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Chapter

1

Accounting in Action

Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso

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What is Accounting?

SO 1 Explain what accounting is.

The purpose of accounting:

(1) to identify, record, and communicate the economic

events of an

(2) organization to

(3) interested users.

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Three Activities

What is Accounting?

The accounting process includes

the bookkeeping function.

Illustration 1-1

The activities of theaccounting process

SO 1 Explain what accounting is.

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Management

HumanResources

TaxingAuthorities

LaborUnions

RegulatoryAgencies

Marketing

Finance

Investors

Creditors

SO 2 Identify the users and uses of accounting.

Customers

InternalUsers

ExternalUsers

What is Accounting?

Who Uses Accounting Data

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The Building Blocks of Accounting

Ethics In Financial Reporting

SO 3 Understand why ethics is a fundamental business concept.

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 (USA),

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

(USA), and others.

Effective financial reporting depends on sound ethical

behavior.

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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)

The Building Blocks of Accounting

Accounting Standards

http://www.fasb.org/http://www.iasb.org/http://www.iasb.org/http://www.fasb.org/

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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.

The Building Blocks of Accounting

Measurement Principles

SO 4 Explain accounting standards and the 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 asinvestment securities, is the fair value principle applied.

The Building Blocks of Accounting

Measurement Principles

SO 4 Explain accounting standards and the 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 theentity be kept separate and distinct from the activities of its

owner and all other economic entities.

Proprietorship.

Partnership.

Corporation.

Forms of BusinessOwnership

Assumptions

The Building Blocks of Accounting

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.

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

The Building Blocks of Accounting

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Assets Liabilities Equity= +

Provides the underlying frameworkfor recording andsummarizing economic events.

Applies to all economic entities regardless of size.

The Basic Accounting Equation

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

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Assets

Provides the underlying frameworkfor recording andsummarizing economic events.

The Basic Accounting Equation

Resources a business owns.Provide future services or benefits.

Cash, Inventory, Equipment, etc.

Assets

Liabilities Equity= +

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

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Provides the underlying frameworkfor recording andsummarizing economic events.

The Basic Accounting Equation

Claims against assets (debts and obligations).Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

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

Liabilities

Assets Liabilities= + Equity

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Provides the underlying frameworkfor recording andsummarizing economic events.

The Basic Accounting Equation

Ownership claim on total assets.Referred to as residual equity.

Share capital and retained earnings.

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

Equity

Assets Liabilities Equity= +

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Revenuesresult 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

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

The Basic Accounting Equation

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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

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

The Basic Accounting Equation

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

Reduce retained earnings

Not an expense

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

The Basic Accounting Equation

Illustration 1-7

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Classification

Classify the following items as issuance ofshares, dividends, revenues, or expenses.

Solution onnotes page

1. Rent expense

2. Service revenue

3. Dividends

4. Salaries expense

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

The Basic Accounting Equation

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 Equation

Transactionsare a businesss economic events

recordedby 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 theaccounting records?

EventPurchasecomputer.

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

Discussproduct

design with

customer.

Pay rent.

Record/Dont Record

Using The Accounting Equation

Illustration 1-8

SO 7 Analyze the effects of business transactions on the accounting equation.

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Slide1-22 SO 7 Analyze the effects of business transactions on the accounting equation.

Using The Accounting Equation

Transaction Analysis

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Transaction (1). Investment by Shareholders. Ray and Barbara Nealdecides to open a computer programming service which he names Softbyte.

On September 1, 2011, they invest $15,000 cash in exchange for capital

shares.

Transaction (2). Purchase of Equipment for Cash. Softbyte purchases

computer equipment for $7,000 cash.

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.

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

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.

Transactions Analysis

Solution onnotes page SO 7 Analyze the effects of business transactionson the accounting equation.

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Transactions Analysis

Transaction (6). Services Provided for Cash and Credit. 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.

Transaction (7). Payment of Expenses. Softbyte pays the following

Expenses in cash for September: store rent $600, salaries of employees $900,

and utilities $200.

Transaction (8). Payment of Accounts Payable. Softbyte pays its $250

Daily News bill in cash.

Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in

cash from customers who had been billed for services [in Transaction (6)].

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

cash.

Solution onnotes page SO 7 Analyze the effects of business transactionson the accounting equation.

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Transactions Analysis

Summary of TransactionsIllustration 1-10

Tabular summary ofSoftbyte transactions

SO 7 Analyze the effects of business transactions on the accounting equation.

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Companies prepare four financial statements from thesummarized accounting data:

Statementof Financial

Position

IncomeStatement

Statementof CashFlows

RetainedEarnings

Statement

Financial Statements

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

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Financial Statements Net income is needed to determine theending balance in retained earnings.

Illustration 1-11Financial statements andtheir interrelationships

SO 8

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Financial Statements

Statement indicates the reasons why

retained earnings has increased or

decreased during the period.

Retained EarningsStatement

Illustration 1-11Financial statements andtheir interrelationships

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

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Financial

Statements

The endingbalance inretainedearnings isneeded inpreparing thestatement offinancial position

Illustration 1-11Financial statements andtheir interrelationships

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

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Financial Statements Balance Sheet

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

Illustration 1-11Financial statements andtheir interrelationships

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Financial

Statements

Illustration 1-11Financial statements andtheir interrelationships

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Financial Statements

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 Flows

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

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Financial Statements Statement of Cash Flows

Illustration 1-11Financial statements andtheir interrelationships

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