ch01.pptx

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 1 Accounting in Action This slide deck contains animations. Please disable animations if they cause issues with your device. Chapter Outl...

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 1 Accounting in Action This slide deck contains animations. Please disable animations if they cause issues with your device. Chapter Outline Learning Objectives LO 1 Identify the activities and users associated with accounting. LO 2 Explain the building blocks of accounting: ethics, principles, and assumptions. LO 3 State the accounting equation, and define its components. LO 4 Analyze the effects of business transactions on the accounting equation. LO 5 Describe the four financial statements and how they are prepared. Copyright ©2018 John Wiley & Sons, 2 Inc. Accounting Activities and Users Accounting consists of three activities 1.Identification – Identify economic events (relevant to its business) 2.Recording - Record, classify, and summarize 3.Communication Prepare accounting reports Analyze and interpret the reported information Copyright ©2018 John Wiley & Sons, 3 Inc. Who Uses Accounting Data (1 of 2) Internal Users Finance - Is cash sufficient to pay dividends to Microsoft stockholders? Marketing – What price should Apple charge for an iPad to maximize net income? Human Resources – Can General Motors afford to give its employees pay raises this year? Management - Which PepsiCo product line is the most profitable? Should any product lines be eliminated? Copyright ©2018 John Wiley & Sons, Inc. 4 Who Uses Accounting Data (2 of 2) External Users Investors o Is General Electric earning satisfactory income? o How does Disney compare in size and profitability with Time Warner? Creditors – Will United Airlines be able to pay its debts as they come due? Copyright ©2018 John Wiley & Sons, 5 Inc. Do It! 1: Basic Concepts (1 of 2) Indicate whether each of the statements is true or false. 1. The three steps in the accounting process are identification, recording, and communication. 2. Bookkeeping encompasses all steps in the accounting process. 3. Accountants prepare, but do not interpret, financial reports. 4. The two most common types of external users are investors Soluti 1. and company 2. officers. 4. 3. 5. on: 5. Managerial accounting focuses on reports for internal users. Copyright ©2018 John Wiley & Sons, 6 Inc. Do It! 1: Basic Concepts (2 of 2) Indicate whether each of the statements is true or false. 1. The three steps in the accounting process are identification, recording, and communication. 2. Bookkeeping encompasses all steps in the accounting process. 3. Accountants prepare, but do not interpret, financial reports. 4. The two most common types of external users are investors Soluti 1. and company 2. officers. 4. 3. 5. on: True accounting 5. Managerial False False focuses on False reportsTrue for internal users. Copyright ©2018 John Wiley & Sons, 7 Inc. The Building Blocks of Accounting Ethics in Financial Reporting Financial scandals include: Enron, WorldCom, HealthSouth, AIG. Regulators and lawmakers were concerned that economy would suffer if investors lost confidence in corporate accounting o Congress passed Sarbanes-Oxley Act (SO X) Effective financial reporting depends on sound ethical behavior Copyright ©2018 John Wiley & Sons, 8 Inc. Ethics in Financial Reporting (1 of 2) Ethics are the standards of conduct by which actions are judged as: a. right or wrong b. honest or dishonest c. fair or not fair d. all of these options Copyright ©2018 John Wiley & Sons, 9 Inc. Ethics in Financial Reporting (2 of 2) Ethics are the standards of conduct by which actions are judged as: a. right or wrong b. honest or dishonest c. fair or not fair d. Answer: all of these options Copyright ©2018 John Wiley & Sons, 10 Inc. Generally Accepted Accounting Principles Standards that are generally accepted and universally practiced. These standards indicate how to report economic events. Standard-setting bodies: Financial Accounting Standards Board (FASB) Securities and Exchange Commission (S EC) International Accounting Standards Board (IASB)Copyright ©2018 John Wiley & Sons, 11 Inc. Measurement Principles Historical Cost Principle (or cost principle) Record assets at their cost. Fair Value Principle Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability) Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. Copyright ©2018 John Wiley & Sons, 12 Inc. Assumptions (1 of 5) Monetary Unit Assumption Include in accounting records only transaction data that can be expressed in terms of money Economic Entity Assumption Activities of entity be kept separate and distinct from activities of its owner and all other economic Forms of Businessentities Ownership o Proprietorship o Partnership o CorporationCopyright ©2018 John Wiley & Sons, 13 Inc. Forms of Business Ownership Corporation Proprietorship Partnership Owned by one Owned by two