Session 4-5-Accounting in Action

Course
: F0005 - Business Environment & Principles of
Year
Accounting & Finance

: September 2013
ACCOUNTING IN ACTION
Session 4-5
Slide
1-3
Chapter
Accounting in Action
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
1-4
Study
Study Objectives
Objectives
Slide
1-5
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.
Accounting
Accounting in
in Action
Action
What is
Accounting?
Three
activities
Who uses
accounting
data?
Slide
1-6
The Building
Blocks of
Accounting
Ethics in
financial
reporting
Accounting
standards
Assumptions
The Basic
Accounting
Equation
Assets
Liabilities
Equity
Using the
Accounting
Equation
Transaction
analysis
Summary of
transactions
Financial
Statements
Income
statement
Retained
earnings
statement
Statement of
financial
position
Statement of
cash flows
What
What is
is Accounting?
Accounting?
The purpose of accounting:
Slide
1-7
(1)
to identify,
identify record,
record and communicate the economic events of an
(2)
organization to
(3)
interested users.
SO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Three Activities
Illustration 1-1
The activities of the
accounting process
The accounting process includes

the bookkeeping function.
Slide
1-8
SO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Who Uses Accounting Data
External Users
Internal Users
Human
Resources
Taxing
Authorities
Labor
Unions
Finance
Management
Customers
Creditors
Marketing
Slide
1-9
Regulatory
Agencies
Investors
SO 2 Identify the users and uses of accounting.
What
What is
is Accounting?
Accounting?
Common Questions Asked
Slide
1-10
User
1. Can we afford to give our

employees a pay raise?
Human Resources
2. Did the company earn a

satisfactory income?
Investors
3. Should any product lines be

eliminated?
Management
4. Is cash sufficient to pay

dividends to shareholders?
Finance
5. What price for our product will

maximize net income?
Marketing
6. Will the company be able to

pay its debts?
Creditors
SO 2 Identify the users and uses of accounting.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting
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.
Slide
1-11
SO 3 Understand why ethics is a fundamental business concept.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Ethics In Financial Reporting
Slide
1-12
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Review Question
Ethics are the standards of conduct by which one's actions are judged as:
Slide
1-13
a.
right or wrong.
b.
honest or dishonest.
c.
fair or not fair.
d.
all of these options.
Solution on
notes page
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Accounting Standards
International Accounting Standards Board (IASB)
http://www.iasb.org/
International Financial Reporting Standards (IFRS)
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
Generally Accepted Accounting Principles (GAAP)
Slide
1-14
SO 4 Explain accounting standards and the measurement principles.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Measurement Principles
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.
Slide
1-15
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Measurement Principles
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.
Slide
1-16
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Assumptions
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.
Forms of Business
Ownership
Corporation.
Slide
1-17
SO 5 Explain the monetary unit assumption and the economic entity assumption.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Proprietorship
Slide
1-18
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Ownership divided
into shares
Often small
service-type
businesses
Often retail and

service-type
businesses
Owner receives
any profits, suffers
any losses, and is
personally liable for
all debts.
Generally unlimited
personal liability
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Review Question
Combining the activities of Kellogg and General Mills would violate the
Slide
1-19
a.
cost principle.
b.
economic entity assumption.
c.
monetary unit assumption.
d.
ethics principle.
Solution on
notes page
SO 5 Explain the monetary unit assumption

and the economic entity assumption.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Review Question
A business organized as a separate legal entity under state law having ownership divided into shares is a
Slide
1-20
a.
proprietorship.
b.
partnership.
c.
corporation.
d.
sole proprietorship.
Solution on
notes page

The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Indicate whether each of the following
statements presented below is true or false.
Slide
1-21
1. The three steps in the accounting process are

identification, recording, and communication.
True
2. The two most common types of external users

are investors and company officers.
False
3. Shareholders in a corporation enjoy limited legal

liability as compared to partners in a partnership.
True
Solution on
notes page

The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Indicate whether each of the following
statements presented below is true or false.
4. The primary accounting standard-setting body
outside the United States is the International
Accounting 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.
Slide
1-22
Solution on
notes page
True
False

Slide
1-23
Answer on notes page
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Assets
Liabilities
Liabilities
Equity
Equity
+
Provides the underlying framework for recording and summarizing economic events.
Applies to all economic entities regardless of size.
Slide
1-24
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Assets
Liabilities
Liabilities
Equity
Equity
+
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.
Slide
1-25
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Assets
Liabilities
Liabilities
Equity
Equity
+
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Slide
1-26
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Assets
Liabilities
Liabilities
Equity
Equity
+
Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital and retained earnings.
Slide
1-27
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Illustration 1-7
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.
Slide
1-28
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Illustration 1-7
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.
Slide
1-29
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Illustration 1-7
Dividends are the distribution of cash or other assets to shareholders.

