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CHAPTER 1
ACCOUNTING IN ACTION
Accounting Principles, Eighth Edition
Chapter 1-2
Study Objectives
1. 2. 3. 4. 5. 6. 7. 8.
Chapter 1-3
Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain generally accepted accounting principles and the cost principle. Explain the monetary unit assumption and the economic entity assumption. State the accounting equation, and define assets, liabilities, and owners equity. Analyze the effects of business transactions on the accounting equation. Understand the four financial statements and how they are prepared.
Accounting in Action
What is Accounting?
The Building Blocks of Accounting Ethics in financial reporting Generally accepted accounting principles
Financial Statements
Assumptions
Chapter 1-4
What is Accounting?
The purpose of accounting is to:
(1) identify, record, and communicate the economic events of an
(2) organization to (3) interested users.
Chapter 1-5
What is Accounting?
Three Activities
Illustration 1-1 Accounting process
Human Resources
Finance
Investors
There are two broad groups of users of financial information: internal users and external users.
Customers SEC
Marketing
Chapter 1-7
User
Human Resources
Investors
Management
Finance
Marketing
Creditors
Discussion Question
Q1. Accounting is ingrained in our society and it is vital to our economic system. Do you agree? Explain.
Ethics
Review Question
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.
Chapter 1-11
Ethics
Review Question
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.
Chapter 1-12
The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.
Chapter 1-13
Chapter 1-15
Assumptions
Monetary Unit Assumption include in the
accounting records only transaction data that can be expressed in terms of money.
activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship.
Partnership.
Corporation.
Chapter 1-16
Partnership
Owned by two or more persons. Often retail and service-type businesses
Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability
LO 5 Explain the monetary unit assumption and the economic entity assumption.
Assumptions
Review Question
Combining the activities of Kellogg and General Mills would violate the
a. cost principle.
Chapter 1-18
LO 5 Explain the monetary unit assumption and the economic entity assumption.
Assumptions
Review Question
Combining the activities of Kellogg and General Mills would violate the
a. cost principle.
Chapter 1-19
LO 5 Explain the monetary unit assumption and the economic entity assumption.
Review Question
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.
LO 5 Explain the monetary unit assumption and the economic entity assumption.
Chapter 1-20
Review Question
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.
LO 5 Explain the monetary unit assumption and the economic entity assumption.
Chapter 1-21
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.
Chapter 1-22
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.
Provides the underlying framework for recording and summarizing economic events. Assets Resources a business owns.
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.
Provides the underlying framework for recording and summarizing economic events. Liabilities Claims against assets (debts and obligations).
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.
Provides the underlying framework for recording and summarizing economic events. Owners Equity Ownership claim on total assets.
Chapter 1-25
Owners Equity
Illustration 1-6
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.
Chapter 1-26
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.
Owners Equity
Illustration 1-6
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.
Chapter 1-27
LO 6 State the accounting equation, and define assets, liabilities, and owners equity.
Chapter 1-28
Transactions (Question?)
Q1-15: Are the following events recorded in the accounting records? Owner Event
Supplies are purchased on account. An employee is hired.
Criterion
Is the financial position (assets, liabilities, or owners equity) of the company changed?
Transactions
Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in her business, Kings Pharmacy, which is organized as a proprietorship.
Transactions (Problem)
P1-1A: Barones Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May. 1. Invested $10,000 cash to start the repair shop.
Assets Cash Liabilities Equity Accounts Accounts Barone, + Receivable + Equipment = Payable + Capital
1. +10,000
+10,000
Investment
Chapter 1-31
Transactions (Problem)
2. Purchased equipment for $5,000 cash.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
Chapter 1-32
Transactions (Problem)
3. Paid $400 cash for May office rent.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3.
-400
-400
Expense
Chapter 1-33
Transactions (Problem)
4. Received $5,100 from customers for repair service.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3. 4.
-400 +5,100
-400 +5,100
Expense Revenue
Chapter 1-34
Transactions (Problem)
5. Withdrew $1,000 cash for personal use.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3. 4.
5.
