Accounting principles 9e willey kieso chapter 01

The Building Blocks of AccountingThe Basic Accounting Equation The Basic Accounting Equation Using the Basic Accounting Equation Using the Basic Accounting Equation Financial Statements

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Chapter 1-1

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Chapter

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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 and the cost

principle.

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

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The Building Blocks of Accounting

The Basic Accounting Equation

Using the Basic Accounting Equation

Financial Statements

Transaction analysisSummary of transactions

Income statementOwner’s equity statementBalance sheetStatement of cash flows

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Chapter

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What is Accounting?

SO 1 Explain what accounting is.

The purpose of accounting is to:

economic events of an

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The accounting process includes

the bookkeeping function.

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internal users and external users.

Human

Resources

IRS

Labor Unions

SEC Marketing

Finance

Investors

Creditors

Who Uses Accounting Data?

SO 2 Identify the users and uses of accounting.

Customers

Internal Users

External Users

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Chapter

1-8

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?

SO 2 Identify the users and uses of accounting.

6 Will the company be able to

pay its short-term debts?

Investors Management Finance Marketing Creditors

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Chapter

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Discussion Question

SO 3 Understand why ethics is a fundamental business concept.

Q1-1: “Accounting is ingrained in our society and it

is vital to our economic system.” Do you agree?

Explain.

See notes page for discussion

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Chapter

1-10

Ethics In Financial Reporting

SO 3 Understand why ethics is a fundamental business concept.

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 Sarbanes-Oxley Act of 2002

Effective financial reporting depends on sound ethical behavior.

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Chapter

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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.

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Chapter

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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 Owner’s Equity Statement of Cash Flows Note Disclosure

Financial Statements

Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure

Generally Accepted

Accounting Principles (GAAP)

Generally Accepted

Accounting Principles (GAAP)

SO 4 Explain generally accepted accounting principles and the cost principle.

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Chapter

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Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB)

International Accounting Standards Board (IASB)

http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/

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Fair value information may be more useful

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Chapter

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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.

SO 5 Explain the monetary unit assumption

and the economic entity assumption.

Forms of Business Ownership

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Chapter

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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

for all debts.

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Chapter

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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.

Assumptions

Review Question

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Chapter

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A business organized as a separate legal entity

under state law having ownership divided into

Review Question

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Chapter

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Assets = Liabilities + Owner’s Owner’s Equity Equity

Provides the underlying framework for recording and

summarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownership

claims.

SO 6 State the accounting equation, and define

its components.

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Chapter

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Resources a business owns.

Provide future services or benefits.

Cash, Supplies, Equipment, etc.

Assets

its components.

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Chapter

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Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

Liabilities

its components.

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Chapter

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Ownership claim on total assets.

Referred to as residual equity.

Capital, Drawings, etc (Proprietorship or Partnership).

Owner’s Equity

its components.

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Common sources of revenue are: sales, fees, services,

commissions, interest, dividends, royalties, and rent.

Illustration 1-6

its components.

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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.

its components.

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Chapter

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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 dual effect on the accounting equation.

SO 7 Analyze the effects of business transactions

on the accounting equation.

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Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?

An employee

is hired.

Owner withdraws cash for personal use.

Record/

Don’t Record

Transactions (Question?)

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Chapter

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Q1-18: In February 2010, Paula King invested

an additional $10,000 in her business, King’s

Pharmacy, which is organized as a proprietorship

King’s accountant, Lance Jones, recorded this

receipt as an increase in cash and revenues Is

this treatment appropriate? Why or why not?

Transactions

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Chapter

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to open a computer programming service which he names

Softbyte On September 1, 2010, he invests $15,000 cash in the The effect of this transaction on the basic equation is:

Transactions Analysis

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Chapter

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Transaction (2) Purchase of Equipment for Cash.

Softbyte purchases computer equipment for $7,000 cash.

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purchases for $1,600 from Acme Supply Company computer

paper and other supplies expected to last several months.

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receives $1,200 cash from customers for programming

services it has provided.

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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.

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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.

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Chapter

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following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

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Chapter

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pays its $250 Daily News bill in cash.

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Chapter

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receives $600 in cash from customers who had been billed

for services [in Transaction (6)].

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Chapter

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withdraws $1,300 in cash from the business for his personal use.

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Chapter

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Softbyte transactions

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Chapter

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Companies prepare four financial statements from

the summarized accounting data:

Companies prepare four financial statements from

the summarized accounting data:

Balance Sheet

Income

Statement

of Cash Flows

Owner’s Equity Statement

SO 8 Understand the four financial statements and how they are prepared.

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Chapter

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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.

Review Question

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Chapter

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ending balance in owner’s equity

Financial statements and their interrelationships

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Statement indicates the reasons

why owner’s equity has increased or

decreased during the period.

Owner’s Equity Statement

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Chapter

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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?

Statement of Cash Flows

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Chapter

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Statement of Cash Flows

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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.

Review Question

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Chapter

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Q1-19: “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.

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Chapter

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Forensic Accounting

Careers with insurance companies and law offices to conduct

investigations into theft and fraud.

Opportunities in Government

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.

SO 9 Explain the career opportunities in accounting.

Accounting Career Opportunities

Public Accounting

Careers in auditing and taxation serving the general public.

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Chapter

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