Reduce retained earnings
Not an expense
Slide
1-30
SO 6
The
The Basic
Basic Accounting
Accounting Equation
Equation
Classify the following items as issuance of
shares, dividends, revenues, or expenses.
Then indicate whether each item increases or decreases equity.
Classification
Slide
1-31
Effect on Equity
1. Rent expense
Expense
Decrease
2. Service revenue
Revenue
Increase
3. Dividends
Dividends
Decrease
4. Salaries expense
Expense
Decrease
Solution on
notes page
SO 6
Using
Using The
The Accounting
Accounting Equation
Equation
Transactions are a businesss economic events recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting
equation.
Slide
1-32
SO 7
Analyze the effects of business transactions on the accounting equation.
Using
Using The
The Accounting
Accounting Equation
Equation
Illustration: Are the following events recorded in the accounting records?
Purchase
computer.
Event
Discuss
product
design with
customer.
Illustration 1-8
Pay rent.
Is the financial position (assets, liabilities, or

equity) of the company changed?
Criterion
Record/ Dont Record
Slide
1-33
SO 7
Using
Using The
The Accounting
Accounting Equation
Equation
Transaction Analysis
Slide
1-34
SO 7
Transactions
Transactions Analysis
Analysis
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:
Slide
1-35
Solution on
notes page
SO 7
Analyze the effects of business transactions

on the accounting equation.
Transactions
Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.
Slide
1-36
Solution on
notes page
SO 7

Transactions
Analysis
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.
Slide
1-37
Solution on
notes page
SO 7

Transactions
Analysis
Transaction (4). Services Provided for Cash. Softbyte
receives $1,200 cash from customers for programming services
it has provided.
Slide
1-38
Solution on
notes page
SO 7

Transactions
Analysis
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.
Slide
1-39
Solution on
notes page
SO 7

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.
Slide
1-40
Solution on
notes page
SO 7

Transactions
Analysis
Transaction (7). Payment of Expenses. Softbyte pays the
following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.
Slide
1-41
Solution on
notes page
SO 7

Transactions
Analysis
Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.
Slide
1-42
Solution on
notes page
SO 7

Transactions
Analysis
Transaction (9). Receipt of Cash on Account. Softbyte
receives $600 in cash from customers who had been billed for
services [in Transaction (6)].
Slide
1-43
Solution on
notes page
SO 7

Transactions
Analysis
Transaction (10). Dividends. The corporation pays a dividend
of $1,300 in cash.
Slide
1-44
Solution on
notes page
SO 7

Transactions
Analysis
Summary of Transactions
Slide
1-45
SO 7
Illustration 1-10
Tabular summary of
Softbyte transactions
Financial
Financial Statements
Statements
Companies
Companiesprepare
preparefour
fourfinancial
financialstatements
statementsfrom
fromthe
thesummarized
summarizedaccounting
accountingdata:
data:
Income Statement
Slide
1-46
Retained Earnings
Statement
Statement of Financial
Position
Statement of Cash
Flows
SO 8 Understand the four financial statements and how they are prepared.
Financial
Statements
Review Question
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.
Solution on
notes page
Slide
1-47
Financial
Statements
Income Statement
Reports the revenues and expenses for a specific period of time.

Net income revenues exceed expenses.
Illustration 1-11
Financial statements and
Net loss expenses exceed revenues.
their interrelationships
Slide
1-48
Financial
Statements
Net income is needed to determine the

ending balance in retained earnings.
Illustration 1-11
Slide
1-49
SO 8
Financial
Statements
Statement indicates the reasons why

retained earnings has increased or
decreased during the period.
Slide
1-50
Retained Earnings
Statement
Illustration 1-11
Financial
Financial
Statements
Statements
The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial position
Illustration 1-11
Slide
1-51
Financial
Statements
Balance Sheet
Illustration 1-11
Slide
1-52
Financial
Financial
Statements
Statements
Illustration 1-11
Slide
1-53
Financial
Statements
Statement of Cash Flows
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?
Slide
1-54
Financial
Statements
Statement of Cash Flows

