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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
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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