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CHAPTER 1
ACCOUNTING IN
ACTION
Accounting Principles, Eighth Edition
Chapter
1-2
Study
Study Objectives
Objectives
1.
2.
3.
4.
5.
6.
7.
8.
Chapter
1-3
Accounting
Accounting in
in Action
Action
What
What is
is
Accounting?
Three
activities
Who uses
accounting
data
Chapter
1-4
The
The Building
Building
Blocks
Blocks of
of
Accounting
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions
The
The Basic
Basic
Accounting
Accounting
Equation
Equation
Assets
Liabilities
Owners
equity
Using
Using the
the
Basic
Basic
Accounting
Accounting
Equation
Equation
Transaction
analysis
Summary of
transactions
Financial
Financial
Statements
Income
statement
Owners
equity
statement
Balance
sheet
Statement of
cash flows
What
What is
is Accounting?
Accounting?
The purpose of accounting is to:
(1) identify,
identify record,
record and communicate the
economic events of an
(2) organization to
(3) interested users.
Chapter
1-5
What
What is
is Accounting?
Accounting?
Three Activities
Illustration 1-1
Accounting process
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Human
Resources
Finance
Management
IRS
Investors
Marketing
Customers
Chapter
1-7
SEC
Labor
Unions
Creditors
External
Users
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?
User
Human Resources
Investors
Management
Finance
Marketing
Creditors
Chapter
1-8
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Discussion Question
Q1. Accounting is ingrained in our society and it is
vital to our economic system. Do you agree? Explain.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting
Standards of conduct by which ones actions are
judged as right or wrong, honest or dishonest, fair
or not fair, are Ethics.
Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and others.
Congress passedSarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
Chapter
1-10
Ethics
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
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
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Various users
need financial
information
Financial Statements
Balance Sheet
Income Statement
Statement of Owners Equity
Statement of Cash Flows
Note Disclosure
Generally Accepted
Accounting
Principles (GAAP)
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
http://www.sec.gov/
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
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, whereas market value is often
subjective.
Fair value information may be more useful.
Chapter
1-15
Assumptions
Assumptions
Monetary Unit Assumption include in the
Forms of
Business Ownership
Corporation.
Chapter
1-16
Forms
Forms of
of Business
Business Ownership
Ownership
Proprietorship
Chapter
1-17
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Often small
service-type
businesses
Ownership
divided into
shares of stock
Owner receives
any profits,
suffers any
losses, and is
personally liable
for all debts.
Generally
unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
LO 5 Explain the monetary unit assumption
and the economic entity assumption.
Assumptions
Assumptions
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.
Chapter
1-18
Assumptions
Assumptions
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.
Chapter
1-19
Forms
Forms of
of Business
Business Ownership
Ownership
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.
Chapter
1-20
Forms
Forms of
of Business
Business Ownership
Ownership
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.
Chapter
1-21
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity
Chapter
1-22
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Owners
Equity
Chapter
1-25
Owners
Owners Equity
Equity
Illustration 1-6
Owners
Owners Equity
Equity
Illustration 1-6
Using
Using The
The Basic
Basic Accounting
Accounting Equation
Equation
Transactions are a businesss economic events
recorded by accountants.
Chapter
1-28
Transactions
Transactions (Question?)
(Question?)
Q1-15: Are the following events recorded in the
accounting records?
Owner
An employee
is hired.
withdraws
cash for
personal use.
Event
Supplies are
purchased
on account.
Criterion
Record/
Dont Record
Chapter
1-29
Transactions
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.
Kings accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?
See notes page for discussion
Chapter
1-30
Transactions
Transactions (Problem)
(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.
Cash
1. +10,000
Chapter
1-31
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
+10,000
Investment
Transactions
Transactions (Problem)
(Problem)
2. Purchased equipment for $5,000 cash.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
2.
-5,000
Chapter
1-32
+10,000
Investment
+5,000
Transactions
Transactions (Problem)
(Problem)
3. Paid $400 cash for May office rent.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
2.
-5,000
3.
-400
Chapter
1-33
+10,000
Investment
+5,000
-400
Expense
Transactions
Transactions (Problem)
(Problem)
4. Received $5,100 from customers for repair service.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
2.
-5,000
3.
4.
-400
+5,100
Chapter
1-34
+10,000
Investment
+5,000
-400
+5,100
Expense
Revenue
Transactions
Transactions (Problem)
(Problem)
5. Withdrew $1,000 cash for personal use.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
-1,000
-1,000
Drawings
Chapter
1-35
+5,000
Transactions
Transactions (Problem)
(Problem)
6. Paid part-time employee salaries of $2,000.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
Chapter
1-36
+5,000
Transactions
Transactions (Problem)
(Problem)
7. Incurred $250 of advertising costs, on account.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
Chapter
1-37
+5,000
+250
-250
Expense
Transactions
Transactions (Problem)
(Problem)
8. Provided $750 of repair services on account.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
8.
Chapter
1-38
+5,000
+250
+750
-250
+750
Expense
Revenue
Transactions
Transactions (Problem)
(Problem)
9. Collected $120 cash for services previously billed.
Cash
Liabilities
Equity
Assets
Accounts
Accounts
Barone,
+ Receivable + Equipment = Payable + Capital
1. +10,000
+10,000
Investment
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
Expense
Revenue
5.
6.
-1,000
-2,000
-1,000
-2,000
Drawings
Expense
7.
8.
9.
+250
+750
+120
6,820 +
Chapter
1-39
+5,000
-120
630 +
5,000 =
250 +
-250
+750
Expense
Revenue
12,200
Financial
Financial Statements
Statements
Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:
Income
Statement
Chapter
1-40
Owners
Equity
Statement
Balance
Sheet
Statement
of Cash
Flows
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
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
Financial Statements
Statements
Income Statement
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
Financial Statements
Statements
Income Statement
Owners Equity
Statement
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Owners Equity
Statement
Statement indicates the
reasons why owners
equity has increased or
decreased during the
period.
Chapter
1-44
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Balance Sheet
Owners Equity
Statement
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Balance Sheet
Chapter
1-46
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Balance Sheet
Chapter
1-47
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Information for a
specific period of time.
from?
for?
Chapter
1-48
LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
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
Financial Statements
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
companys balance sheet. Do you agree? Explain.
LO 8 Understand the four financial statements and how they are prepared.
Accounting
Accounting Career
Career Opportunities
Opportunities
Public Accounting
Careers in auditing and taxation serving the general public.
Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.
Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.
Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-51
Copyright
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