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Unformatted text preview: Chapter 1 Chapter 1 Accounting In Action Financial Accounting, Sixth Edition Chapter 1-1 Study Objectives Study Objectives 1. 2. 3. 4. 5. 6. 7. 8. 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 stockholders' equity. Analyze the effects of business transactions on the accounting equation. Understand the four financial statements and how they are prepared. Chapter 1-2 What is Accounting? What is Accounting? The purpose of accounting is to: (1) _______, _______, and ___________ the economic events of an (2) organization to (3) interested users. Chapter 1-3 SO 1 Explain what accounting is. What is Accounting? What is Accounting? Three Activities Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. Chapter 1-4 SO 1 Explain what accounting is. Who Uses Accounting Data? Who Uses Accounting Data? Internal Users Human Resources Management IRS Investors Labor Unions Creditors Customers Chapter 1-5 Finance Common Questions Marketing SEC External Users SO 2 Identify the users and uses of accounting. Who Uses Accounting Data? Who Uses Accounting Data? Common Questions Asked 1. Can we afford to give our employees a pay raise? 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 1-6 User SO 2 Identify the users and uses of accounting. 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 passed SarbanesOxley Act of 2002. Effective financial reporting depends on sound ethical behavior. Chapter 1-7 SO 3 Understand why ethics is a fundamental business concept. Ethics Ethics Review Question Ethics are the standards of conduct by which one's actions are judged as: a. right or wrong. b. honest or dishonest. c. fair or not fair. d. all of these options. Chapter 1-8 SO 3 Understand why ethics is a fundamental business concept. The Building Blocks of Accounting The Building Blocks of Accounting Various users need financial information Financial Statements The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Chapter 1-9 SO 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: Securities and Exchange Commission (SEC) http://www.sec.gov/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ International Accounting Standards Board (IASB) http://www.iasb.org/ Chapter 1-10 SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting The Building Blocks of Accounting Cost Principle (Historical) Issues: Chapter 1-11 SO 4 Explain generally accepted accounting principles and the cost principle. Assumptions Assumptions Monetary Unit Assumption Economic Entity Assumption __________. __________. __________. Chapter 1-12 Forms of Business Ownership SO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership Forms of Business Ownership Proprietorship Partnership Corporation Chapter 1-13 SO 5 Explain the monetary unit assumption and the economic entity assumption. Assumptions Assumptions Review Question Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle. Chapter 1-14 SO 5 Explain the monetary unit assumption and the economic entity assumption. Forms of Business Ownership Forms of Business Ownership Review Question A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship. Chapter 1-15 SO 5 Explain the monetary unit assumption and the economic entity assumption. The Basic Accounting Equation The Basic Accounting Equation Assets Assets = Liabilities Liabilities + Stockholders Stockholders '' Equity Equity Provides the underlying framework for recording and summarizing economic events. Chapter 1-16 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation The Basic Accounting Equation Assets Assets = Liabilities Liabilities + Stockholders Stockholders '' Equity Equity Assets Assets Chapter 1-17 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation The Basic Accounting Equation Assets Assets = Liabilities Liabilities + Stockholders Stockholders '' Equity Equity Liabilities Liabilities Chapter 1-18 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. The Basic Accounting Equation The Basic Accounting Equation Assets Assets = Liabilities Liabilities + Stockholders Stockholders '' Equity Equity Stockholders' Equity Stockholders' Equity Chapter 1-19 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. Stockholders' Equity Stockholders' Equity Stockholders' Equity Paid In Paid In Capital Capital Capital Capital Stock Stock + Revenu Revenu e e Retained Earnings Retained Earnings Expense Expense s s - Dividends - Dividends ____________ Stockholders' investment in the business. Chapter 1-20 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. Stockholders' Equity Stockholders' Equity Stockholders' Equity Paid In Paid In Capital Capital Capital Capital Stock Stock + Revenu Revenu e e Retained Earnings Retained Earnings Expense