Illustration 1-11
Slide
1-55
Answer on
notes page
Slide
1-56
Financial
Statements
Review Question
Which of the following financial statements is prepared as of a specific date?
a.
Balance sheet.
b.
Income statement.
c.
Retained earnings statement.
d.
Statement of cash flows.
Solution on
notes page.
Slide
1-57
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
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.
Slide
1-58
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
IFRS tends to be less detailed in its 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.
Slide
1-59
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences
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.
Slide
1-60
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future
Both the IASB and the FASB are hard at work developing standards
that will lead to the elimination of major differences 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.
Slide
1-61
Career
Career Opportunities
Opportunities
APPENDIX
Public accounting
Government
Private accounting
Forensic accounting
Show me the Money
Slide
1-62
SO 9 Explain the career opportunities in accounting.
Copyright
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright 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.
Slide
1-63
Board Financial Reporting Standards

Compiler
1. IASB (International Accounting Standard Board)
compile IFRS (International Accounting Reporting
Standard)
2. FASB (Financial Accounting
compile USGAAP (United
Accounting Principle)
Standard Board)
State Generally
3. IAI (Ikatan Akuntan Indonesia) compile

(Standar Akuntansi Keuangan)
Bina Nusantara University
SAK
64
Comparative Presentation of Financial

Statements
Components of general purpose financial statements
according to IFRS (IAS 1):
1.Statement of financial position (balance sheet)
2.Statement of comprehensive income
3.Statement of changes in equity
4.Statement of cash flows
5.Significant accounting policies
6.Note to the financial statements
7.Voluntary
disclosures:
financial
review
by
management, environmental report, value added
statement
65
According SAK (PSAK NO. 1):

1. Laporan posisi keuangan (neraca) pada akhir periode,
2. Laporan laba rugi komprehensif selama periode,
3. Laporan perubahan ekuitas selama periode,
4. Laporan arus kas selama periode,
5. Catatan atas laporan keuangan, berisi ringkasan
kebijakan akuntansi penting dan informasi penjelasan
lain, dan
6. Laporan posisi keuangan pada awal periode komparatif
yang disajikan ketika entitas menerapkan suatu kebijakan
akuntansi secara retrospektif atau membuat penyajian
kembali pos-pos laporan keuangan, atau ketika entitas
mereklasifikasikan pos-pos dalam laporan keuangannya.
66
According USGAAP:
1.Balance Sheet
2.Income Statement
3.Statement of Owners Equity
4.Statement of Cash Flows
5.Note Disclosure
67

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Course

: F0005 - Business Environment & Principles of

Accounting & Finance

Explain what accounting is.

Identify the users and uses of accounting.

Understand why ethics is a fundamental business concept.

Explain accounting standards and the measurement principles.

Explain the monetary unit assumption and the economic entity

State the accounting equation, and define its components.

Analyze the effects of business transactions on the accounting

Understand the four financial statements and how they are

SO 1 Explain what accounting is.

The accounting process includes

SO 1 Explain what accounting is.

SO 2 Identify the users and uses of accounting.

1. Can we afford to give our

2. Did the company earn a

3. Should any product lines be

4. Is cash sufficient to pay

5. What price for our product will

6. Will the company be able to

SO 2 Identify the users and uses of accounting.

Recent financial scandals include: Enron (USA),

SO 3 Understand why ethics is a fundamental business concept.

SO 3 Understand why ethics is a fundamental business concept.

fair or not fair.

all of these options.

SO 3 Understand why ethics is a fundamental business concept.

Financial Accounting Standards Board (FASB)

SO 4 Explain accounting standards and the measurement principles.

SO 4 Explain accounting standards and the measurement principles.

SO 4 Explain accounting standards and the measurement principles.

Often retail and

economic entity assumption.

monetary unit assumption.

SO 5 Explain the monetary unit assumption

SO 5 Explain the monetary unit assumption

1. The three steps in the accounting process are

2. The two most common types of external users

3. Shareholders in a corporation enjoy limited legal

SO 5 Explain the monetary unit assumption

SO 5 Explain the monetary unit assumption

Answer on notes page

State the accounting equation, and define its components.

State the accounting equation, and define its components.

State the accounting equation, and define its components.

State the accounting equation, and define its components.

State the accounting equation, and define its components.

Expenses are the cost of assets consumed or services used in the

State the accounting equation, and define its components.

Dividends are the distribution of cash or other assets to shareholders.

State the accounting equation, and define its components.

State the accounting equation, and define its components.

Analyze the effects of business transactions on the accounting equation.

Is the financial position (assets, liabilities, or

Record/ Dont Record

Analyze the effects of business transactions on the accounting equation.

Analyze the effects of business transactions on the accounting equation.

Analyze the effects of business transactions

Analyze the effects of business transactions

Analyze the effects of business transactions

Analyze the effects of business transactions

Analyze the effects of business transactions

Analyze the effects of business transactions