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7/30/2019 Accounting principle_Chapter 1 (Slide)
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Slide
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Chapter 1
Accounting in Action
Financial Accounti ng, IFRS EditionWeygandt Kimmel Kieso
Slide
1-2
1. Explain what accounting is.
2. Identify the users and uses of accounting.3. Understand why ethics is a fundamental business concept.
4. Explain accounting standards and the measurement principles.
5. Explain the monetary unit assumption and the economic entity
assumption.
6. State the accounting equation, and define its components.
7. Analyze the effects of business transactions on the accounting
equation.
8. Understand the four financial statements and how they are
prepared.
Study ObjectivesStudy Objectives
Slide1-3
Ethics inEthics infinancialfinancialreportingreporting
AccountingAccountingstandardsstandards
AssumptionsAssumptions
What isWhat is
Accounting?Accounting?
The BuildingThe Building
Blocks ofBlocks of
AccountingAccounting
The BasicThe Basic
AccountingAccounting
EquationEquation
Using theUsing theAccountingAccounting
EquationEquation
FinancialFinancial
StatementsStatements
ThreeThreeactivitiesactivities
Who usesWho usesaccountingaccountingdata?data?
AssetsAssets
LiabilitiesLiabilities
EquityEquity
TransactionTransactionanalysisanalysis
Summary ofSummary oftransactionstransactions
IncomeIncomestatementstatement
RetainedRetainedearningsearningsstatementstatement
Statement ofStatement offinancialfinancialpositionposition
Statement ofStatement ofcash flowscash flows
Accounting in ActionAccounting in Action
Slide1-4
What is Accounting?What is Accounting?
SO 1 Explain what accounting is.
The purpose of accounting:
(1) to identifyidentify, recordrecord, and communicatecommunicate the economic
events of an
(2) organization to
(3) interested users.
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Slide
1-5
Three Activities
What is Accounting?What is Accounting?
The accounting process includes
the bookkeeping function.
Illustration 1-1The activities of the
accounting process
SO 1 Explain what accounting is.Slide
1-6
Management
HumanResources
TaxingAuthorities
LaborUnions
Regulatory
Agencies
Marketing
Finance
Investors
Creditors
SO 2 Identify the users and uses of accounting.
Customers
Internal
Users
ExternalUsers
What is Accounting?What is Accounting?
Who Uses Accounting Data
Slide1-7
Common Questions Asked User
1. Can we afford to give ouremployees a pay raise? Human Resources
2. Did the company earn asatisfactory income?
3. Should any product lines beeliminated?
4. Is cash sufficient to paydividends to shareholders?
5. What price for our product willmaximize net income?
What is Accounting?What is Accounting?
SO 2 Identify the users and uses of accounting.
6. Will the company be able topay its debts?
Investors
Management
Finance
Marketing
Creditors
Slide1-8
The Building Blocks of AccountingThe 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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Slide
1-9
The Building Blocks of AccountingThe Building Blocks of Accounting
Ethics In Financial Reporting
SO 3 Understand why ethics is a fundamental business concept.Slide
1-10
Ethics are the standards of conduct by which one'sactions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Ethics are the standards of conduct by which one'sactions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Review Question
SO 3 Understand why ethics is a fundamental business concept.
Solution on
notes page
The Building Blocks of AccountingThe Building Blocks of Accounting
Slide1-11
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 AccountingThe Building Blocks of Accounting
Accounting Standards
Slide1-12
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 AccountingThe Building Blocks of Accounting
Measurement Principles
SO 4 Explain accounting standards and the measurement principles.
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Slide
1-13
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 as
investment securities, is the fair value principle applied.
The Building Blocks of AccountingThe Building Blocks of Accounting
Measurement Principles
SO 4 Explain accounting standards and the measurement principles.Slide
1-14
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 the
entity 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 AccountingThe Building Blocks of Accounting
SO 5 Explain the monetary unit assumption and the economic entity assumption.
Slide1-15
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 AccountingThe Building Blocks of Accounting
Slide1-16
Combining the activities of Kellogg and General Millswould violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Combining the activities of Kellogg and General Millswould violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
Review Question
SO 5 Explain the monetary unit assumptionand the economic entity assumption.
The Building Blocks of AccountingThe Building Blocks of Accounting
Solution onnotes page
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1-17
A business organized as a separate legal entity understate law having ownership divided into shares is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
Review Question
The Building Blocks of AccountingThe Building Blocks of Accounting
Solution on
notes page
A business organized as a separate legal entity understate law having ownership divided into shares is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Slide
1-18
True
False
True
Indicate whether each of the following
statements presented below is true or false.
