Accounting in Business Chapter 1 PDF

Accounting in Business Chapter 1 Wild, Kwok, Venkatesh and Shaw Fundamental Accounting Principles 3rd Edition Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.  Chapter 1 Learning Objectives CONCEPTUAL C1 E...

Accounting in Business Chapter 1 Wild, Kwok, Venkatesh and Shaw Fundamental Accounting Principles 3rd Edition Copyright ©2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill.  Chapter 1 Learning Objectives CONCEPTUAL C1 Explain the purpose and importance of accounting. C2 Identify users and uses of, and opportunities in, accounting. C3 Explain why ethics are crucial to accounting. C4 Explain generally accepted accounting principles and define and apply several accounting principles. C5 Appendix 1B Identify and describe the three major activities of organizations. ANALYTICAL A1 Define and interpret the accounting equation and each of its components. A2 Compute and interpret return on assets. A3 Appendix 1A—Explain the relation between return and risk. PROCEDURAL P1 Analyze business transactions using the accounting equation. P2 Identify and prepare basic financial statements and explain how they interrelate. © McGraw Hill 2  Learning Objective C1 Explain the purpose and importance of accounting. © McGraw Hill 3  1-4 Importance of Accounting Exhibit 1.1 For example, the sale Keep a chronological Prepare reports such as by Apple of an iPhone. log of transactions. financial statements. Accounting is an information and measurement system that identifies, records, and communicates an organization’s business activities. © McGraw Hill 4 Learning Objective C1: Explain the purpose and importance of accounting.  Learning Objective C2 Identify users and uses of, and opportunities in, accounting. © McGraw Hill 5  1-6 Users of Financial Information Accounting is called the language of business because it communicates data that help people make better decisions. People using accounting information are divided into two groups: external users and internal users. Lenders Research and development managers External auditors Purchasing managers Shareholders Human resource managers Regulators Marketing managers Customers Production managers Distribution managers Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw Hill 6  1-7 Opportunities in Accounting Exhibit 1.2 Accounting information is in all aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we use accounting. Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw Hill 7  Learning Objective C3 Explain why ethics are crucial to accounting. © McGraw Hill 8  1-9 Ethics – A Key Concept Exhibit 1.3 For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. Learning Objective C3: Explain why ethics are crucial to accounting. © McGraw Hill 9  1 - 10 Fraud Triangle Exhibit 1.4 Three factors push a person to commit fraud: opportunity, pressure, and rationalization. © McGraw Hill 10 Learning Objective C3: Explain why ethics are crucial to accounting.  Learning Objective C4 Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw Hill 11  1 - 12 Generally Accepted Accounting Principles (GAAP) Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP). GAAP wants information to have relevance and faithful representation. © McGraw Hill 12 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.  1 - 13 International Standards Our global economy demands comparability in accounting reports. International Accounting Standards Board (IASB) Issues International Financial International Financial Reporting Standards (IFRS) Reporting Standards (IFRS) Identifies preferred accounting practices © McGraw Hill 13 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.  1 - 14 Principles, Assumptions and Constraint Exhibit 1.5 General principles are the Specific principles are detailed rules assumptions, concepts, and used in reporting business guidelines for preparing financial transactions and events. statements. © McGraw Hill 14 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.  1 - 15 Accounting Principles Measurement Principle Revenue Recognition Principle (Cost Principle) 1. recognize revenue when goods or Accounting information is based on services are provided to customers actual cost. Information based on and cost is considered objective. 2. at an amount expected to be received from the customer. Expense Recognition Principle Full Disclosure Principle (Matching Principle) A company reports the details behind A company records its expenses financial statements that would impact incurred to generate the revenue users’ decisions in the notes to the reported. financial statements. © McGraw Hill 15 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.  1 - 16 Accounting Assumptions Going-Concern Assumption Monetary Unit Assumption The business is presumed to Transactions and events are continue operating instead of being expressed in monetary, or money, closed or sold. units. Business Entity Assumption Time Period Assumption A business is accounted for The life of a company separately from other business can be divided into time periods, entities, including its owner. such as months and years. © McGraw Hill 16 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.  Accounting Constraint Cost-benefit Only information with benefits of disclosure greater than their cost need to be disclosed. Materiality Only information that would influence the decisions of a reasonable person need to be disclosed. © McGraw Hill 17 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. Qualitative Characteristics Exhibit 1.6 © McGraw Hill 18  1 - 19 Learning Objective A1 Define and interpret the accounting equation and each of its components. © McGraw Hill 19  1 - 20 Business Transaction and Accounting The Accounting Equation Assets = Liabilities + Equity Expanded Accounting Equation: © McGraw Hill 20 Learning Objective A1: Define and interpret the accounting equation and each of its components.  1 - 21 Learning Objective P1 Analyze business transactions using the accounting equation. © McGraw Hill 21  1 - 22 Transaction 1: Investment by Owner Chas Taylor invests $30,000 cash to start a business named FastFoward. The accounts involved are: (1) Cash (asset) (2) C. Taylor, Capital (equity) © McGraw Hill 22 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 23 Transaction 1 Chas Taylor invests $30,000 cash to start the business, Fast Forward. © McGraw Hill 23 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 24 Transaction 2: Purchase Supplies for Cash Company purchases supplies by paying $2,500 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) © McGraw Hill 24 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 25 Transaction 2 Company purchases supplies by paying $2,500 cash. © McGraw Hill 25 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 26 Transaction 3: Purchase Equipment for Cash Purchases equipment for $26,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) © McGraw Hill 26 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 27 Transaction 3 Purchases equipment for $26,000 cash. © McGraw Hill 27 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 28 Transaction 4: Purchase Supplies on Credit Purchases supplies of $7,100 on credit. