Chapter 1-1 CHAPTER ACCOUNTING IN ACTION Accounting Principles, Eighth Edition Chapter 1-2 Study Study Objectives 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 Accounting in in Action 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 What is is Accounting? Accounting? The purpose of accounting is to: (1) identify, identify record, record and communicate the economic events of an (2) organization to (3) interested users Chapter 1-5 LO Explain what accounting is What What is is Accounting? Accounting? Three Activities Illustration 1-1 Accounting process The accounting process includes the bookkeeping function Chapter 1-6 LO Explain what accounting is Who Who Uses Uses Accounting Accounting Data? Data? Internal Users Human Resources Finance Management IRS Investors There are two broad groups of users of financial information: internal users and external users Marketing Customers Chapter 1-7 SEC Labor Unions Creditors External Users LO Identify the users and uses of accounting Who Who Uses Uses Accounting Accounting Data? Data? Common Questions Asked Can we afford to give our employees a pay raise? User Human Resources Did the company earn a satisfactory income? Investors Do we need to borrow in the near future? Is cash sufficient to pay dividends to the stockholders? Management Finance What price for our product will maximize net income? Marketing Will the company be able to pay its short-term debts? Creditors Chapter 1-8 LO Identify the users and uses of accounting Who Who Uses Uses Accounting Accounting Data? 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 Understand why ethics is a fundamental business concept The The Building Building Blocks Blocks of of Accounting 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 passedSarbanes-Oxley Act of 2002 Effective financial reporting depends on sound ethical behavior Chapter 1-10 LO Understand why ethics is a fundamental business concept Transactions Transactions (Problem) (Problem) Provided $750 of repair services on account Assets Cash Liabilities Equity Accounts Accounts + Receivable + Equipment = Payable Barone, + Capital +10,000 +10,000 Investment -5,000 -400 +5,100 -400 +5,100 Expense Revenue -1,000 -2,000 -1,000 -2,000 Drawings Expense Chapter 1-38 +5,000 +250 +750 -250 +750 Expense Revenue LO Analyze the effects of business transactions on the accounting equation Transactions Transactions (Problem) (Problem) Collected $120 cash for services previously billed Assets Cash Liabilities Equity Accounts Accounts + Receivable + Equipment = Payable Barone, + Capital +10,000 +10,000 Investment -5,000 -400 +5,100 -400 +5,100 Expense Revenue -1,000 -2,000 -1,000 -2,000 Drawings Expense +5,000 +250 +750 +120 6,820 5,000 = Chapter 1-39 -120 + 250 630 + + 12,200 -250 +750 Expense Revenue LO Analyze the effects of business transactions on the accounting equation Financial Financial Statements Statements Companies Companies prepare prepare four four financial financial statements statements from from the the summarized summarized accounting accounting data: data: Income Statement Chapter 1-40 Owner’s Equity Statement Balance Sheet Statement of Cash Flows LO Understand the four financial statements and how they are prepared Financial Financial Statements 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 Understand the four financial statements and how they are prepared Financial Financial Statements Statements Income Statement Reports the revenues and expenses for a specific period of time Net income – revenues exceed expenses Net loss – expenses exceed revenues Chapter 1-42 LO Understand the four financial statements and how they are prepared Financial Financial Statements Statements Income Statement Owner’s Equity Statement Net income is needed to determine the ending balance in owner’s equity Chapter 1-43 LO Understand the four financial statements and how they are prepared Financial Financial Statements Statements Owner’s Equity Statement Statement indicates the reasons why owner’s equity has increased or decreased during the period Chapter 1-44 LO Understand the four financial statements and how they are prepared Financial Financial Statements Statements Balance Sheet Owners’ Equity Statement The ending balance in owner’s equity is needed in preparing the balance sheet Chapter 1-45 LO Understand the four financial statements and how they are prepared Financial Financial Statements Statements Balance Sheet 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 Chapter 1-46 LO Understand the four financial statements and how they are prepared Financial Financial Statements Statements Balance Sheet Chapter 1-47 Statement of Cash Flows LO Understand the four financial statements and how they are prepared Financial Financial Statements Statements Information for a specific period of time Statement of Cash Flows Answers the following: Where did cash come from? What was cash used for? What was the change in the cash balance? Chapter 1-48 LO Understand the four financial statements and how they are prepared Financial Financial Statements 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 Understand the four financial statements and how they are prepared Financial Financial Statements 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 Understand the four financial statements and how they are prepared Accounting Accounting Career Career Opportunities 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 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 back-up 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 .. .CHAPTER ACCOUNTING IN ACTION Accounting Principles, Eighth Edition Chapter 1-2 Study Study Objectives Objectives Explain what accounting is Identify the users and uses of accounting. .. transactions on the accounting equation Understand the four financial statements and how they are prepared Chapter 1-3 Accounting Accounting in in Action Action What Whatisis Accounting? Accounting? ... 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