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Chapter
Accounting in Action
Financial Accounting, IFRS Edition Weygandt Kimmel Kieso
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Explain what accounting is. Identify the users and uses of accounting. Understand why ethics is a fundamental business concept. Explain accounting standards and the measurement principles. Explain the monetary unit assumption and the economic entity assumption. State the accounting equation, and define its components. Analyze the effects of business transactions on the accounting equation. Understand the four financial statements and how they are prepared.
6. 7.
8.
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The Building Blocks of Accounting Ethics in financial reporting Accounting standards Assumptions
Financial Statements Income statement Retained earnings statement Statement of financial position Statement of cash flows
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(2) (3)
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External Users
Labor Unions
Investors
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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.
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SO 5 Explain the monetary unit assumption and the economic entity assumption.
Partnership
Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement
Corporation
Ownership divided into shares Separate legal entity organized under state corporation law Limited liability
SO 5 Explain the monetary unit assumption and the economic entity assumption.
Review Question
Combining the activities of Kellogg and General Mills would violate the a. cost principle. b. economic entity assumption. c. monetary unit assumption. d. ethics principle.
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SO 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 is a a. proprietorship. b. partnership. c. corporation. d. sole proprietorship.
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SO 5 Explain the monetary unit assumption and the economic entity assumption.
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SO 5 Explain the monetary unit assumption and the economic entity assumption.
True
False
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SO 5 Explain the monetary unit assumption and the economic entity assumption.
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SO 5 Explain the monetary unit assumption and the economic entity assumption.
Provides the underlying framework for recording and summarizing economic events. Applies to all economic entities regardless of size.
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SO 6
Provides the underlying framework for recording and summarizing economic events.
Assets
Resources a business owns. Provide future services or benefits. Cash, Inventory, Equipment, etc.
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SO 6
Provides the underlying framework for recording and summarizing economic events.
Liabilities
Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc.
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SO 6
Provides the underlying framework for recording and summarizing economic events.
Equity
Ownership claim on total assets. Referred to as residual equity. Share capital and retained earnings.
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SO 6
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.
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SO 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.
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SO 6
Dividends are the distribution of cash or other assets to shareholders. Reduce retained earnings Not an expense
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SO 6
SO 6
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SO 7
Criterion
SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
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SO 7
Income Statement
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SO 8 Understand the four financial statements and how they are prepared.
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.
SO 8 Understand the four financial statements and how they are prepared.
Income Statement
Reports the revenues and expenses for a specific period of time. Net income revenues exceed expenses. Illustration 1-11 Financial statements and Net loss expenses exceed revenues. their interrelationships
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SO 8 Understand the four financial statements and how they are prepared.
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SO 8
Statement indicates the reasons why retained earnings has increased or decreased during the period.
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SO 8 Understand the four financial statements and how they are prepared.
The ending balance in retained earnings is needed in preparing the statement of financial position
SO 8 Understand the four financial statements and how they are prepared.
Balance Sheet
Illustration 1-11 Financial statements and their interrelationships
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SO 8 Understand the four financial statements and how they are prepared.
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SO 8 Understand the four financial statements and how they are prepared.
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SO 8 Understand the four financial statements and how they are prepared.
SO 8 Understand the four financial statements and how they are prepared.
Review Question
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.
SO 8 Understand the four financial statements and how they are prepared.
In 2002, the U.S. Congress issued the Sarbanes-Oxley Act (SOX), which mandated certain internal controls for large public companies listed on U.S. exchanges. 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. Financial frauds have occurred at companies such as Satyam Computer Services (IND), Parmalat (ITA), and Royal Ahold (NLD). They have also occurred at large U.S. companies such as Enron, WorldCom, and AIG.
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IFRS tends to be less detailed in its accounting and disclosure requirements than GAAP. This difference in approach has resulted in a debate about the merits of principles-based (IFRS) versus rules-based (GAAP) standards. U.S. regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with GAAP. GAAP is based on a conceptual framework that is similar to that used to develop IFRS.
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The three common forms of business organization that are presented in the chapter, proprietorships, partnerships, and corporations, are also found in the United States. Because the choice of business organization is influenced by factors such as legal environment, tax rates and regulations, and degree of entrepreneurism, the relative use of each form will vary across countries. Transaction analysis is basically the same under IFRS and GAAP but, as you will see in later chapters, the different standards may impact how transactions are recorded.
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Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. Consider, for example, that as a result of a joint project on the conceptual framework, the definitions of the most fundamental elements (assets, liabilities, equity, revenues, and expenses) may actually change. However, whether the IASB adopts internal control provisions similar to those in SOX remains to be seen.
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APPENDIX
Government Forensic accounting
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