Accounting in Action PDF

Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Accounting in Action STUDY OBJECTIVES 1. EXPLAIN what ACCOUNTING is. 2. IDENTIFY THE USERS AND USES OF ACCOUNTING. 3. UNDER...

Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Accounting in Action STUDY OBJECTIVES 1. EXPLAIN what ACCOUNTING is. 2. IDENTIFY THE USERS AND USES OF ACCOUNTING. 3. UNDERSTAND WHY ETHICS IS A FUNDAMENTAL BUSINESS CONCEPT. 4. EXPLAIN THE MEANING OF GENERALLY ACCEPTED ACCOUNTING PRIN- CIPLES AND THE COST PRINCIPLE. 5. EXPLAIN THE MEANING OF THE MONETARY UNIT ASSUMPTION AND THE ECONOMIC ENTITY ASSUMPTION. 6. STATE THE BASIC ACCOUNTING EQUATION AND EXPLAIN THE MEANING OF ASSETS, LIABILITIES, AND OWNER’S EQUITY. 7. ANALYZE THE EFFECT OF BUSINESS TRANSACTIONS ON THE BASIC AC- COUNTING EQUATION. 8. UNDERSTAND what the FOUR FINANCIAL STATEMENTS are and HOW THEY ARE PREPARED. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 1 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Accounting Defined 1. (S.O. 1) Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users. a. The first part of the process, identifying, involves selecting those events that are con- sidered evidence of economic activity relevant to a particular business organization. b. Recording is the keeping of a chronological diary of events, measured in dollars and cents. c. Communication occurs through the preparation and distribution of accounting reports. 2. The accounting process consists of: Identification ‡ Recording ‡ Communication. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 2 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 3. (S.O. 2) Internal users of accounting information are managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance direc- tors, and company officers. 4. External users include investors, creditors, taxing authorities, regulatory agencies, labor unions, customers, and economic planners outside the business. 5. Bookkeeping is not the same as accounting. Bookkeeping involves only the recording of economic events, while accounting also includes identification, recording, and communica- tion. Bookkeeping is therefore only a part of accounting. 6. Accounting is also divided into financial versus managerial accounting. Financial account- ing is the field of accounting that provides economic and financial information for investors, creditors, and other external users. Managerial accounting provides economic and finan- cial information for managers and other internal users. The Accounting Profession 7. Public accounting provides the services of auditing, taxation, and management consulting. a. Auditing involves examining financial statements of companies and expressing an opinion as to the fairness of their presentation. b. Taxation includes providing tax advice and planning, preparing tax returns, and repre- senting clients before governmental agencies. c. Management consulting involves providing advice for managers on such matters as financial planning and control and the development of computer systems. 8. Private accounting involves the employment of accountants within individual companies. The private accountant performs a wide variety of duties such as general accounting, cost accounting, budgeting, accounting information systems, tax accounting, and internal audit- ing. 9. Not-for-profit accounting pertains to not-for-profit organizations such as governmental units, foundations, hospitals, colleges, universities, and charities. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 3 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Ethics 10. (S.O. 3) The standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics. The process of analyzing ethical issues is to recognize that an ethical issue is involved, identify and analyze the principle elements in the situation (especially those harmed or benefited), identify the alternatives and weigh the impact of each alternative on the various stakeholders, then select the most ethical alterna- tive. GAAP and the Cost Principle 11. (S.O. 4) Generally accepted accounting principles (GAAP) are a common set of guide- lines (standards) used by accountants in reporting economic events. 12. The Securities and Exchange Commission (SEC) is an independent regulatory agency of the government. The SEC has the legal power to enforce the form and content of financial statements of corporations that wish to sell securities to the public. 13. The Philippine Financial Reporting Standard Council (PFRSC) has been granted the power from the R.A. 9298 thru Philippine Professional Regulation Commission (PRC) Board of Accountancy (BOA) to establish GAAP. 14. Under the cost principle assets should be recorded at their cost. Cost is the value ex- changed at the time something is acquired. The Monetary Unit and Economic Entity Assumptions 15. (S.O. 5) The accounting profession has developed certain assumptions that serve as guide- lines for the accounting process. a. The monetary unit assumption requires that only transaction data that can be ex- pressed in terms of money be included in the accounting records. b. The economic entity assumption requires that the activities of the entity be kept sep- arate and distinct from (1) the activities of its owner and (2) all other economic entities. Business Enterprises Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 4 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 16. Three types of business enterprises are proprietorships, partnerships, and corporations. a. A proprietorship is a business owned by one person. b. A partnership is a business owned by two or more persons associated as partners. c. A corporation is a business organized as a separate legal entity under state corpora- tion law with ownership divided into transferable shares of stock. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 5 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Accounting Equation 17. (S.O. 6) The basic accounting equation is: Assets = Liabilities + Owner's Equity. The accounting equation applies to all economic entities regardless of size, nature of busi- ness, or form of business organization. 18. The key components of the basic accounting equation are: a. Assets are resources controlled (not necessarily owned) by a business b. Liabilities are claims against assets. c. Owner's equity is the claims of owners. 