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) © McGraw Hill 28 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 29 Transaction 4 Purchases Supplies of $7,100 on credit. © McGraw Hill 29 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 30 Transaction Analysis: Revenues, Expenses and Withdrawals Now, let’s look at transactions involving revenues, expenses and withdrawals. © McGraw Hill 30 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 31 Transaction 5: Provide Services for Cash Provides consulting services to a customer and receives $4,200 cash right away. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) © McGraw Hill 31 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 32 Transaction 5 Provides consulting services to a customer and receives $4,200 cash right away. © McGraw Hill 32 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 33 Transactions 6 and 7: Payment of Expenses in Cash Pays rent of $1,000 and salaries of $700 to employees. The accounts involved are: (1) Cash (asset) (2) Rent expense (equity) (3) Salaries expense (equity) Remember that the balances in the Expense accounts actually increase. But total Equity decreases, because expenses reduce equity. © McGraw Hill 33 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 34 Transactions 6 and 7 Pays rent of $1,000 and salaries of $700 to employees. © McGraw Hill 34 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 35 Transaction 8: Provide Services and Facilities for Credit Provides consulting services of $1,600 and rents facilities for $300 to a customer for credit. The accounts involved are: (1) Accounts receivable (asset) (2) Consulting Revenues (equity) (3) Rental Revenue (equity) © McGraw Hill 35 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 36 Transaction 8 Provides consulting services of $1,600 and rents facilities for $300 to a customer for credit. © McGraw Hill 36 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 37 Transaction 9: Receipt of Cash from Accounts Receivable Client in transaction 8 pays $1,900 for consulting services. The accounts involved are: (1) Cash (asset) (2) Accounts receivable (asset) © McGraw Hill 37 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 38 Transaction 9 Client in transaction 8 pays $1,900 for consulting services. © McGraw Hill 38 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 39 Transaction 10: Payment of Accounts Payable FastForward pays $900 as partial payment for supplies purchased in transaction 4. The accounts involved are: (1) Cash (asset) (2) Accounts payable (liability) © McGraw Hill 39 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 40 Transaction 10 FastForward pays $900 as partial payment for supplies purchased in transaction 4. © McGraw Hill 40 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 41 Transaction 11: Withdrawal of Cash by Owner Owner withdraws $200 cash for personal use. The accounts involved are: (1) Cash (asset) (2) C. Taylor, Withdrawals (equity) Remember that the Withdrawals account actually increases (just like our Expense accounts) But total Equity decreases because withdrawals cause equity to go down!! © McGraw Hill 41 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 42 Transaction 11 Owner withdraws $200 cash for personal use. © McGraw Hill 42 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 43 Summary of Transactions Exhibit 1.7 © McGraw Hill 43 Learning Objective P1: Analyze business transactions using the accounting equation.  1 - 44 Learning Objective P2 Identify and prepare basic financial statements and explain how they interrelate. © McGraw Hill 44  1 - 45 Financial Statements © McGraw Hill Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.  1 - 46 Exhibit 1.8: Financial Statements and Their Links © McGraw Hill 46 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.  1 - 47 Learning Objective A2 Compute and interpret return on assets. © McGraw Hill 47  1 - 48 Return on Assets Return on assets (ROA) is stated in ratio form as net profit divided by the average total assets invested. Net Profit Exhibit Return on assets = 1.9 Average total assets Where Average total assets = (Beginning total assets + Ending total assets) / 2 Exhibit 1.10 © McGraw Hill 48 Learning Objective A2: Compute and interpret return on assets.  1 - 49 Learning Objective A3 Appendix 1A Explain the relation between return and risk. © McGraw Hill 49  1 - 50 Appendix 1A Return and Risk Analysis Many different Exhibit Risk is the uncertainty about 1A.1 returns may be the return we will earn. reported. The lower the risk, the lower our expected return. ROA Interest return on savings accounts. Interest return on corporate bonds. © McGraw Hill 50 Learning Objective A3: Explain the relation between return and risk.  1 - 51 Learning Objective C5 Appendix 1B Identify and describe the three major activities of organizations. © McGraw Hill 51  1 - 52 Activities of Organizations Exhibit 1B.1 © McGraw Hill 52 Learning Objective C5: Identify and describe the three major activities of organizations.  1 - 53 Financing Activities One of the three major types of business activities: Financing activities provide the means organizations use to pay for assets such as land, buildings, and equipment.  Owner financing—resources contributed by the owner along with any profit the owner leaves in the organization.  Nonowner financing—resources loaned by creditors (lenders). © McGraw Hill 53 Learning Objective C5: Identify and describe the three major activities of organizations.  1 - 54 Investing Activities One of the three major types of business activities: Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.  Assets—invested amounts.  Liabilities—creditors’ claims.  Equity—owner’s claim. © McGraw Hill 54 Learning Objective C5: Identify and describe the three major activities of organizations.  1 - 55 Operating Activities One of the three major types of business activities: Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. © McGraw Hill 55 Learning Objective C5: Identify and describe the three major activities of organizations.  1 - 56 End of Chapter 1 © McGraw Hill 56