Ownership person or more divided into persons transferable Owner is often shares of manager/operato Often retail and stock r service-type businesses Separate Owner receives legal entity any profits, Generally organized suffers any unlimited under state losses, and is personal corporation personally liable liability law for all debts Partnership Limited agreement liability Copyright ©2018 John Wiley & Sons, 14 Inc. Assumptions (2 of 5) 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. Copyright ©2018 John Wiley & Sons, 15 Inc. Assumptions (3 of 5) Combining the activities of Kellogg and General Mills would violate the a. cost principle b. Answer: economic entity assumption c. monetary unit assumption d. ethics principle. Copyright ©2018 John Wiley & Sons, 16 Inc. Assumptions (4 of 5) 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. porporation d. sole proprietorship Copyright ©2018 John Wiley & Sons, 17 Inc. Assumptions (5 of 5) 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. Answer: porporation d. sole proprietorship Copyright ©2018 John Wiley & Sons, 18 Inc. Do It! 2: Building Blocks of Accounting (1 of 4) Indicate whether each of the five statements presented below is true or false. If false, indicate how to correct the statement. 1. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals. 2. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (F ASB). 3. The historical 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. Solutio 1. n: 2. 3. Copyright ©2018 John Wiley & Sons, 19 Inc. Do It! 2: Building Blocks of Accounting (2 of 4) Indicate whether each of the five statements presented below is true or false. If false, indicate how to correct the statement. 1. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals. 2. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (F ASB). 3. The historical 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. Solutio 1. n: True 2. True 3. False. The historical cost principle dictates that companies record assets at their cost. Under the historical cost principle, the company must also use cost in later Copyright periods. ©2018 John Wiley & Sons, 20 Inc. Do It! 2: Building Blocks of Accounting (3 of 4) Indicate whether each of the five statements presented below is true or false. If false, indicate how to correct the statement. 4. Relevance means that financial information matches what really happened; the information is factual. 5. A business owner’s personal expenses must be separated from expenses of the business to comply with accounting’s economic entity assumption. Solutio 1. n: True 2. True 3. False 4. 5. Copyright ©2018 John Wiley & Sons, 21 Inc. Do It! 2: Building Blocks of Accounting (4 of 4) Indicate whether each of the five statements presented below is true or false. If false, indicate how to correct the statement. 4. Relevance means that financial information matches what really happened; the information is factual. 5. A business owner’s personal expenses must be separated from expenses of the business to comply with accounting’s economic entity assumption. Solutio 1. n: True 2. True 3. False 4. False. Faithful representation, not relevance, means that financial information matches what really happened; the information is factual. 5. True Copyright ©2018 John Wiley & Sons, 22 Inc. The Accounting Equation (1 of 6) Basic Accounting Equation Provides underlying framework for recording and summarizing economic events Assets are claimed by either creditors or owners If a business is liquidated, claims of creditors must be paid before ownership claims Copyright ©2018 John Wiley & Sons, 23 Inc. The Accounting Equation (2 of 6) Assets Resources a business owns Provide future services or benefits Cash, Supplies, Equipment, etc. Copyright ©2018 John Wiley & Sons, 24 Inc. The Accounting Equation (3 of 6) Liabilities Claims against assets (debts and obligations) Creditors (party to whom money is owed) Accounts Payable, Notes Payable, Salaries and Wages Payable, etc. Copyright ©2018 John Wiley & Sons, 25 Inc. The Accounting Equation (4 of 6) Owner’s Equity Ownership claim on total assets Referred to as residual equity Investment by owners and revenues increases owner's equity Drawings and expenses decreases owner's equity Copyright ©2018 John Wiley & Sons, 26 Inc. The Accounting Equation (5 of 6) Increase in Owner’s Equity Investment by Owner. Assets the owner puts into the business Revenues. Increases in assets or decreases in liabilities resulting from sale of goods or performance of services in normal course of business Copyright ©2018 John Wiley & Sons, 27 Inc. The Accounting Equation (6 of 6) Decrease in Owner’s Equity Drawings. A withdraw of cash or other assets for personal use Expenses. Cost of assets consumed or services used in the process of earning revenue Copyright ©2018 John Wiley & Sons, 28 Inc. Do It! 3: Owner’s Equity Effects Classify the following items as investment by owner (I), owner’s drawings (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases owner’s equity. Effect Classification on Equity 1. Rent Expense Expense Decrease 2. Service Revenue Revenue Increase Owner’s 3. Drawings Decrease Drawings 4. Salaries and Wages Expense Expense Decrease Copyright ©2018 John Wiley & Sons, 29 Inc. Analyzing Business Transactions (1 of 2) Transactions are a business’s economic events recorded by accountants. May be external or internal Not all activities represent transactions Have a dual effect on the accounting equation Copyright ©2018 John Wiley & Sons, 30 Inc. Analyzing Business Transactions (2 of 2) Illustration: Are the following events recorded in the accounting records? Copyright ©2018 John Wiley & Sons, 31 Inc. Transaction Analysis (1 of 10) Transaction 1. Ray Neal decides to start a smartphone app development company which he names Softbyte. On September 1, 2020, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity. Copyright ©2018 John Wiley & Sons, 32 Inc. Transaction Analysis (2 of 10) Transaction 2. Softbyte purchases computer equipment for $7,000 cash. Copyright ©2018 John Wiley & Sons, 33 Inc. Transaction Analysis (3 of 10) Transaction 3. Softbyte Inc. purchases for $1,600 headsets and other computer accessories expected to last several months. The supplier allows Softbyte to pay this bill in October. Copyright ©2018 John Wiley & Sons, 34 Inc. Transaction Analysis (4 of 10) Transaction 4. Softbyte receives $1,200 cash from customers for app development services it has performed. Copyright ©2018 John Wiley & Sons, 35 Inc. Transaction Analysis (5 of 10) Transaction 5. Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. Copyright ©2018 John Wiley & Sons, 36 Inc. Transaction Analysis (6 of 10) Transaction 6. Softbyte performs $3,500 of app development services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account. Copyright ©2018 John Wiley & Sons, 37 Inc. Transaction Analysis (7 of 10) Transaction 7. Softbyte pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. Copyright ©2018 John Wiley & Sons, 38 Inc. Transaction Analysis (8 of 10) Transaction 8. Softbyte pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable and a decrease in owner’s equity. Copyright ©2018 John Wiley & Sons, 39 Inc. Transaction Analysis (9 of 10) Transaction 9. Softbyte receives $600 in cash from customers who had been billed for services (in Transaction 6). Copyright ©2018 John Wiley & Sons, 40 Inc. Transaction Analysis (10 of 10) Transaction 10. Ray Neal withdraws $1,300 in cash in cash from the business for his personal use. Copyright ©2018 John Wiley & Sons, 41 Inc. Summary of Transactions 1. Each transaction analyzed in terms of effect on:components of basic a. Three accounting equation Assets Liabilities Owner’s equity b. Specific types of items, such as Cash 2. Two sides of equation must always be equal 3. The Owner’s Capital, Owner’s Drawings, Revenues, and Expenses columns indicate the cause of each change in the owner’s claim on assets. Copyright ©2018 John Wiley & Sons, 42 Inc. Do It! 4: Tabular Analysis (1 of 6) Transactions made by Virmari & Co., a public accounting firm, for the month of August are shown below. Prepare a tabular analysis which shows the effects of these transactions on the expanded accounting equation, similar to that shown in Illustration 1.8. 1. The owner invested $25,000 cash in the business. 2. The company purchased $7,000 of office equipment on credit. 3. The company received $8,000 cash in exchange for services performed. 4. The company paid $850 for this month’s rent. Copyright ©2018 John Wiley & Sons, 5. The owner withdrew $1,000 Inc. cash for personal use. 43 Do It! 4: Tabular Analysis (2 of 6) Transaction 1. The owner invested $25,000 cash in the business. Copyright ©2018 John Wiley & Sons, 44 Inc. Do It! 4: Tabular Analysis (3 of 6) Transaction 2. The company purchased $7,000 of office equipment on credit. Copyright ©2018 John Wiley & Sons, 45 Inc. Do It! 4: Tabular Analysis (4 of 6) Transaction 3. The company received $8,000 cash in exchange for services performed. Copyright ©2018 John Wiley & Sons, 46 Inc. Do It! 4: Tabular Analysis (5 of 6) Transaction 4. The company paid $850 for this month’s rent. Copyright ©2018 John Wiley & Sons, 47 Inc. Do It! 4: Tabular Analysis (6 of 6) Transaction 5. The owner withdrew $1,000 cash for personal use. Copyright ©2018 John Wiley & Sons, 48 Inc. The Four Financial Statements Copyright ©2018 John Wiley & Sons, 49 Inc. Financial Statements (1 of 7) 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 Copyright ©2018 John Wiley & Sons, 50 Inc. Financial Statements (2 of 7) Net income will result during a time period when: a. assets exceed liabilities b. assets exceed revenues c. expenses exceed revenues d. Answer: revenues exceed expenses Copyright ©2018 John Wiley & Sons, 51 Inc. Financial Statements (3 of 7) Softbyte statements for the Month Ended September 30, 2020 Copyright ©2018 John Wiley & Sons, 