19. In proprietorships, there are four subdivisions of owner's equity: a. Investments by Owner are the assets put in the business by the owner. b. Revenues are the gross increases in owner's equity resulting from business activities entered into for the purpose of earning income. c. Drawings are withdrawals of cash or other assets by the owner for personal use. d. Expenses are the cost of assets consumed or services used in the process of earning revenue. 20. Revenues and expenses determine if a net income or net loss occurs as follows: a. Revenues > Expenses = Net Income. b. Revenues < Expenses = Net Loss. Transactions 21. (S.O. 7) Transactions are the economic events of the enterprise recorded. Transactions may be identified as either external or internal transactions. 22. Each transaction must be analyzed in terms of its effect on the components of the basic accounting equation. The analysis must also identify the specific items affected and the amount of the change in each item. 23. Each transaction has a dual effect on the equation. For example, if an individual asset is increased, there must be a corresponding: Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 6 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations a. decrease in another asset, or b. increase in a specific liability, or c. increase in owner's equity. 24. A tabular summary may be prepared to show the cumulative effect of transactions on the basic accounting equation. The summary demonstrates that: a. Each transaction must be analyzed in terms of its effect on (1) the three components of the equation and (2) specific types of items within each component. b. The two sides of the equation must always be equal. c. The causes of each change in the owner's claim on assets must be indicated in the owners' equity column. Recording transactions in transaction worksheet: Lee Chang enjoys listening to all types of music and owns countless CDs. Over the years, Lee has gained a local reputation for knowledge of music from classical to rap and the ability to put together sets of recordings that appeal to all ages. Dung the last several months, Lee served as a guest disc jockey on a local radio station. In addition, Lee has entertained at several friends’ parties as the host deejay. On June 1, 2010, Lee established a proprietorship known as Music Depot. Using an extensive collection of music CDs, Lee will serve as a disc jockey on a fee basis for weddings, college parties, and other events. During June, Lee entered into the following transactions: June 1 Deposited P8,000 in a checking account in the name of Music Depot. 2 Received P2,400 from a local radio station for serving as the guest disc jockey for June. 3 Agreed to share office space with a local real estate agency, Upstairs Realty. Music Depot will pay ¼ of the rent. In addition, Music Depot agreed to pay a portion of the salary of the receptionist and to pay one-fourth of the utilities. Paid P750 for the rent of the office. 4 Purchased supplies (blank CDs, poster board, extension cords, etc.) from City Office Supply Co. for P350. Agreed to pay P100 within 10 days and the remainder by July 5, 2010. 6 Paid P600 to a local radio station to advertise the services of Music Depot twice daily for two weeks. 8 Paid P500 to a local electronics store for renting digital recording equipment. 12 Paid P250 (music expense) to Cool Music for the use of its current music demos to make various music sets. 13 Paid City Office Supply Co. P100 on account. 16 Received P400 from a dentist for providing two music sets for the dentist to play for her patients. 22 Served as disk jockey for a wedding party. The father of the bride agreed to pay P1,350 the 1st of July. 25 Received P500 from a friend for serving as the disc jockey for a cancer charity ball hosted by the local hospital. 29 Paid P240 (music expense) to Galaxy Music for the use of its library of music demos. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 7 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 30 Received P1,000 for serving as disc jockey for a local club’s monthly dance. 30 Paid Upstairs Realty P400 for Music Depot’s share of the receptionists salary for June. 30 Paid Upstairs Realty P300 for Music Depot’s share of the utilities for June. 30 Determined that the cost of supplies on hand is P170. Therefore, the cost of supplies used during the month was P180. 30 Paid for miscellaneous expenses, P150. 30 Paid P800 royalties (music expense) to National Music Clearing for use of various artists’ music during the month. 30 Withdrew P200 of cash from Music Depot for personal use. INSTRUCTIONS 1. Indicate the effect of each transaction and the balances after each transaction in the transaction worksheet. 2. Prepare an income statement (statement of financial performance) for Music Depot for the month ended June 30, 2010. 3. Prepare statement of owner’s equity for Music Depot for the month ended June 30, 2010. 4. Prepare a balance sheet (statement of financial position) for Music Depot as of June 30, 2010. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 8  DATE ASSET LIABILITIES OWNER's EQUITY Office Equipment Accounts Accounts Chang, Chang, Fees Music Rent Rent Advertising Wages Utilities Supplies Misc. June Cash + Receivable + Supplies Payable + Capital - Draw ing + Earned - Expense - Expense - Expense - Expense - Expense - Expense - Expense - Expense 1 2 2 4 6 8 12 13 16 22 25 29 Accounting Process for Service Operations 30 30 30 30 Accounting 11A Financial Accounting and Reporting 30 30 30 Bal Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 9 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations The Financial Statements 25. (S.O. 8) Four financial statements are prepared from the summarized accounting data: a. An income statement presents the revenues and expenses and resulting net income (or net loss) for a specific period of time. b. An owner's equity statement summarizes the changes in owner's equity for a specific period of time. c. A balance sheet reports the assets, liabilities, and owner's equity at a specific date. d. A statement of cash flows summarizes information concerning the cash inflows (re- ceipts) and outflows (payments) for a specific period of time. 26. The financial statements are interrelated because: a. Net income (or net loss) shown on the income statement is added (subtracted) to (from) the beginning balance of owner's capital in the owner's equity statement. b. Owner's capital at the end of the reporting period shown in the owner's equity statement is reported in the balance sheet. c. The amount of cash shown on the balance sheet is reported on the statement of cash flows. 