Expense s s - Dividends - Dividends _________result from business activities entered into for the purpose of earning income. Common sources of revenue are: _________________ Chapter 1-21 State the accounting equation, and define assets, liabilities, and stockholders' equity. _________________________________________ SO 6 Stockholders' Equity Stockholders' Equity Stockholders' Equity Paid In Paid In Capital Capital Capital Capital Stock Stock + Revenu Revenu e e Retained Earnings Retained Earnings Expense Expense s s - Dividends - Dividends ___________ are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: _________________________ Chapter 1-22 __________________________________________ Stockholders' Equity Stockholders' Equity Stockholders' Equity Paid In Paid In Capital Capital Capital Capital Stock Stock + Revenu Revenu e e Retained Earnings Retained Earnings Expense Expense s s - Dividends - Dividends ____________ are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings, however dividends are not an expense. Chapter 1-23 Stockholders' Equity Stockholders' Equity Illustration 1-6 Chapter 1-24 SO 6 State the accounting equation, and define assets, liabilities, and stockholders' equity. Using The Basic Accounting Equation 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 _________on the accounting equation. Chapter 1-25 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions Transactions Question: Are the following events recorded in the accounting records? Event Supplies are purchased on account. An employee is hired. Dividends are paid to stockholders'. Criterion Is the financial position (assets, liabilities, or stockholders' equity) of the company changed? Record/ Don't Record Chapter 1-26 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions Transactions Discussion Question Q18. In February 2008, Paula King invested an additional $10,000 in Hardy Company. Hardy's accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not? Chapter 1-27 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) P1-1A: Barone's Repair Shop was started on May. Prepare a tabular analysis of the following transactions for the month of May. 1. Stockholders invested $10,000 cash to start the repair shop. Assets Cash 1. Liabilities Stockholders' Equity Accounts Receivable Accounts Payable Common Stock + + Equipment = + Chapter 1-28 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 2. Purchased equipment for $5,000 cash. Assets Cash 1. 2. Liabilities Stockholders' Equity Accounts Receivable + + Equipment = Accounts Payable + Common Stock Chapter 1-29 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 3. Paid $400 cash for May office rent. Assets Cash 1. 2. 3. +10,000 5,000 +5,000 Liabilities Stockholders' Equity Accounts Receivable + + Equipment = Accounts Payable + Common Stock +10,000 Retained + Earnings Chapter 1-30 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 4. Received $5,100 from customers for repair service. Assets Cash 1. 2. 3. 4. +10,000 5,000 400 +5,000 400 Liabilities Stockholders' Equity Accounts Receivable + + Equipment = Accounts Payable + Common Stock +10,000 Retained + Earnings Chapter 1-31 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 5. Paid dividends of $1,000 cash. Assets Cash 1. 2. 3. 4. 5. +10,000 5,000 400 +5,100 +5,000 400 +5,100 Liabilities Stockholders' Equity Accounts Receivable + + Equipment = Accounts Payable + Common Stock +10,000 Retained + Earnings Chapter 1-32 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 6. Paid part-time employee salaries of $2,000. Assets Cash 1. 2. 3. 4. 5. 6. +10,000 5,000 400 +5,100 1,000 +5,000 400 +5,100 1,000 Liabilities Stockholders' Equity Accounts Receivable + + Equipment = Accounts Payable + Common Stock +10,000 Retained + Earnings Chapter 1-33 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 7. Incurred $250 of advertising costs, on account. Assets Cash 1. 2. 3. 4. 5. 6. 7. +10,000 5,000 400 +5,100 1,000 2,000 +5,000 400 +5,100 1,000 2,000 Liabilities Stockholders' Equity Accounts Receivable + + Equipment = Accounts Payable + Common Stock +10,000 Retained + Earnings Chapter 1-34 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 8. Provided repair services on account to customers $750. Assets Cash 1. 2. 3. 4. 5. 6. 7. 8. +10,000 5,000 400 +5,100 1,000 2,000 +250 +5,000 400 +5,100 1,000 2,000 250 Liabilities Stockholders' Equity Accounts Receivable Accounts Payable Common Stock +10,000 Retained + Earnings + + Equipment = + Chapter 1-35 SO 7 Analyze the effects of business transactions on the accounting equation. Transactions (Problem) Transactions (Problem) 9. Collected $120 cash for services previously billed. Assets Cash 1. 2. 3. 4. 5. 6. 7. 8. 