© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin fundamental accounting principles 17 th...
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© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Fundamental Accounting PrinciplesFundamental Accounting Principles
17th Edition
Larson Wild Chiappetta
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Accounting in BusinessChapter
11
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IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Importance of AccountingImportance of Accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
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Identifying Business Activities
Recording Business Activities
Communicating Business Activities
Accounting ActivitiesAccounting Activities
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Users of Accounting InformationUsers of Accounting Information
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
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Users of Accounting InformationUsers of Accounting Information
External Users
Financial accounting provides external users with financial
statements.
Internal Users
Managerial accounting provides information needs for internal
decision makers.
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Opportunities in AccountingOpportunities in Accounting
FinancialFinancial
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
ManagerialManagerial
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
TaxationTaxation
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning
Accounting-related
Accounting-related
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs
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Accounting Jobs by AreaAccounting Jobs by Area
Private accounting
60%Public accounting
25%
Government, not-for-profit, & education
15%
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Beliefs that distinguish right from
wrong
Accepted standards of good and bad
behavior
Ethics
Ethics—A Key ConceptEthics—A Key Concept
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Identify ethical concerns
Analyze options
Make ethical decision
Use personal ethics to
recognize ethical concern.
Consider all good and bad
consequences.
Choose best option after weighing all
consequences.
Guidelines for Ethical Decision MakingGuidelines for Ethical Decision Making
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Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
Comparable Information
Comparable Information
Is helpful in contrasting organizations.
Is helpful in contrasting organizations.
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The Securities and Exchange Commission is the government group that establishes
reporting requirements for companies that issue stock to the public.
The Securities and Exchange Commission is the government group that establishes
reporting requirements for companies that issue stock to the public.
Setting Accounting PrinciplesSetting Accounting Principles
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
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Principles of AccountingPrinciples of Accounting
Now Future
Going-Concern PrincipleReflects assumption that the
business will continue operating instead of being closed or sold.
Cost PrincipleAccounting information is
based on actual cost.
Objectivity PrincipleAccounting information is supported by independent,
unbiased evidence.
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Principles of AccountingPrinciples of Accounting
Revenue Recognition Principle1. Recognize revenue when it is
earned.2. Proceeds need not be in cash.3. Measure revenue by cash
received plus cash value of items received.
Monetary Unit PrincipleExpress transactions and events in
monetary, or money, units.
Business Entity PrincipleA business is accounted for
separately from other business entities, including its owner.
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Business Entity FormsBusiness Entity Forms
ProprietorshipProprietorship PartnershipPartnership CorporationCorporation
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Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
*
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
* Proprietorships and partnerships that are set up as LLC’s provide limited liability.
Characteristics of BusinessesCharacteristics of Businesses
Exh.1.8
*
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Owners of a corporation are called shareholders (or stockholders).
When a corporation issues only one class of stock, we call it
common stock (or capital stock).
CorporationCorporation
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AssetsLiabilities & Equity
Accounting EquationAccounting Equation
LiabilitiesLiabilities EquityEquityAssetsAssets = +
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LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
AssetsAssets
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Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
LiabilitiesLiabilities
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Owner’sclaims
on assets
Owner’sclaims
on assets
RevenuesRevenues
Owner Investments
Owner Investments
Owner Withdrawals
Owner Withdrawals
ExpensesExpenses
EquityEquity
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Expanded Accounting EquationExpanded Accounting Equation
RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital
Owner Withdrawals
Owner Withdrawals
_ + _
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The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Transaction Analysis EquationTransaction Analysis Equation
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000 cash to start the business.
Transaction AnalysisTransaction Analysis
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Transaction AnalysisTransaction Analysis
J. Scott, the owner, contributed $20,000 cash to start the business.
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The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction AnalysisTransaction Analysis
Purchased supplies paying $1,000 cash.
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Transaction AnalysisTransaction Analysis
Purchased supplies paying $1,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction AnalysisTransaction Analysis
Purchased equipment for $15,000 cash.
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Transaction AnalysisTransaction Analysis
Purchased equipment for $15,000 cash.
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The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction AnalysisTransaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.
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Transaction AnalysisTransaction AnalysisPurchased Supplies of $200 and Equipment of $1,000 on account.
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The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction AnalysisTransaction Analysis
Borrowed $4,000 from 1st American Bank.
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Transaction AnalysisTransaction Analysis
Borrowed $4,000 from 1st American Bank.
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Transaction AnalysisTransaction AnalysisThe balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenue, expenses and withdrawals.
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction AnalysisTransaction AnalysisRendered consulting services
receiving $3,000 cash.
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Transaction AnalysisTransaction AnalysisRendered consulting services
receiving $3,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction AnalysisTransaction Analysis
Paid salaries of $800 to employees.
Remember that the balance in the salaries expense account actually increases.
But, equity actually decreases because expenses reduce equity.
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Transaction AnalysisTransaction Analysis
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Transaction AnalysisTransaction AnalysisJ. Scott withdrew $500 from the
business for personal use.
Remember that the balance in the J. Scott, Withdrawals account actually increases.
But, equity actually decreases because withdrawals reduce equity.
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Transaction AnalysisTransaction Analysis
Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the business for personal use.
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Financial StatementsFinancial StatementsLet’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
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Net income is the difference between
Revenues and Expenses.
The income statement describes a company’s revenues and expenses
along with the resulting net income or loss over a period of time due to
earnings activities.
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The net income of $2,200 increases
Scott’s capital by $2,200.
The Statement of Owner’s Equity
explains changes in equity from net
income (or net loss) and from
owner investments and withdrawals for
a period of time.
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The Balance Sheet describes a company’s
financial position at a point in time.
The Balance Sheet describes a company’s
financial position at a point in time.
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The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
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Net income ÷ Average total assets
ROA is viewed as an indicator of operating
efficiency.
ROA is viewed as an indicator of operating
efficiency.
Return on Assets (ROA)Return on Assets (ROA)
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End of Chapter 1End of Chapter 1