Financial accounting 9th kieso kimmel chapter 01

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

Preview of Chapter 1

Financial Accounting

Ninth EditionWeygandt Kimmel Kieso

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

Three Activities Illustration 1-1The activities of the

accounting process

The accounting process includes

the bookkeeping function.

What is Accounting?

LO 1

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

1-7 LO 2

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

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 ,

 Congress passed Sarbanes-Oxley Act of (SOX)

 Effective financial reporting depends on sound ethical

behavior.

LO 3

c fair or not fair

d all of these options.

Question

Ethics in Financial Reporting

LO 3

1-13 LO 3

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

Various users need financial information

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

Financial Statements

 Balance Sheet

 Income Statement

 Statement of Stockholders’ Equity

 Statement of Cash Flows

 Note Disclosure

Generally Accepted

Accounting Principles (GAAP)

Generally Accepted

Accounting Principles (GAAP)

Generally Accepted Accounting Principles

LO 4

Generally Accepted Accounting Principles (GAAP) –

Standards that are generally accepted and universally practiced

These standards indicate how to report economic events.

Measurement Principles

Generally Accepted Accounting 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

1-18 LO 4

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

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.

 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

for all debts

Forms of Business Ownership

LO 5

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.

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

Advance slide in presentation mode to reveal answers.

b economic entity assumption

c monetary unit assumption

1-26 LO 5

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

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

The Basic Accounting Equation

 Resources a business owns.

 Provide future services or benefits.

 Cash, Supplies, Equipment, etc.

Assets

LO 6

The Basic Accounting Equation

 Claims against assets (debts and obligations).

 Creditors - party to whom money is owed.

 Accounts payable, Notes payable, etc.

Liabilities

LO 6

 Ownership claim on total assets.

 Referred to as residual equity.

 Common stock and retained earnings

Investments by stockholders represent the total amount paid in by

stockholders for the shares they purchase.

The Basic Accounting Equation

Illustration 1-6

LO 6

Dividends are the distribution of cash or other assets to stockholders.

Dividends reduce retained earnings However, dividends are not an expense.

The Basic Accounting Equation

Illustration 1-6

LO 6

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.

The Basic Accounting Equation

Illustration 1-6

LO 6

Classification

Classify the following items as issuance of stock, dividends,

revenues, or expenses Then indicate whether each item

increases or decreases stockholders’ equity.

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

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

Illustration: Are the following events recorded in the accounting

records?

Event computer. Purchase

Criterion Is the financial position (assets, liabilities, or

stockholder’s equity) of the company changed?

Discuss product design with potential customer Pay rent.

1-41 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

Advance slide in presentation mode to reveal answers.

1-42 LO 7

Transaction Analysis

Transaction (2) Purchase of Equipment for Cash Softbyte

purchases computer equipment for $7,000 cash.

Illustration 1-9

1-43 LO 7

Transaction Analysis

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

1-44 LO 7

Transaction Analysis

Transaction (4) Services Provided for Cash Softbyte receives

$1,200 cash from customers for programming services it has

provided.

Illustration 1-9

1-45 LO 7

Transaction Analysis

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

1-46 LO 7

Transaction Analysis

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

1-47 LO 7

Transaction Analysis

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

1-48 LO 7

Transaction Analysis

Transaction (8) Payment of Accounts Payable Softbyte pays its

$250 Daily News bill in cash.

Illustration 1-9

1-49 LO 7

Transaction Analysis

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

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.

Companies prepare four financial statements :

Balance Sheet

Income Statement

Statement

of Cash Flows

Retained Earnings Statement

Financial Statements

LO 8

Financial Statements

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

Advance slide in presentation mode to reveal answers.

The ending balance in retained earnings

is needed in preparing the balance sheet.

Financial Statements

Illustration 1-10

LO 8

 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)

Financial Statements

Income Statement

LO 8

 Is a snapshot of the company’s financial condition at a

specific moment in time (usually the month-end or end).

year-Financial Statements

Balance Sheet

LO 8

 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?

Financial Statements

Statement of Cash Flows

LO 8

c Retained earnings statement

d Statement of cash flows.

Financial Statements

Question

LO 8

1-62 LO 8

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.

“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

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

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,

internationally, for example, at Satyam Computer Services (India),

LO 10