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In this chapter, the learning objectives are: Discuss fraud and the principles of internal control, identify the basic concepts of an accounting information system, describe the nature and purpose of a subsidiary ledger, explain how companies use special journals in journalizing.
Chapter 1-1 CHAPTER ACCOUNTING IN ACTION Accounting Principles, Eighth Edition Chapter 1-2 Study Objectives Study Objectives 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 assets, liabilities, and owner’s equity Analyze the effects of business transactions on the accounting equation Understand the four financial statements and how they are prepared Chapter 1-3 Accounting in Action Accounting in Action What Whatisis Accounting? Accounting? Three activities Who uses accounting data Chapter 1-4 The TheBuilding Building Blocks Blocksof of Accounting Accounting Ethics in financial reporting Generally accepted accounting principles Assumptions The TheBasic Basic Accounting Accounting Equation Equation Assets Liabilities Owner’s equity Using Usingthe the Basic Basic Accounting Accounting Equation Equation Transaction analysis Summary of transactions Financial Financial Statements Statements Income statement Owner’s equity statement Balance sheet Statement of cash flows What is Accounting? What is Accounting? The purpose of accounting is to: (1) identify, communicate the economic identify record, and record communicate events of an (2) organization to (3) interested users Chapter 1-5 LO 1 Explain what accounting is What is Accounting? What is Accounting? Three Activities Illustration 11 Accounting process The accounting process includes the bookkeeping function Chapter 1-6 LO 1 Explain what accounting is Who Uses Accounting Data? Who Uses Accounting Data? Internal Users Human Resources Finance Management IRS Investors There are two broad groups of users of financial information: internal users and external users Creditors Marketing Customers Chapter 1-7 Labor Unions SEC External Users LO 2 Identify the users and uses of accounting Who Uses Accounting Data? Who Uses Accounting Data? 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? 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? 6. Will the company be able to pay its shortterm debts? Chapter 1-8 Investors Management Finance Marketing Creditors LO 2 Identify the users and uses of accounting Who Uses Accounting Data? Who Uses Accounting Data? Discussion Question Q1. “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain See notes page for discussion Chapter 1-9 LO 3 Understand why ethics is a fundamental business concept The Building Blocks of Accounting 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, WorldCom, HealthSouth, AIG, and others Congress passedSarbanesOxley Act of 2002. Effective financial reporting depends on sound ethical behavior Chapter 1-10 LO 3 Understand why ethics is a fundamental business concept Transactions (Problem) Transactions (Problem) 8. Provided $750 of repair services on account Cash + Assets Liabilities Equity Accounts Receivable Accounts Payable Barone, Capital + Equipment = + +10,000 5,000 400 +5,100 400 +5,100 Expense Revenue 1,000 2,000 1,000 2,000 Drawings Expense 250 +750 Expense Revenue Chapter 1-38 +10,000 Investment +5,000 +250 +750 LO 7 Analyze the effects of business transactions on the accounting equation Transactions (Problem) Transactions (Problem) 9. Collected $120 cash for services previously billed Cash + Assets Liabilities Equity Accounts Receivable Accounts Payable Barone, Capital + Equipment = + +10,000 5,000 400 +5,100 