9. Chapter 1-36 Liabilities Stockholders' Equity + Accounts Receivable + Equipment = +5,000 Accounts Payable + Common Stock +10,000 Retained + Earnings +10,000 5,000 400 +5,100 1,000 2,000 +750 +250 400 +5,100 1,000 2,000 250 +750 SO 7 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 Statement of retained earnings Balance sheet Statement of cash flow Chapter 1-37 SO 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 1-38 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Income Statement Barone's Repair Shop I ncome St at ement For t he Mont h Ended May 31, 2007 Revenues: S e r vic e r e ve nue Expenses: S a la r y e x pe ns e Re nt e x pe ns e A d ve r t is ing e x pe ns e T o t a l e x pe ns e s Net income Chapter 1-39 shows revenues and expenses for a period of time net income $ ,8 5 0 5 2 ,0 0 0 4 0 0 2 5 0 2 ,6 5 0 $ 3, 200 net loose SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Income Statement Barone's Repair Shop I ncome St at ement For t he Mont h Ended May 31, 2007 Revenues: S e r vic e r e ve nue Expenses: S a la r y e x pe ns e Re nt e x pe ns e A d ve r t is ing e x pe ns e T o t a l e x pe ns e s Net income Chapter 1-40 Retained Earnings Statement Bar one's Repair Shop Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 $ 3, 200 1,0 0 0 ) ( $ 2 ,2 0 0 $ ,8 5 0 5 2 ,0 0 0 4 0 0 2 5 0 2 ,6 5 0 $ 3, 200 A d d : N e t inc o me Le s s : Divid e nd s Ret ained ear nings, May 31 Net income is needed to determine the ending balance in retained earnings. SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Retained Earnings Statement Bar one's Repair Shop Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 A d d : N e t inc o me Le s s : Divid e nd s Ret ained ear nings, May 31 $ 3, 200 1,0 0 0 ) ( $ 2 ,2 0 0 Chapter 1-41 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Balance Sheet Bar one's Repair Shop Balance Sheet May 31, 2007 Asset s C as h A c c o unt s r e c e ivab le Eq uip me nt T ot al as s e t s Liabilit ies A c c o unt s p ay ab le St ockholder s' Equit y C o mmo n s t oc k Re t aine d e ar nings T ot al liab . & e q uit y Chapter 1-42 Retained Earnings Statement Bar one's Repair Shop Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 A d d : N e t inc o me Le s s : Divid e nd s Ret ained ear nings, May 31 $ 3, 200 1,0 0 0 ) ( $ 2 ,2 0 0 $ 6 ,8 2 0 6 3 0 5 ,0 0 0 $ 12 ,4 5 0 $ 2 5 0 10 ,0 0 0 2, 200 $ 12 ,4 5 0 The ending balance in retained earnings is needed in preparing the balance sheet. SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Balance Sheet Bar one's Repair Shop Balance Sheet May 31, 2007 Asset s C as h A c c o unt s r e c e ivab le Eq uip me nt T ot al as s e t s Liabilit ies A c c o unt s p ay ab le St ockholder s' Equit y C o mmo n s t oc k Re t aine d e ar nings T ot al liab . & e q uit y Chapter 1-43 $ 6 ,8 2 0 6 3 0 5 ,0 0 0 $ 12 ,4 5 0 $ 2 5 0 10 ,0 0 0 2, 200 $ 12 ,4 5 0 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Balance Sheet Bar one's Repair Shop Balance Sheet May 31, 2007 Asset s C as h A c c o unt s r e c e ivab le Eq uip me nt T ot al as s e t s Liabilit ies A c c o unt s p ay ab le St ockholder s' Equit y C o mmo n s t oc k Re t aine d e ar nings T ot al liab . & e q uit y Chapter 1-44 Statement of Cash Flows Barone's Repair Shop St at ement of Cash Flows For t he Mont h Ended May 31, 2007 Cash f low f rom Operat ions Ca s h r e c e ipt s f r o m c us t o m e r s Ca s h pa id f o r e x pe ns e s Ca s h pr o vid e d b y o pe r a t io ns Cash f low f rom I nvest ing Pur c h a s e o f e q uipm e nt Cash f low f rom Financing 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 N et increase in cash Cash balance, May 1 Cash balance, May 31 $ 5 ,2 2 0 (2 ,4 0 0 ) 2 ,8 2 0 (5 ,0 0 0 ) ,0 0 0 10 0 0 ) (1,0 9 ,0 0 0 6 ,8 2 0 $ 6, 820 $ 6 ,8 2 0 6 3 0 5 ,0 0 0 $ 12 ,4 5 0 $ 2 5 0 10 ,0 0 0 2, 200 $ 12 ,4 5 0 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Information for a ________________. Answers the following: 1. Statement of Cash Flows Barone's Repair Shop St at ement of Cash Flows For t he Mont h Ended May 31, 2007 Cash f low f rom Operat ions Ca s h r e c e ipt s f r o m c us t o m e r s Ca s h pa id f o r e x pe ns e s Ca s h pr o vid e d b y o pe r a t io ns Cash f low f rom I nvest ing Pur c h a s e o f e q uipm e nt Cash f low f rom Financing 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 N et increase in cash Cash balance, May 1 Cash balance, May 31 $ 5 ,2 2 0 (2 ,4 0 0 ) 2 ,8 2 0 (5 ,0 0 0 ) ,0 0 0 10 0 0 ) (1,0 9 ,0 0 0 6 ,8 2 0 $ 6 ,8 2 0 2. 3. Chapter 1-45 SO 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. Statement of stockholders' equity. d. Statement of cash flows. Chapter 1-46 SO 8 Understand the four financial statements and how they are prepared. ...
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