Solution on
notes page
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
The Building Blocks of AccountingThe Building Blocks of Accounting
1. The three steps in the accounting process are
identification, recording, and communication.
2. The two most common types of external users
are investors and company officers.
3. Shareholders in a corporation enjoy limited legal
liability as compared to partners in a partnership.
Slide1-19
False
True
Indicate whether each of the following
statements presented below is true or false.
Solution onnotes page
SO 5 Explain the monetary unit assumptionand the economic entity assumption.
The Building Blocks of AccountingThe Building Blocks of Accounting
4. The primary accounting standard-setting body
outside the United States is the InternationalAccounting Standards Board (IASB).
5. The cost principle dictates that companies
record assets at their cost. In later periods,
however, the fair value of the asset must be
used if fair value is higher than its cost.
Slide1-20 SO 5 Explain the monetary unit assumption and the economic entity assumption.
Answer on notes pageAnswer on notes page
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AssetsAssets LiabilitiesLiabilities EquityEquity= +
Provides the underlying framework for recording and
summarizing economic events.
Applies to all economic entities regardless of size.
The Basic Accounting EquationThe Basic Accounting Equation
SO 6 State the accounting equation, and define its components.
Slide
1-22
AssetsAssets
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting EquationThe Basic Accounting Equation
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.
Assets
LiabilitiesLiabilities EquityEquity= +
SO 6 State the accounting equation, and define its components.
Slide1-23
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting EquationThe 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
AssetsAssets LiabilitiesLiabilities= + EquityEquity
Slide1-24
Provides the underlying framework for recording and
summarizing economic events.
The Basic Accounting EquationThe 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
AssetsAssets LiabilitiesLiabilities EquityEquity= +
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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.
Illustration 1-7
SO 6 State the accounting equation, and define its components.
The Basic Accounting EquationThe Basic Accounting Equation
Slide
1-26
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 EquationThe Basic Accounting Equation
Slide1-27
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 EquationThe Basic Accounting Equation
Illustration 1-7
Slide1-28
Classification
Classify the following items as issuance of
shares, 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 EquationThe 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 EquationUsing The Accounting Equation
Transactions are 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.
Slide
1-30
Illustration: Are the following events recorded in theaccounting records?
EventPurchasecomputer.
Criterion Is the financial position (assets, liabilities, orequity) of the company changed?
Discussproduct
design withcustomer.
Pay rent.
Record/Dont Record
Using The Accounting EquationUsing The Accounting Equation
Illustration 1-8
SO 7 Analyze the effects of business transactions on the accounting equation.
Slide1-31 SO 7 Analyze the effects of business transactions on the accounting equation.
Using The Accounting EquationUsing The Accounting Equation
Transaction Analysis
Slide1-32
Transaction (1). Investment by Shareholders.Transaction (1). Investment by Shareholders. Ray and
Barbara Neal decides to open a computer programming service
which he names Softbyte. On September 1, 2011, they invest
$15,000 cash in exchange for capital shares. The effect of this
transaction on the basic equation is:
Transactions AnalysisTransactions Analysis
Solution onnotes page
SO 7 Analyze the effects of business transactionson the accounting equation.
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Transaction (2). Purchase of Equipment for Cash.Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
Transactions AnalysisTransactions Analysis
Solution on
notes page
SO 7 Analyze the effects of business transactions
on the accounting equation.
Slide
1-34
Transactions AnalysisTransactions Analysis
Transaction (3). Purchase of Supplies on Credit.Transaction (3). Purchase of Supplies on Credit. Softbyte
purchases for $1,600 from Acme Supply Company computerpaper and other supplies expected to last several months.
Solution on
notes page
SO 7 Analyze the effects of business transactions
on the accounting equation.
Slide1-35
Transactions AnalysisTransactions Analysis
Transaction (4). Services Provided for Cash.Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming services
it has provided.
Solution onnotes page
SO 7 Analyze the effects of business transactionson the accounting equation.
Slide1-36
Transactions AnalysisTransactions Analysis
Transaction (5). Purchase of Advertising on Credit.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.
Solution onnotes page
SO 7 Analyze the effects of business transactionson the accounting equation.
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Transactions AnalysisTransactions Analysis
Transaction (6). Services Provided for Cash and Credit.Transaction (6). Services Provided for Cash and Credit.
Softbyte provides $3,500 of programming services forcustomers. The company receives cash of $1,500 from
customers, and it bills the balance of $2,000 on account.
Solution on
notes page
SO 7 Analyze the effects of business transactions
on the accounting equation.