400 +5,100 Expense Revenue 1,000 2,000 1,000 2,000 Drawings Expense 250 +750 Expense Revenue +10,000 +5,000 +250 +750 +120 6,820 + Chapter 1-39 Investment 120 630 + 5,000 = LO 7 250 + 12,200 Analyze the effects of business transactions on the accounting equation Financial Statements Financial Statements Companies prepare four financial statements from the summarized Companies prepare four financial statements from the summarized accounting data: accounting data: Income Statement Chapter 1-40 Owner’s Equity Statement Balance Sheet Statement of Cash Flows LO 8 Understand the four financial statements and how they are prepared Financial Statements 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 Chapter 1-41 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Income Statement Ba r o ne ’s Re pa ir S h o p I nc o m e S t a t e m e nt Fo r t h e Mo nt h End e d Ma y , 0 Re ve nue s : Chapter 1-42 S e r vic e r e ve nue Ex pe ns e s : $ 5 ,8 S a la r y e x pe ns e Re nt e x pe ns e Ad ve r tis ing e x pe ns e T o ta l e x pe ns e s Ne t inc o m e 2 ,0 0 4 0 2 2 ,6 $ 3 ,2 0 Reports the revenues and expenses for a specific period of time Net income – revenues exceed expenses Net loss – expenses exceed revenues LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Income Statement Owner’s Equity Statement Ba r o ne ’s Re pa ir S h o p Ba r o ne ’s Re pa ir S h o p I nc o m e S t a t e m e nt O wne r ' s Eq uit y S t a t e m e nt Fo r t h e Mo nt h End e d Ma y , 0 For t h e Mont h End e d Ma y , 0 Re ve nue s : S e r vic e r e ve nue Ex pe ns e s : $ 5 ,8 S a la r y e x pe ns e Re nt e x pe ns e Ad ve r t is ing e x pe ns e T o ta l e x pe ns e s Ne t inc o m e 2 ,0 0 4 0 2 2 ,6 $ 3 , 0 Ba r o ne ' s , C a pit a l Ma y $ Ad d : I nve s tm e nt 10 ,0 0 3 , 0 Ne t inc o m e Le s s : Dr awing s Ba r o ne ' s , C a pit a l Ma y 13 ,2 0 1,0 0 $ 12 ,2 0 Net income is needed to determine the ending balance in owner’s equity Chapter 1-43 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Owner’s Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period Ba r o ne ’s Re pa ir S h o p O wne r ' s Eq uit y S t a t e m e nt For t h e Mont h End e d Ma y , 0 Ba r o ne ' s , Ca pit a l Ma y $ Ad d : I nve s t m e nt Ne t inc o m e 10 ,0 0 3 ,2 0 13 ,2 0 1,0 0 Le s s : Dr awing s Ba r o ne ' s , Ca pit a l Ma y Chapter 1-44 $ 12 ,2 0 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Balance Sheet Ba r o ne ’s Re pa ir S h o p Ba la nc e S h e e t Ma y , 0 Asse ts Ca s h Ac c o unts r e c e iva b le Eq uipm e nt T o ta l a s s e t s $ 6 ,8 6 5 ,0 0 $ 12 ,4 Lia b ilit ie s Ba r o ne ’s Re pa ir S h o p O wne r ' s Eq uit y S t a t e m e nt Fo r t h e Mont h End e d Ma y , 0 Ba r o ne ' s , C a p it a l Ma y $ Ad d : I nve s t m e nt Ne t inc o m e 10 ,0 0 3 ,2 0 13 ,2 0 1,0 0 $ 1 , 0 Le s s : Dr a wing s Ac c o unts pa y a b le O wne r ' s Eq uit y $ 2 Ba r o ne ' s , c a pital 1 , 0 T o ta l lia b & e q uity $ 12 ,4 Chapter 1-45 Owners’ Equity Statement Ba r o ne ' s , C a p it a l Ma y The ending balance in owner’s equity is needed in preparing the balance sheet LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Balance Sheet Ba r o ne ’s Re pa ir S h o p Ba la nc e S h e e t Ma y , 0 As s e t s Ca s h Ac c o unts r e c e iva b le Eq uipm e nt T o ta l a s s e t s $ 6 ,8 6 5 ,0 0 $ 12 ,4 Lia b ilit ie s Ac c o unts pa y a b le O wne r ' s Eq uit y Ba r o ne ' s , c apita l T o ta l lia b & e q uity Chapter 1-46 $ 2 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 12 ,2 0 $ 12 ,4 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Balance Sheet Ba r o ne ’s Re pa ir S