52 Inc. Financial Statements (4 of 7) Softbyte statements for the Month Ended September 30, 2020 Copyright ©2018 John Wiley & Sons, 53 Inc. Financial Statements (5 of 7) Softbyte statements for the Month Ended September 30, 2020 Copyright ©2018 John Wiley & Sons, 54 Inc. Income Statement Reports revenues and expenses for a specific period of time Lists revenues first, followed by expenses Shows net income (or net loss) Does not include investment and withdrawal transactions between owner and business in measuring net income Copyright ©2018 John Wiley & Sons, 55 Inc. Owner’s Equity Statement Reports changes in owner’s equity for a specific period of time Time period is the same as that covered by the income statement Copyright ©2018 John Wiley & Sons, 56 Inc. Balance Sheet Reports assets, liabilities, and owner’s equity at a specific date Lists assets at top, followed by liabilities and owner’s equity Total assets must equal total liabilities and owner's equity Snapshot of company’s financial condition at a specific moment in time (usually month- end or year-end) Copyright ©2018 John Wiley & Sons, 57 Inc. Statement of Cash Flows Provides information on cash receipts and payments for a specific period of time Answers the following: o Where did cash come from during the period? o What was cash used for during the period? o What was the change in the cash balance during the period? Copyright ©2018 John Wiley & Sons, 58 Inc. Financial Statements (6 of 7) 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 Copyright ©2018 John Wiley & Sons, 59 Inc. Financial Statements (7 of 7) Which of the following financial statements is prepared as of a specific date? a. Answer: Balance sheet b. Income statement c. Owner’s equity statement d. Statement of cash flows Copyright ©2018 John Wiley & Sons, 60 Inc. Do It! 5: Financial Statement Items (1 of 4) Presented below is selected information related to Flanagan Company at December 31, 2020. Flanagan reports financial information Equipment monthly. 10,000 Utilities Expense 4,000 Cash 8,000 Accounts Receivable 9,000 Salaries and Wages Service Revenue 36,000 7,000 Expense Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 a. Determine the total assets of Flanagan Company at December 31, 2020. b. Determine the net income that Flanagan Company reported for December 2020. c. Determine the owner’s equity of Flanagan Company at December 31, 2020. Copyright ©2018 John Wiley & Sons, 61 Inc. Do It! 5: Financial Statement Items (2 of 4) Presented below is selected information related to Flanagan Company at December 31, 2020. Flanagan reports financial information Equipment monthly. 10,000 Utilities Expense 4,000 Cash 8,000 Accounts Receivable 9,000 Salaries and Wages Service Revenue 36,000 7,000 Expense Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 a. Determine the total assets of Flanagan Company at December 31, 2020. Cas $ h Accounts 8,000 9,00 receivable Equipme 0 10,00 nt Total 0 $27,000 assets Copyright ©2018 John Wiley & Sons, 62 Inc. Do It! 5: Financial Statement Items (3 of 4) Presented below is selected information related to Flanagan Company at December 31, 2020. Flanagan reports financial information Equipment monthly. 10,000 Utilities Expense 4,000 Cash 8,000 Accounts Receivable 9,000 Salaries and Wages Service Revenue 36,000 7,000 Expense Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 b. Determine the net income that Flanagan Company reported for December 2020. Service $36,00 revenue Rent 011,00 expense Salaries and wages 07,00 expense Utilities 0 4,00 expense Net 0 $14,000 income Copyright ©2018 John Wiley & Sons, 63 Inc. Do It! 5: Financial Statement Items (4 of 4) Presented below is selected information related to Flanagan Company at December 31, 2020. Flanagan reports financial information Equipment monthly. 10,000 Utilities Expense 4,000 Cash 8,000 Accounts Receivable 9,000 Salaries and Wages Service Revenue 36,000 7,000 Expense Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000 c. Determine the owner’s equity of Flanagan Company at December Total31, 2020. $27,0 assets Less: Notes payable 00 16,50 expense Less: Accounts 02,00 payable Owner’s 0,500 $ 8 equity Copyright ©2018 John Wiley & Sons, 64 Inc. Appendix 1A: Career Opportunities in Accounting Public Accounting Private Accounting Careers in auditing, Careers in industry taxation, and working in cost management accounting, budgeting, consulting serving the accounting information general public. systems, and tax planning and Governmental Forensic preparation. Accounting Accounting Careers with the I RS, F Uses accounting, BI, the SEC, public auditing, and colleges and investigative skills to in ©2018 Johnconduct universities, and Copyright Wiley & Sons, 65 state and local Inc. investigations into Copyright Copyright © 2018 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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. Copyright ©2018 John Wiley & Sons, 66 Inc.