1-basic accounting terms and concepts - 2 per sheet

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Chapter 1

Accounting in Action

Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso

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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 accounting standards and the measurement 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.

Study ObjectivesStudy Objectives

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Ethics in Ethics in financial financial reportingreporting

Accounting Accounting standardsstandards

AssumptionsAssumptions

What is What is Accounting?Accounting?

What is What is Accounting?Accounting?

The Building The Building Blocks of Blocks of

AccountingAccounting

The Building The Building Blocks of Blocks of

AccountingAccounting

The Basic The Basic Accounting Accounting

EquationEquation

The Basic The Basic Accounting Accounting

EquationEquation

Using the Using the Accounting Accounting

EquationEquation

Using the Using the Accounting Accounting

EquationEquation

Financial Financial StatementsStatementsFinancial Financial

StatementsStatements

Three Three activitiesactivities

Who uses Who uses accounting accounting data?data?

AssetsAssets

LiabilitiesLiabilities

EquityEquity

Transaction Transaction analysisanalysis

Summary of Summary of transactionstransactions

Income Income statementstatement

Retained Retained earnings earnings statementstatement

Statement of Statement of financial financial positionposition

Statement of Statement of cash flowscash flows

Accounting in ActionAccounting in Action

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What is Accounting?What is Accounting?

SO 1 Explain what accounting is.

The purpose of accounting:

(1) to identifyidentify , recordrecord , and communicatecommunicate the economic

events of an

(2) organization to

(3) interested users.

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Three Activities


The accounting process includesthe bookkeeping function.

Illustration 1-1The activities of theaccounting process

SO 1 Explain what accounting is.

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Management

Human Resources

Taxing Authorities

Labor Unions

Regulatory Agencies

Marketing

Finance

Investors

Creditors

SO 2 Identify the users and uses of accounting.

Customers

Internal Users

External Users


Who Uses Accounting Data

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Common Questions Asked User

1. Can we afford to give our employees a pay raise? Human Resources

2. Did the company earn a satisfactory income?

3. Should any product lines be eliminated?

4. Is cash sufficient to pay dividends to shareholders?

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 debts?

Investors

Management

Finance

Marketing

Creditors

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The Building Blocks of AccountingThe Building Blocks of Accounting

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 (USA),

Parmalat (ITA), Satyam Computer Services (IND), AIG

(USA), and others.

Effective financial reporting depends on sound ethical

behavior.

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Ethics In Financial Reporting

SO 3 Understand why ethics is a fundamental business concept.

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International Financial Reporting Standards (IFRS)

SO 4 Explain accounting standards and the measurement principles.

Financial Accounting Standards Board (FASB)http://www.fasb.org/

International Accounting Standards Board (IASB)http://www.iasb.org/

Generally Accepted Accounting Principles (GAAP)


Accounting Standards

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Cost Principle (Historical) – dictates that companies record

assets at their cost.

Issues:

Reported at cost when purchased and also over the time the

asset is held.

Cost easily verified, market value is often subjective.

Fair value information may be more useful.


Measurement Principles


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Fair Value Principle – indicates that assets and liabilities should

be reported at fair value.

In determining which measurement principle to use, companies

weigh the factual nature of cost figures versus the relevance of

fair value.

Only in situations where assets are actively traded, such as

investment securities, is the fair value principle applied.


Measurement Principles


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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.

Proprietorship.

Partnership.

Corporation.

Forms of Business Ownership

Assumptions


SO 5 Explain the monetary unit assumption and the economic entity assumption.

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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

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.



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A business organized as a separate legal entity under state law having ownership divided into shares is a

a. proprietorship.

b. partnership.

c. corporation.

d. sole proprietorship.


Review Question


Solution on notes page

A business organized as a separate legal entity under state law having ownership divided into shares is a

a. proprietorship.

b. partnership.

c. corporation.

d. sole proprietorship.

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True

False

True

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. Shareholders in a corporation enjoy limited legal

liability as compared to partners in a partnership.

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False

True

Indicate whether each of the following statements presented below is true or false.




4. The primary accounting standard-setting body

outside the United States is the International

Accounting Standards Board (IASB).

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.