h o p Ba la nc e S h e e t Ma y , 0 Asse ts Ca s h $ 6 , Ac c o unts r e c e iva b le 6 Eq uipm e nt 5 ,0 0 T o ta l a s s e ts $ 12 ,4 Lia b ilit ie s Ac c o unts pa y a b le O wne r ' s Eq uit y Ba r o ne ' s , c a pita l T o ta l lia b & e q uity Chapter 1-47 $ 2 12 ,2 0 $ 12 ,4 Statement of Cash Flows Ba r o ne ’s Re pa ir S h o p S t a t e m e nt o f C a s h Flo ws Fo r t h e Mo nt h End e d Ma y , 0 C a s h f lo w f r o m o pe r a t ing a c t ivit ie s Ca s h r e c e ipt s f r o m r e ve nue s $ 5 ,2 Ca s h pa id f o r e x pe ns e s ( ,4 0 ) Ca s h pr o vid e d b y o pe r a tio ns 2 ,8 C a s h f lo w f r o m inve s t ing a c t ivit it e s Pur c s e o f e q uipm e nt ( ,0 0 ) C a s h f lo w f r o m f ina nc ing a c t ivit ie s I nve s t m e nt b y o wne r s Dr a wing s b y o wne r s Ca s h pr o vid e d b y f ina nc ing Ne t inc r e a s e in c a s h 10 ,0 0 ( 1,0 0 ) 9 ,0 0 C a s h b a la nc e , Ma y C a s h b a la nc e , Ma y $ 6 , 6 ,8 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Information for a specific period of time Answers the following: Where did cash come from? What was cash used for? What was the change in the cash balance? Chapter 1-48 Statement of Cash Flows Ba r o ne ’s Re pa ir S h o p S t a t e m e nt o f C a s h Flo ws Fo r t h e Mo nt h End e d Ma y , 0 C a s h f lo w f r o m o pe r a t ing a c t ivit ie s Ca s h r e c e ipt s f r o m c us t o m e r s $ 5 ,2 Ca s h pa id f o r e x pe ns e s ( ,4 0 ) Ca s h pr o vid e d b y o pe r a t io ns 2 ,8 C a s h f lo w f r o m inve s t ing a c t ivit ie s Pur c s e o f e q uipm e nt ( ,0 0 ) C a s h f lo w f r o m f ina nc ing a c t ivit ie s I nve s tm e nt b y o wne r s Dr a wing s b y o wne r s Ca s h pr o vid e d b y f ina nc ing Ne t inc r e a s e in c a s h 10 ,0 0 ( 1,0 0 ) 9 ,0 0 C a s h b a la nc e , Ma y C a s h b a la nc e , Ma y $ 6 ,8 6 ,8 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements Review Question 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 Chapter 1-49 LO 8 Understand the four financial statements and how they are prepared Financial Statements Financial Statements 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 Chapter 1-50 LO 8 Understand the four financial statements and how they are prepared Accounting Career Opportunities Accounting Career Opportunities Public Accounting Careers in auditing and taxation serving the general public Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation Opportunities in Government Careers with the IRS, the FBI, the SEC, and in public colleges and universities Forensic Accounting Careers with insurance companies and law offices to conduct investigations into theft and fraud Chapter 1-51 LO 9 Explain the career opportunities in accounting Copyright Copyright Copyright © 2008 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 backup 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 Chapter 1-52 ... 1-3 Accounting? ?in? ?Action Accounting? ?in? ?Action What Whatisis Accounting? Accounting? Three activities Who uses accounting data Chapter 1-4 The TheBuilding Building Blocks Blocksof of Accounting Accounting... Generally Accepted Accounting? ?Principles? ? (GAAP) LO 4 Explain generally accepted? ?accounting? ?principles? ?and the cost principle The Building Blocks of? ?Accounting The Building Blocks of? ?Accounting Organizations Involved? ?in? ?Standard Setting:.. .CHAPTER? ? ACCOUNTING IN ACTION Accounting? ?Principles, Eighth Edition Chapter 1-2 Study Objectives Study Objectives Explain what? ?accounting? ?is Identify the users and uses of? ?accounting Understand why ethics is a fundamental business concept