effects of business transactions on the accounting equation.

Chapter 1-21 Q1-15: Q1-15: Are the following events recorded in the accounting records? Event Supplies are purchased on account. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? SO 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 (Question?)

Chapter 1-22 Transaction (1). Investment By Owner. Transaction (1). Investment By Owner. Ray Neal decides to open a computer programming service which he names Softbyte. On September 1, 2010, he invests $15,000 cash in the. The effect of this transaction on the basic equation is: Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation.

Chapter 1-23 Transaction (2). Purchase of Equipment for Cash. Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash. Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation.

Chapter 1-24 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (3). Purchase of Supplies on Credit. 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.

Chapter 1-25 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (4). Services Provided for Cash. Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.

Chapter 1-26 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (5). Purchase of Advertising on Credit. 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.

Chapter 1-27 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (6). Services Provided for Cash and Credit. 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.

Chapter 1-28 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (7). Payment of Expenses. Transaction (7). Payment of Expenses. Softbyte pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

Chapter 1-29 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (8). Payment of Accounts Payable. Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.

Chapter 1-30 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (9). Receipt of Cash on Account. Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].

Chapter 1-31 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (10). Withdrawal of Cash by Owner. Transaction (10). Withdrawal of Cash by Owner. Ray Neal withdraws $1,300 in cash from the business for his personal use.

Chapter 1-32 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Summary of Transactions Illustration 1-8 Tabular summary of Softbyte transactions

Chapter 1-33 Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Owner’s Equity Statement Financial Statements SO 8 Understand the four financial statements and how they are prepared.

Chapter 1-34 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Income Statement Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. Illustration 1-9 Financial statements and their interrelationships

Chapter 1-35 Financial Statements Net income is needed to determine the ending balance in owner’s equity. Illustration 1-9 Financial statements and their interrelationships

Chapter 1-36 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Statement indicates the reasons why owner’s equity has increased or decreased during the period. Owner’s Equity Statement Illustration 1-9 Financial statements and their interrelationships

Chapter 1-37 Financial Statements The ending balance in owner’s equity is needed in preparing the balance sheet Illustration 1-9 Financial statements and their interrelationships

Chapter 1-38 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Balance Sheet Illustration 1-9 Financial statements and their interrelationships

Chapter 1-39 Financial Statements Illustration 1-9 Financial statements and their interrelationships

Chapter 1-40 Financial Statements SO 8 Understand the four financial statements and how they are prepared. 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? Statement of Cash Flows

Chapter 1-41 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Statement of Cash Flows Illustration 1-9 Financial statements and their interrelationships

Chapter 1-42 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. SO 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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