-400 +5,100
-1,000
-400 +5,100
-1,000
Expense Revenue
Drawings
Chapter 1-35
Transactions (Problem)
6. Paid part-time employee salaries of $2,000.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3. 4.
-400 +5,100
-400 +5,100
-1,000 -2,000
Expense Revenue
Drawings Expense
5. -1,000 6. -2,000
Chapter 1-36
Transactions (Problem)
7. Incurred $250 of advertising costs, on account.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3. 4.
-400 +5,100
-400 +5,100
-1,000 -2,000 +250 -250
Expense Revenue
Drawings Expense
5. -1,000 6. -2,000 7.
Expense
Chapter 1-37
Transactions (Problem)
8. Provided $750 of repair services on account.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3. 4.
-400 +5,100
-400 +5,100
-1,000 -2,000 +250 +750 -250 +750
Expense Revenue
Drawings Expense
5. -1,000 6. -2,000 7. 8.
Expense Revenue
Chapter 1-38
Transactions (Problem)
9. Collected $120 cash for services previously billed.
Assets Liabilities Equity
Cash 1. +10,000
2. -5,000
+10,000
+5,000
Investment
3. 4.
-400 +5,100
-400 +5,100
-1,000 -2,000 +250 +750 -250 +750 12,200
Expense Revenue
Drawings Expense
5. -1,000 6. -2,000 7. 8. 9.
Chapter 1-39
Expense Revenue
+120 6,820 +
-120 630 +
5,000 =
250 +
Financial Statements
Companies prepare four financial statements from the summarized accounting data:
Income Statement
Balance Sheet
Chapter 1-40
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Review Question
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.
Chapter 1-41
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Income Statement
Barones Repair Shop Income Statement
For the Month Ended May 31, 2008
Revenues: Service revenue Expenses: Salary expense Rent expense Advertising expense Total expenses Net income 2,000 400 250 2,650 $ 3,200 $ 5,850
Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues.
Chapter 1-42
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Income Statement
Barones Repair Shop Income Statement
For the Month Ended May 31, 2008
Revenues: Service revenue Expenses: Salary expense Rent expense Advertising expense Total expenses Net income 2,000 400 250 2,650 $ 3,200 $ 5,850
Barone's, Capital May 1 Add: Investment Net income Less: Drawings Barone's, Capital May 31
3,200
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Owners Equity Statement
Statement indicates the reasons why owners equity has increased or decreased during the period.
Barones Repair Shop Owner's Equity Statement
For the Month Ended May 31, 2008
Barone's, Capital May 1 Add: Investment Net income Less: Drawings Barone's, Capital May 31
Chapter 1-44
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Barones Repair Shop Balance Sheet May 31, 2008 Assets Cash $ 6,820 Accounts receivable 630 Equipment 5,000 Total assets $12,450 Liabilities Accounts payable Owner's Equity Barone's, capital 12,200 Total liab. & equity $12,450 $ 250
$ 12,200
The ending balance in owners equity is needed in preparing the balance sheet
Chapter 1-45
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Barones Repair Shop Balance Sheet May 31, 2008 Assets Cash Accounts receivable Equipment Total assets Liabilities Accounts payable Owner's Equity Barone's, capital Total liab. & equity 12,200 $12,450 $ 250 $ 6,820 630 5,000 $12,450
Chapter 1-46
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Barones Repair Shop Balance Sheet May 31, 2008 Assets Cash $ 6,820 Accounts receivable 630 Equipment 5,000 Total assets $12,450 Liabilities Accounts payable Owner's Equity Barone's, capital 12,200 Total liab. & equity $12,450 $ 250
Cash flow from operating activities Cash receipts from revenues Cash paid for expenses Cash provided by operations Purchase of equipment Investment by owners Drawings by owners Cash provided by financing Net increase in cash Cash balance, May 1 Cash balance, May 31 $ 5,220 (2,400) 2,820 (5,000) 10,000 (1,000) 9,000 6,820 $ 6,820
Cash flow from investing activitites Cash flow from financing activities
Chapter 1-47
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Information for a specific period of time. Answers the following:
1. Where did cash come
from?
for?
Cash flow from investing activities Cash flow from financing activities
Chapter 1-48
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Review Question
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.
Chapter 1-49
LO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Discussion Question
Q19. A companys net income appears directly
on the income statement and the owners equity statement, and it is included indirectly in the
LO 8 Understand the four financial statements and how they are prepared.
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
Chapter 1-52