What

What is
is Accounting?
Accounting?

The purpose of accounting is to:

Chapter 1
1. identify, record, and communicate the economic
Principles of Accounting events of an

2. organization to

Uses of Accounting 3. interested users.

Information and the
Financial
Statements

Chapter Chapter
1-1 1-2

Accounting
Accounting as
as an
an Information
Information System
System Accounting
Accounting as
as an
an Information
Information System
System

The accounting
process
includes the
bookkeeping
function.

Chapter Chapter
1-3 1-4

Performance
Performance Measures
Measures Users
Users of
of Accounting
Accounting Information
Information

Indicate whether managers are achieving business

goals and whether business activities are well managed.

Types of performance measures:

1. Earned income

2. Relationship of expenses to revenue

3. Cash flow

4. Relationship of money owed to total resources

controlled

Chapter Chapter
1-5 1-6
 Accounting
Accounting and
and Capital
Capital Allocation
Allocation

Resources are limited. Efficient use of resources often

determines whether a business thrives.

Capital Allocation Process

Financial Capital
Users
Reporting Allocation
Information to help Investors, creditors, The process of
users with capital and other users determining how
allocation decisions. and at what cost
money is allocated
among competing
interests.

Chapter Chapter
1-7 LO 2 Explain how accounting assists in the efficient use of scare
scare resources. 1-8

Financial
Financial and
and Management
Management Accounting
Accounting Uses
Uses of
of Financial
Financial Information
Information

Accounting’s role is divided into two categories: Ethics In Financial Reporting

1. Management accounting Standards of conduct by which one’s actions are

judged as right or wrong, honest or dishonest, fair or
2. Financial accounting
not fair, are Ethics.
Functions overlap.
Recent financial scandals include: Enron, WorldCom,
Primary difference is the principal users of the HealthSouth, AIG, and others.
information. Congress passed Sarbanes-Oxley Act of 2002.

Effective financial reporting depends on sound

ethical behavior.

Chapter Chapter
1-9 1-10

Uses
Uses of
of Financial
Financial Information
Information Users
Users and
and Uses
Uses of
of Financial
Financial Information
Information

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 Chapter
1-11 1-12 SO 2 Identify the users and uses of accounting information.
 Accounting
Accounting Measurement
Measurement Business
Business Transaction
Transaction

Four basic questions: Economic events that affect the financial position of a
1. What is measured?
business entity.

2. When should the measurement be made? 1. An exchange of value between two or more parties.
Purchase, sale, payment, collection, etc.
3. What value should be placed on what is measured?
2. A Nonexchange transaction.
4. How should what is measured be classified?
Loss from fire, flood, theft.

Physical wear and tear on equipment.

Accumulation of interest.

Chapter Chapter
1-13 1-14

Forms
Forms of
of Business
Business Organization
Organization Financial
Financial Position
Position and
and Accounting
Accounting Equation
Equation

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership

by one person. more persons. divided into
Often small shares of stock
Often retail and
service-type service-type Separate legal
businesses businesses entity organized
Owner receives under state
Generally
any profits, corporation law
unlimited
suffers any personal liability Limited liability
losses, and is
Partnership
personally liable
agreement
for all debts.
Chapter SO 5 Explain the monetary unit assumption Chapter
1-15
and the economic entity assumption. 1-16

Financial
Financial Statements
Statements Financial
Financial Statements
Statements

Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from Review Question
the
the summarized
summarized accounting
accounting data:
data: Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
Retained Statement c. expenses exceed revenues.
Balance Income
Earnings of Cash
Sheet Statement d. revenues exceed expenses.
Statement Flows

Chapter Chapter
1-17 1-18
 Financial
Financial Statements
Statements Financial
Financial Statements
Statements

Balance Sheet Balance Sheet Retained Earnings

Statement
Reports the assets,
liabilities, and
stockholder’s equity at a
specific date.

Assets listed at the top,

followed by liabilities and
stockholder’s equity.

