ch01adfadfbadfbbadfbbbbtinadfbadfbag.ppt

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Preview of Chapter 1
Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso

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Accounting in Action
Learning Objectives
After studying this chapter, you should be able to:
[1] Explain what accounting is
[2] Identify the users and uses of accounting.
[3] Understand why ethics is a fundamental business concept.
[4] Explain generally accepted accounting 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] Understand the four financial statements and how they are prepared.
1
1 Accounting in Action

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Accounting consists of three basic activities—it
 identifies,
 records, and
 communicates
the economic events of an organization to interested users.
What is Accounting?
LO 1

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Three Activities
Illustration 1-1
The activities of the
accounting process
The accounting process includes
the bookkeeping function.
What is Accounting?
LO 1

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Learning Objectives
[1] Explain what accounting is.
1

1-6 LO 2
Internal
Users
Illustration 1-2
Questions that internal
users ask
Who Uses Accounting Data

1-8 LO 2
External
Users
Illustration 1-3
Questions that external
users ask
Who Uses Accounting Data

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Learning Objectives
1

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Ethics In Financial Reporting
The Building Blocks of Accounting
United States regulators and lawmakers were very concerned
that the economy would suffer if investors lost confidence in
corporate accounting because of unethical financial reporting.
 Recent financial scandals include: Enron, WorldCom,
HealthSouth, AIG, and others.
 Congress passed Sarbanes-Oxley Act of (SOX).
 Effective financial reporting depends on sound ethical
behavior.
LO 3

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Illustration 1-4
Steps in analyzing ethics cases
and situations
The Building Blocks of Accounting
LO 3
Ethics In Financial Reporting

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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.
Question
Ethics in Financial Reporting
LO 3

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Learning Objectives
1

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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 Stockholders’ Equity
 Statement of Cash Flows
 Note Disclosure
Generally Accepted
Generally Accepted
Accounting
Accounting
Principles (GAAP)
Principles (GAAP)
Generally Accepted Accounting Principles
LO 4

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Generally Accepted Accounting Principles (GAAP) –
Standards that are generally accepted and universally practiced.
These standards indicate how to report economic events.
Standard-setting bodies:
► Financial Accounting Standards
Board (FASB)
► Securities and Exchange Commission
(SEC)
► International Accounting Standards
Board (IASB)
LO 4

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Measurement Principles
Historical Cost Principle (or cost principle) dictates that
companies record assets at their cost.
Fair Value Principle states that assets and liabilities should
be reported at fair value (the price received to sell an asset or
settle a liability).
Selection of which principle to follow
generally relates to trade-offs
between relevance and faithful
representation.
LO 4

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Learning Objectives
[5] Explain the monetary unit assumption and the economic entity
assumption.
1

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Monetary Unit Assumption requires that companies
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.
Forms of Business
Ownership
Assumptions
LO 5

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Proprietorship Partnership 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
 Generally owned
by one person.
 Often small
service-type
businesses
 Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
Forms of Business Ownership
LO 5

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Indicate whether each of the following statements presented below
is true or false.
1. The three steps in the accounting process are
identification, recording, and communication.
2. The two most common types of external users are
investors and company officers.
3. Congress passed the Sarbanes-Oxley Act to reduce
unethical behavior and decrease the likelihood of
future corporate scandals.
True
False
True
LO 5
Advance slide in presentation mode to reveal answers.

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False
True
4. The primary accounting standard-setting body in the
United States is the Financial Accounting Standards
Board (FASB).
5. The cost principle dictates that companies record
assets at their cost. In later periods, however, the fair
value of the asset must be used if fair value is higher
than its cost.
Indicate whether each of the following statements presented below
is true or false.
LO 5

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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.
LO 5

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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.
Question
LO 5

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Learning Objectives
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Assets
Assets Liabilities
Liabilities
Stockholder’s
Stockholder’s
Equity
Equity
= +
The Basic Accounting Equation
Provides the underlying framework for recording and
summarizing economic events.
Assets must equal the sum of liabilities and stockholders’
equity.
Claims of creditors (liabilities) must be paid before ownership
claims (stockholders’ equity).
LO 6