27. In the income statement, revenues are listed first, followed by expenses. Then below ex- penses is the resulting amount of net income (or net loss). MUSIC DEPOT Income Statement For the Month Ended June 30, 2010 Fees earned......................................................................................................... P5,650 Expenses: Music expense........................................................................................... P1,290 Office rent expense.................................................................................. 750 Advertising expense................................................................................. 600 Equipment rent expense......................................................................... 500 Wages expense......................................................................................... 400 Utilities expense......................................................................................... 300 Supplies expense...................................................................................... 180 Miscellaneous expense............................................................................ 150 Total expenses...................................................................................... 4,170 Net income.......................................................................................................... P 1,480 Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 10 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 28. The owner's equity statement shows the owner's capital at the beginning of the period, ad- ditional investments, net income (or net loss) for the period, owner's drawings, and the own- er's capital at the end of the period. MUSIC DEPOT Statement of Owner’s Equity For the Month Ended June 30, 2010 Lee Chang, capital, June 1, 2010..................................................................... P 0 Investment on June 1, 2010.............................................................................. P8,000 Net income for June.......................................................................................... 1,480 P9,480 Less withdrawals................................................................................................. 200 Increase in owner’s equity................................................................................ 9,280 Lee Chang, capital, June 30, 2010.................................................................. P9,280 29. In the balance sheet, assets are listed at the top, followed by liabilities and owner's equity. MUSIC DEPOT Balance Sheet June 30, 2010 Assets Liabilities Cash................................................. P8,010 Accounts payable....................... P 250 Accounts receivable..................... 1,350 Supplies........................................... 170 Owner’s Equity Lee Chang, capital..................... 9,280 Total liabilities and Total assets..................................... P9,530 owner’s equity....................... P9,530 30. The statement of cash flows reports the sources, uses, and net increase or decrease in cash. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 11 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations 20 MINUTE QUIZ Circle the correct answer. True/False 1. Accounting is the information system that identifies, records, and communicates the eco- nomic events of an organization to interested users. True False 2. Bookkeeping deals with the record-keeping process and is only one aspect of accounting. True False 3. Internal users are those who manage the business. True False 4. The Financial Accounting Standards Board is a private organization that establishes broad reporting guidelines of general applicability as well as specific accounting rules. True False 5. Certified Public Accountants are only permitted to prepare audit reports and tax returns. True False 6. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities. True False 7. Collection of an accounts receivable will increase both cash and accounts receivable. True False 8. An expense paid with cash would result in an equal decrease in liabilities and owner’s eq- uity. True False 9. Liabilities represent the ownership claim on total assets. True False 10. Net income is the excess of revenues over expenses for the accounting period. True False Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 12 Accounting 11A Financial Accounting and Reporting Accounting Process for Service Operations Multiple Choice 1. All of the following are external users of accounting information except a. labor unions. b. taxing authorities. c. regulatory agencies. d. company officers. 2. Recording consists of a. identifying and measuring economic events. b. preparing and distributing accounting reports. c. keeping a systematic, chronological diary of events, measured in dollars and cents. d. identifying, measuring, receiving, and communicating economic events to interested users. 3. Accounting for government, foundations, hospitals, labor unions, colleges/universities, and charities is part of which broad category within the accounting profession? a. Not-for-profit accounting b. Management consulting c. Public accounting d. Cost accounting 4. Which of the following is not an acceptable statement of the basic accounting equation? a. Assets – Liabilities = Owner’s equity b. Assets = Liabilities – Owner’s equity c. Assets = Liabilities + Owner’s equity d. Assets – Owner’s equity = Liabilities 5. The financial statement that summarizes information about the cash inflows and outflows during a period is the a. income statement. b. statement of retained earnings. c. balance sheet. d. statement of cash flows. Content is adopted from Warren, Reeve, Duchac (2009). Accounting. South-western Cengage Learning. Rey Joseph M. Redoblado | 13