Total assets must equal

total liabilities and The ending balance in retained
earnings is needed in
stockholder’s equity. preparing the balance sheet

Chapter Chapter
1-19 1-20

Financial
Financial Statements
Statements Financial
Financial Statements
Statements
Retained Earnings
Income Statement
Statement
Statement indicates the Reports revenues and
reasons why retained expenses for a specific
earnings has increased period of time.
or decreased during the Net income – revenues
period. exceed expenses.

Net loss – expenses

exceed revenues.

Chapter Chapter
1-21 1-22

Financial
Financial Statements
Statements Financial
Financial Statements
Statements
Retained Earnings
Income Statement Statement of Cash Flows
Statement
Answers:
1. Where did cash come
from during the
period?

2. How was cash used

during the period?

3. What was the change

Net income is needed to
determine the ending balance in in the cash balance
stockholder’s equity. during the period?

Chapter Chapter
1-23 1-24
 Financial
Financial Statements
Statements Other
Other Elements
Elements of
of an
an Annual
Annual Report
Report

Review Question U.S. companies that are publicly traded must provide
shareholders with an annual report.
Which of the following financial statements is
prepared as of a specific date? The annual report always includes:
a. Balance sheet. Financial statements.
b. Income statement. Management discussion and analysis.
c. Owner's equity statement.
Notes to the financial statements.
d. Statement of cash flows.
Independent auditor's report.

Chapter Chapter
1-25 1-26

Other
Other Elements
Elements of
of an
an Annual
Annual Report
Report Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles

Auditor’s Report Various users Financial Statements

need financial Balance
Balance Sheet
Sheet
Standard unqualified opinion – auditor expresses the Income
Income Statement
Statement
information Statement
Statement ofof Stockholders’
Stockholders’ Equity
Equity
opinion that the financial statements are presented Statement
Statement ofof Cash
Cash Flows
Flows
fairly, in all material respects, in conformity with GAAP. Note
Note Disclosure
Disclosure

The accounting profession

has attempted to develop a Generally Accepted
set of standards that are
Accounting Principles
generally accepted and
universally practiced. (GAAP)

Chapter Chapter
1-27 1-28

Generally Standard
Standard Setting
Setting User Groups that Influence
Generally Accepted
Accepted Accounting
Accounting Principles
Principles Business
BusinessEntities
Entities
Accounting Standards

Standard Setting in a Political Environment CPAs

CPAsand
and Financial
Financial
Accounting
AccountingFirms
Firms Community
Accounting standards are as much a product of Community

political action as they are of careful logic or

AICPA
AICPA(AcSEC) Preparers
Preparers
empirical findings. (AcSEC) FASB
FASB (e.g.,
(e.g.,FEI)
FEI)

Government
Government
Academicians
Academicians (SEC,
(SEC,IRS,
IRS,other
other
agencies)
agencies)

Investing Industry
InvestingPublic
Public Industry
Associations
Associations
Accounting standards,
interpretations, and bulletins
Chapter Chapter
1-29 1-30
 Generally
Generally Accepted
Accepted Accounting
Accounting Principles
Principles Securities
Securities and
and Exchange
Exchange Commission
Commission

Organizations: Established by federal government

Securities and Exchange Commission (SEC). Accounting and reporting for public companies

Financial Accounting Standards Board (FASB).

Securities
Securities Act
Act Securities
Securities Act
Act
Public Company Accounting Oversight Board (PCAOB). of
of 1933
1933 of
of 1934
1934
American Institute of Certified Public Accountants
(AICPA). Encouraged private standard-setting body

International Accounting Standards Board (IASB). SEC requires public companies to adhere to GAAP
SEC Oversight
Enforcement Authority
Chapter Chapter
1-31 1-32

Issues
Issues in
in Financial
Financial Reporting
Reporting Copyright
Copyright

International Accounting Standards “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
Two sets of standards accepted for international use: in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
U.S. GAAP, issued by the FASB unlawful. Request for further information should be addressed
International Financial Reporting Standards to the Permissions Department, John Wiley & Sons, Inc. The
(IFRS), issued by the IASB purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
FASB and IASB recognize that responsibility for errors, omissions, or damages, caused by the
global markets will best be use of these programs or from the use of the information
served if only one set of GAAP contained herein.”
is used.

Chapter Chapter
1-33 1-34