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Assets
Assets Liabilities
Liabilities
Stockholder’s
Stockholder’s
Equity
Equity
= +
 Resources a business owns.
 Provide future services or benefits.
 Cash, Supplies, Equipment, etc.
Assets
LO 6

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Assets
Assets Liabilities
Liabilities
Stockholder’s
Stockholder’s
Equity
Equity
= +
 Claims against assets (debts and obligations).
 Creditors - party to whom money is owed.
 Accounts payable, Notes payable, etc.
Liabilities
LO 6

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 Ownership claim on total assets.
 Referred to as residual equity.
 Common stock and retained earnings.
Stockholders’ Equity
Assets
Assets Liabilities
Liabilities
Stockholder’s
Stockholder’s
Equity
Equity
= +
LO 6

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Investments by stockholders represent the total amount paid in by
stockholders for the shares they purchase.
Illustration 1-6
LO 6

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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
LO 6

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Dividends are the distribution of cash or other assets to stockholders.
Dividends reduce retained earnings. However, dividends are not an
expense.
Illustration 1-6
LO 6

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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
LO 6

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Expense Decrease
Classification
Classify the following items as issuance of stock, dividends,
revenues, or expenses. Then indicate whether each item
increases or decreases stockholders’ equity.
1. Rent Expense
2. Service Revenue
3. Dividends
4. Salaries and Wages
expense
Effect on Equity
Expense Decrease
Revenue Increase
Equity Decrease
LO 6

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Learning Objectives
[7] Analyze the effects of business transactions on the accounting
equation.
1

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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.
Using the Accounting Equation
LO 7

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Illustration: Are the following events recorded in the accounting
records?
Event
Purchase
computer.
Criterion Is the financial position (assets, liabilities, or
stockholder’s equity) of the company changed?
Discuss product
design with
potential customer.
Pay rent.
Record/ Don’t
Record
LO 7
Illustration 1-7

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Illustration 1-8
Expanded accounting equation
LO 7

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LO 7
Transaction Analysis
Transaction (1). Investment by Stockholders. Ray and Barbara
Neal decides to open a computer programming service which he
names Softbyte. On September 1, 2015, they invest $15,000 cash
in exchange for common stock. Illustration 1-9

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LO 7
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
Illustration 1-9

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LO 7
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.
Illustration 1-9

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LO 7
Transaction (4). Services Provided for Cash. Softbyte receives
$1,200 cash from customers for programming services it has
provided.
Illustration 1-9

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LO 7
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.
Illustration 1-9

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LO 7
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. Illustration 1-9

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LO 7
Transaction (7). Payment of Expenses. Softbyte pays the
following expenses in cash for September: store rent $600, salaries
and wages of employees $900, and utilities $200.
Illustration 1-9

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LO 7
Transaction (8). Payment of Accounts Payable. Softbyte pays its
$250 Daily News bill in cash.
Illustration 1-9

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LO 7
Transaction (9). Receipt of Cash on Account. Softbyte receives
$600 in cash from customers who had been billed for services [in
Transaction (6)].
Illustration 1-9

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LO 7
Transaction (10). Dividends. The corporation pays a dividend of
$1,300 in cash.
Illustration 1-9

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Learning Objectives
1

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Companies prepare four financial statements :
Balance
Sheet
Income
Statement
Statement
of Cash
Flows
Retained
Earnings
Statement
LO 8

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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.
Question
LO 8

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Net income is needed to determine the
ending balance in retained earnings.
Illustration 1-10
Financial statements and
their interrelationships
LO 8

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The ending balance in retained earnings
is needed in preparing the balance sheet.
Illustration 1-10
LO 8

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Balance sheet and income statement are
needed to prepare statement of cash flows.
Illustration 1-10
LO 8

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 Reports the profitability of the company’s operations over
a specific period of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).
Income Statement
LO 8

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 Reports the changes in retained earnings for a specific
period of time.
 The time period is the same as that covered by the
income statement.
Retained Earnings Statement
LO 8

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 Reports the assets, liabilities, and stockholders’ equity at
a specific date.
 Lists assets at the top, followed by liabilities and
stockholder’s equity.
 Total assets must equal total liabilities and stockholder’s
equity.
 Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end or year-
end).
Balance Sheet
LO 8

