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Chapter 1 Accounting in Action Slide 1 -1 Chapter 1 Accounting in Action Slide 1 -1

Study Objectives 1. 2. Identify the users and uses of accounting. 3. Understand why Study Objectives 1. 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. 5. Explain the monetary unit assumption and the economic entity assumption. 6. State the accounting equation, and define its components. 7. Analyze the effects of business transactions on the accounting equation. 8. Slide 1 -2 Explain what accounting is. Understand the four financial statements and how they are prepared.

Accounting in Action What is Accounting? Three activities Who uses accounting data? Slide 1 Accounting in Action What is Accounting? Three activities Who uses accounting data? Slide 1 -3 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 Income statement Retained earnings statement Statement of financial position Statement of cash flows

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

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

What is Accounting? Who Uses Accounting Data Internal Users Human Resources Taxing Authorities External What is Accounting? Who Uses Accounting Data Internal Users Human Resources Taxing Authorities External Users Labor Unions Finance Management Customers Creditors Marketing Slide 1 -6 Regulatory Agencies Investors SO 2 Identify the users and uses of accounting.

What is Accounting? Common Questions Asked User 1. Can we afford to give our What is Accounting? Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? Investors 3. Should any product lines be eliminated? Management 4. Is cash sufficient to pay dividends to shareholders? Finance 5. What price for our product will maximize net income? Marketing 6. Will the company be able to pay its debts? Creditors Slide 1 -7 SO 2 Identify the users and uses of accounting.

Certain standards to be followed in reporting financial information l l l Slide 1 Certain standards to be followed in reporting financial information l l l Slide 1 -8 Ethics Accounting standards Assumptions

The Building Blocks of Accounting Ethics In Financial Reporting Standards of conduct by which The Building Blocks of Accounting Ethics In Financial Reporting 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 (USA), Parmalat (ITA), Satyam Computer Services (IND), AIG (USA), and others. Effective financial reporting depends on sound ethical behavior. Slide 1 -9 SO 3 Understand why ethics is a fundamental business concept.

The Building Blocks of Accounting Standards International Accounting Standards Board (IASB) http: //www. iasb. The Building Blocks of 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) Slide 1 -10 SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting Measurement Principles Cost Principle (Historical) – dictates that companies 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. Slide 1 -11 SO 4 Explain accounting standards and the measurement principles.

The Building Blocks of Accounting Measurement Principles Fair Value Principle – indicates that assets 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. Slide 1 -12 SO 4 Explain accounting standards and the measurement principles.

Question q Slide 1 -13 Karen Sommers Travel Agency purchased land for $90, 000 Question q Slide 1 -13 Karen Sommers Travel Agency purchased land for $90, 000 cash on December 10, 2014. At December 31, 2014, the land’s value has increased to $93, 000. What amount should be reported for land on the statement of financial position at December 31, 2014.

The Building Blocks of Accounting Assumptions Monetary Unit Assumption – include in the accounting 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. Forms of Business Ownership Corporation. Slide 1 -14 SO 5 Explain the monetary unit assumption and the economic entity assumption.

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

Question q Are the following events recorded in the accounting records? Explain your answer Question q Are the following events recorded in the accounting records? Explain your answer in each case. • • • Slide 1 -16 The president of the company dies. Supplies are purchased on account. An employee is fired.

Accounting Equation l l Slide 1 -17 What is accounting equation? How to use Accounting Equation l l Slide 1 -17 What is accounting equation? How to use accounting equation to analyze economic events?

The Basic Accounting Equation Assets = Liabilities + Equity Provides the underlying framework for 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. All transactions should be recorded and classified into one or two or three out of the three categories. Slide 1 -18 SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation Assets = Liabilities + Equity Provides the underlying framework for 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. Slide 1 -19 SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation Assets = Liabilities + Equity Provides the underlying framework for 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. Slide 1 -20 SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation Assets = Liabilities + Equity Provides the underlying framework for 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. Slide 1 -21 SO 6 State the accounting equation, and define its components.

Remember and think that: l l Slide 1 -22 The accounting equation should be Remember and think that: l l Slide 1 -22 The accounting equation should be in balance all the time after accounting for any transactions (i. e. , economic events). Does ‘the balance in accounting equation’ mean that the accounting for all transactions is all the time correct?

Impact on Equity l Slide 1 -23 What makes ‘the amount in equity’ changed? Impact on Equity l Slide 1 -23 What makes ‘the amount in equity’ changed?