Slide
1-38
Transactions AnalysisTransactions Analysis
Transaction (7). Payment of Expenses.Transaction (7). Payment of Expenses. Softbyte pays the
following Expenses in cash for September: store rent $600,salaries of employees $900, and utilities $200.
Solution on
notes page
SO 7 Analyze the effects of business transactions
on the accounting equation.
Slide1-39
Transactions AnalysisTransactions Analysis
Transaction (8). Payment of Accounts Payable.Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.
Solution onnotes page
SO 7 Analyze the effects of business transactionson the accounting equation.
Slide1-40
Transactions AnalysisTransactions Analysis
Transaction (9). Receipt of Cash on Account.Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed for
services [in Transaction (6)].
Solution onnotes page
SO 7 Analyze the effects of business transactionson the accounting equation.
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Transactions AnalysisTransactions Analysis
Transaction (10). Dividends.Transaction (10). Dividends. The corporation pays a dividend
of $1,300 in cash.
Solution on
notes page
SO 7 Analyze the effects of business transactions
on the accounting equation.
Slide
1-42
Transactions AnalysisTransactions Analysis
Summary of TransactionsSummary of TransactionsIllustration 1-10Tabular summary of
Softbyte transactions
SO 7 Analyze the effects of business transactions on the accounting equation.
Slide1-43
Companies prepare four financial statements from thesummarized accounting data:
Statementof Financial
Position
IncomeStatement
Statementof CashFlows
RetainedEarnings
Statement
Financial StatementsFinancial Statements
SO 8 Understand the four financial statements and how they are prepared.Slide1-44
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.
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.
Financial StatementsFinancial Statements
Review QuestionReview Question
Solution onnotes page
SO 8 Understand the four financial statements and how they are prepared.
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Financial StatementsFinancial Statements Income Statement
Reports the revenues and expenses for a specific period of time.
Net income revenues exceed expenses.
Net loss expenses exceed revenues.Illustration 1-11Financial statements andtheir interrelationships
SO 8 Understand the four financial statements and how they are prepared.
Slide
1-46
Financial StatementsFinancial Statements Net income is needed to determine theending balance in retained earnings.
Illustration 1-11
Financial statements andtheir interrelationships
SO 8SO 8
Slide1-47
Financial StatementsFinancial Statements
Statement indicates the reasons why
retained earnings has increased or
decreased during the period.
Retained EarningsStatement
Illustration 1-11Financial statements and
their interrelationships
SO 8 Understand the four financial statements and how they are prepared.Slide1-48
FinancialFinancialStatementsStatements
The ending
balance in
retainedearnings isneeded inpreparing thestatement offinancial position
Illustration 1-11Financial statements and
their interrelationships
SO 8 Understand the four financial statements and how they are prepared.
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1-49
Financial StatementsFinancial Statements Balance Sheet
SO 8 Understand the four financial statements and how they are prepared.
Illustration 1-11Financial statements andtheir interrelationships
Slide
1-50
FinancialFinancialStatementsStatements
Illustration 1-11Financial statements and
their interrelationships
Slide1-51
Financial StatementsFinancial 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 FlowsStatement of Cash Flows
SO 8 Understand the four financial statements and how they are prepared.Slide1-52
Financial StatementsFinancial Statements Statement of Cash Flows
Illustration 1-11Financial statements andtheir interrelationships
SO 8 Understand the four financial statements and how they are prepared.
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Slide
1-53 SO 8 Understand the four financial statements and how they are prepared.
Answer onAnswer onnotes pagenotes page
Slide
1-54
Which of the following financial statements is preparedas of a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.
Which of the following financial statements is preparedas of a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.
Financial StatementsFinancial Statements
Review QuestionReview Question
Solution onnotes page.
SO 8 Understand the four financial statements and how they are prepared.
Slide1-55
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.
Accounting in Action
Understanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
Slide1-56
IFRS tends to be less detailed in it s 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.
Accounting in Action
Understanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
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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.
Accounting in Action
Understanding U.S. GAAPUnderstanding U.S. GAAP
Key DifferencesKey Differences
Slide
1-58
Looking to the FutureLooking to the Future
Understanding U.S. GAAPUnderstanding U.S. GAAP
Accounting in Action
Both the IASB and the FASB are hard at work developing
standards that will lead to the elimination of major diff erences 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.
Slide1-59
Public accounting
Private accounting
SO 9 Explain the career opportunities in accounting.
Career OpportunitiesCareer Opportunities APPENDIX
Government
Forensic accounting
Show methe Money
Slide1-60
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