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 Information on the cash receipts and
payments 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
LO 8

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Which of the following financial statements is prepared as of
a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.
Question
LO 8

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Forensic Accounting
Uses accounting, auditing, and
investigative skills to conduct
investigations into theft and
fraud.
Governmental Accounting
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.
LO 9 Explain the career opportunities in accounting.
Public Accounting
Careers in auditing, taxation,
and management consulting
serving the general public.
APPENDIX 1A Accounting Career Opportunities

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“Show Me the Money”
Salary estimates for jobs in public and corporate accounting Illustration 1A-1
Upper-level management salaries in corporate accounting Illustration 1A-2
LO 9
APPENDIX 1A Accounting Career Opportunities

1-65
Key Points
 International standards are referred to as International Financial
Reporting Standards (IFRS), developed by the International
Accounting Standards Board (IASB).
 Much of the world has voted for the standards issued by the IASB.
Over 115 countries require or permit use of IFRS.
 The fact that there are differences between what is in this textbook
(which is based on U.S. standards) and IFRS should not be surprising
because the FASB and IASB have responded to different user
needs.
LO 10

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Key Points
 Debate about international companies (non-U.S.) adopting SOX-type
standards centers on whether the benefits exceed the costs. The
concern is that the higher costs of SOX compliance are making the
U.S. securities markets less competitive.
 The textbook mentions a number of ethics violations, such as Enron,
WorldCom, and AIG. These problems have also occurred
internationally, for example, at Satyam Computer Services (India),
Parmalat (Italy), and Royal Ahold (the Netherlands).
LO 10

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Key Points
 IFRS tends to be simpler in its accounting and disclosure
requirements; some people say more “principles-based.” GAAP is
more detailed; some people say it is more “rules-based.”
 U.S. regulators have recently eliminated the need for foreign
companies that trade shares in U.S. markets to reconcile their
accounting with GAAP.
 Because the choice of business organization is influenced by factors
such as legal environment, tax rates and regulations, and degree of
entrepreneurism, the relative use of each form will vary across
countries.
 The conceptual framework that underlies IFRS is very similar to that
used to develop GAAP.
LO 10

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Key Points
 The more substantive definitions, using the IASB definitional
structure, are as follows.
► Assets. A resource controlled by the entity as a result of past
events and from which future economic benefits are expected to
flow to the entity.
► Liabilities. A present obligation of the entity arising from past
events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic
benefits. Liabilities may be legally enforceable via a contract or
law, but need not be, i.e., they can arise due to normal business
practice or customs.
LO 10

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Key Points
 The more substantive definitions, using the IASB definitional
structure, are as follows.
► Equity. A residual interest in the assets of the entity after
deducting all its liabilities.
► Income. Increases in economic benefits that result in increases
in equity (other than those related to contributions from
shareholders). Income includes both revenues (resulting from
ordinary activities) and gains.
► Expenses. Decreases in economic benefits that result in
decreases in equity (other than those related to distributions to
shareholders). Expenses includes losses that are not the result
of ordinary activities.
LO 10

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Looking to the Future
Both the IASB and the FASB are hard at work developing standards that will
lead to the elimination of major differences in the way certain transactions
are accounted for and reported. In fact, at one time the IASB stated that no
new major standards would become effective until 2011. The major reason
for this policy was to provide companies the time to translate and implement
IFRS into practice, as much has happened in a very short period of time.
LO 10

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Which of the following is not a reason why a single set of high-
quality international accounting standards would be beneficial?
a) Mergers and acquisition activity.
b) Financial markets.
c) Multinational corporations.
d) GAAP is widely considered to be a superior reporting system.
A Look at IFRS
IFRS Practice
LO 10

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The Sarbanes-Oxley Act determines:
a) international tax regulations.
b) internal control standards as enforced by the IASB.
c) internal control standards of U.S. publicly traded companies.
d) U.S. tax regulations.
A Look at IFRS
IFRS Practice
LO 10

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IFRS is considered to be more:
a) principles-based and less rules-based than GAAP.
b) rules-based and less principles-based than GAAP.
c) detailed than GAAP.
d) None of the above.
IFRS Practice
A Look at IFRS
LO 10

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