19 SO 5 Explain the monetary unit assumption and the economic entity assumption.

Answer on notes pageAnswer on notes page

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AssetsAssets LiabilitiesLiabilities EquityEquity= +

Provides the underlying framework for recording and summarizing economic events.

Applies to all economic entities regardless of size.

The Basic Accounting EquationThe Basic Accounting Equation

SO 6 State the accounting equation, and define its components.

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AssetsAssets



Resources a business owns.

Provide future services or benefits.

Cash, Inventory, Equipment, etc.

Assets

LiabilitiesLiabilities EquityEquity= +


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Claims against assets (debts and obligations).

Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.


Liabilities

AssetsAssets LiabilitiesLiabilities= + EquityEquity

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Ownership claim on total assets.

Referred to as residual equity.

Share capital and retained earnings.


Equity

AssetsAssets LiabilitiesLiabilities EquityEquity= +

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Revenues result from business activities entered into for the purpose of earning income.

Generally results from selling merchandise, performing services, renting property, and lending money.

Illustration 1-7



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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 1-7



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

� Reduce retained earnings

� Not an expense



Illustration 1-7

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Classification

Classify the following items as issuance of

shares, dividends, revenues, or expenses.


1. Rent expense

2. Service revenue

3. Dividends

4. Salaries expense



Then indicate whether each item increases or decreases

equity.

Effect on Equity

Expense Decrease

Revenue Increase

Dividends Decrease

Expense Decrease

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Using The Accounting EquationUsing The 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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Illustration: Are the following events recorded in the accounting records?

EventPurchase computer.

Criterion Is the financial position (assets, liabilities, or equity) of the company changed?

Discuss product

design with customer.

Pay rent.

Record/ Don’t Record


Illustration 1-8


Slide 1-30 SO 7 Analyze the effects of business transactions on the accounting equation.


Transaction Analysis

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Transaction (1). Investment by Shareholders.Transaction (1). Investment by Shareholders. Ray and Barbara Neal decides to open a computer programming service which he names Softbyte. On September 1, 2011, they invest $15,000 cash in exchange for capital shares. The effect of this transaction on the basic equation is:

Transactions AnalysisTransactions Analysis



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Transaction (2). Purchase of Equipment for Cash.Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash.




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Transaction (3). Purchase of Supplies on Credit.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.



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



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Transaction (5). Purchase of Advertising on Credit .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 Cr edit.Transaction (6). Services Provided for Cash and Cr edit.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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Transaction (7). Payment of Expenses.Transaction (7). Payment of Expenses. Softbyte pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.



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Transaction (8). Payment of Accounts Payable.Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.



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



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Transaction (10). Dividends.Transaction (10). Dividends. The corporation pays a dividend of $1,300 in cash.



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Summary of TransactionsSummary of TransactionsIllustration 1-10Tabular summary ofSoftbyte transactions


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Companies prepare four financial statements from the summarized accounting data:

Statement of Financial

Position

Income Statement

Statement of Cash Flows

Retained Earnings

Statement

Financial StatementsFinancial Statements

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

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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.

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 QuestionReview Question



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Financial StatementsFinancial Statements Income Statement

Reports the revenues and expenses for a specific period of time.Net income – revenues exceed expenses.Net loss – expenses exceed revenues.

Illustration 1-11Financial statements andtheir interrelationships


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Financial StatementsFinancial Statements Net income is needed to determine the ending balance in retained earnings.


SO 8SO 8

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Statement indicates the reasons why retained earnings has increased or decreased during the period.

Retained Earnings Statement



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Financial Financial StatementsStatements

The ending balance in retained earnings is needed in preparing the statement of financial position



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Financial StatementsFinancial Statements Balance Sheet



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Financial Financial StatementsStatements


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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 FlowsStatement of Cash Flows


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Financial StatementsFinancial Statements 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. Retained earnings statement.

d. Statement of cash flows.

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.


Review QuestionReview Question

Solution on notes page.


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Public accounting

Private accounting

SO 9 Explain the career opportunities in accounting.

Career OpportunitiesCareer Opportunities APPENDIX

Government

Forensic accounting

“Show me the Money”

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1-basic accounting terms and concepts - 2 per sheet

Documents

monetary unit assumption

economic entity assumption

summarizing economic events

fundamental business concept

companies record assets

retained earnings statement

retained earnings

economic entities