The Basic Accounting Equation Illustration 1 -7 Revenues result from business activities entered into 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. Slide 1 -24 SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation Illustration 1 -7 Expenses are the cost of assets consumed 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. Slide 1 -25 SO 6 State the accounting equation, and define its components.

The Basic Accounting Equation Illustration 1 -7 Dividends are the distribution of cash or The Basic Accounting Equation Illustration 1 -7 Dividends are the distribution of cash or other assets to shareholders. Ø Reduce retained earnings Ø Not an expense Slide 1 -26 SO 6 State the accounting equation, and define its components.

Using accounting equation l Slide 1 -27 Remember that any transaction (i. e. , Using accounting equation l Slide 1 -27 Remember that any transaction (i. e. , economic events) can affect accounting equation (i. e. , increase, decrease, no change).

Using The Accounting Equation Transactions are a business’s economic events recorded by accountants. May Using The 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. Recognition and measurement Slide 1 -28 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? Using The Accounting Equation Illustration: Are the following events recorded in the accounting records? Illustration 1 -8 Discuss product design with customer. Event Purchase computer. Criterion Is the financial position (assets, liabilities, or equity) of the company changed? Pay rent. Record/ Don’t Record Slide 1 -29 SO 7 Analyze the effects of business transactions on the accounting equation.

Using The Accounting Equation Transaction Analysis Slide 1 -30 SO 7 Analyze the effects Using The Accounting Equation Transaction Analysis Slide 1 -30 SO 7 Analyze the effects of business transactions on the accounting equation.

Question q Slide 1 -31 “A company’s net income appears directly on the income Question q Slide 1 -31 “A company’s net income appears directly on the income statement and the retained earnings statement, and it is included indirectly in the company’s statement of financial position. ” Do you agree? Explain.

Transactions Analysis Transaction (1). Investment by Shareholders. Ray and Barbara Neal decides to open 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: Slide 1 -32 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 Transactions Analysis Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7, 000 cash. Slide 1 -33 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 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. Slide 1 -34 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 Transactions Analysis Transaction (4). Services Provided for Cash. Softbyte receives $1, 200 cash from customers for programming services it has provided. Slide 1 -35 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 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. Slide 1 -36 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 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. Slide 1 -37 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 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. Slide 1 -38 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 Transactions Analysis Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash. Slide 1 -39 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 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)]. Slide 1 -40 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 Transactions Analysis Transaction (10). Dividends. The corporation pays a dividend of $1, 300 in cash. Slide 1 -41 Solution on notes page SO 7 Analyze the effects of business transactions on the accounting equation.

Transactions Analysis Summary of Transactions Slide 1 -42 SO 7 Illustration 1 -10 Tabular Transactions Analysis Summary of Transactions Slide 1 -42 SO 7 Illustration 1 -10 Tabular summary of Softbyte transactions Analyze the effects of business transactions on the accounting equation.

What are four primary financial statements? l l Slide 1 -43 Four primary financial What are four primary financial statements? l l Slide 1 -43 Four primary financial statements? Definition and purpose of each financial statement?

Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Financial Statements Companies prepare four financial statements from the summarized accounting data: Income Statement Slide 1 -44 Retained Earnings Statement of Financial Position Statement of Cash Flows 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 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 Slide 1 -45 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. Financial Statements Net income is needed to determine the ending balance in retained earnings. Illustration 1 -11 Financial statements and their interrelationships Slide 1 -46 SO 8

Financial Statements Statement indicates the reasons why retained earnings has increased or decreased during Financial Statements Statement indicates the reasons why retained earnings has increased or decreased during the period. Slide 1 -47 Retained Earnings Statement Illustration 1 -11 Financial statements and their interrelationships 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 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 -48 SO 8 Understand the four financial statements and how they are prepared.

Financial Statements Balance Sheet Illustration 1 -11 Financial statements and their interrelationships Slide 1 Financial Statements Balance Sheet Illustration 1 -11 Financial statements and their interrelationships Slide 1 -49 SO 8 Understand the four financial statements and how they are prepared.

Financial Statements Illustration 1 -11 Financial statements and their interrelationships Slide 1 -50 Financial Statements Illustration 1 -11 Financial statements and their interrelationships Slide 1 -50

Financial Statements Statement of Cash Flows Information for a specific period of time. Answers 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? Slide 1 -51 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 Financial Statements Statement of Cash Flows Illustration 1 -11 Financial statements and their interrelationships Slide 1 -52 SO 8 Understand the four financial statements and how they are prepared.