1-1
CHAPTER 1
ACCOUNTING IN
ACTION
Chapter
1-2
Study
Study Objectives
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 generally accepted accounting principles and the
cost principle.
5. Explain the monetary unit assumption and the economic
entity assumption.
6. State the accounting equation, and define assets, liabilities,
and owners equity.
7. Analyze the effects of business transactions on the
accounting equation.
8. Understand the four financial statements and how they are
prepared.
Chapter
1-3
Accounting
Accounting in
in Action
Action
The Using
Using the
the
What The Building
Building The
The Basic
Basic
What is
is Blocks
Basic
Basic Financial
Financial
Blocks of
of Accounting
Accounting Accounting
Accounting? Accounting Statements
Accounting
Accounting Equation
Equation Equation
Equation
Chapter
1-4
What
What is
is Accounting?
Accounting?
Chapter
1-5 LO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Three Activities
Illustration 1-1
Accounting process
Chapter
1-6 LO 1 Explain what accounting is.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Management IRS
Human Investors
Resources
Labor
Unions
Finance Common Questions
Creditors
Marketing
SEC
Customers External
Users
Chapter
1-7 LO 2 Identify the users and uses of accounting.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Common Questions Asked User
1. Can we afford to give our
Human Resources
employees a pay raise?
2. Did the company earn a
Investors
satisfactory income?
3. Do we need to borrow in the
near future? Management
Discussion Question
Q1. Accounting is ingrained in our society and it is
vital to our economic system. Do you agree? Explain.
Chapter
1-11 LO 3 Understand why ethics is a fundamental business concept .
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Financial Statements
Various users Balance Sheet
need financial Income Statement
Statement of Owners Equity
information Statement of Cash Flows
Note Disclosure
Chapter
1-12 LO 4 Explain generally accepted accounting principles and the cost principle.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard Setting:
Chapter
1-13 LO 4 Explain generally accepted accounting principles and the cost principle.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Chapter
1-14 LO 4 Explain generally accepted accounting principles and the cost principle.
Assumptions
Assumptions
Assets
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
Chapter LO 6 State the accounting equation, and define
1-20
assets, liabilities, and owners equity.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
Chapter LO 6 State the accounting equation, and define
1-21
assets, liabilities, and owners equity.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Owners Equity
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or
Partnership).
Chapter LO 6 State the accounting equation, and define
1-22
assets, liabilities, and owners equity.
Owners
Owners Equity
Equity
Illustration 1-6
Record/
Dont Record
Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in her business, Kings
Pharmacy, which is organized as a proprietorship.
Kings accountant, Lance Jones, recorded this
receipt as an increase in cash and revenues. Is
this treatment appropriate? Why or why not?
Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:
Owners Statement
Income Balance
Equity of Cash
Statement Sheet
Statement Flows
Chapter
1-37 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Review Question
Chapter
1-38 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Income Statement
Barones Repair Shop Reports the revenues
Income Statement
For the Month Ended May 31, 2007
and expenses for a
Revenues:
specific period of time.
Service revenue $ 5,850
Expenses: Net income revenues
Salary expense 2,000 exceed expenses.
Rent expense 400
Advertising expense 250
Total expenses 2,650 Net loss expenses
Net income $ 3,200 exceed revenues.
Chapter
1-39 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Owners Equity
Income Statement Statement
Barones Repair Shop Barones Repair Shop
Income Statement Owners' Equity Statement
For the Month Ended May 31, 2007 For the Month Ended May 31, 2007
Chapter
1-41 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Owners Equity
Balance Sheet Statement
Barones Repair Shop
Barones Repair Shop
Balance Sheet
Owners' Equity Statement
May 31, 2007
For the Month Ended May 31, 2007
Assets
Cash $ 6,820 Barone's, Capital May 1 $ -
Accounts receivable 630 Add: Investment 10,000
Equipment 5,000 Net income 3,200
Total assets $ 12,450 13,200
Liabilities Less: Drawings 1,000
Accounts payable $ 250 Barone's, Capital May 31 $ 12,200
Owners' Equity
Barone's, capital 12,200
Total liab. & equity $ 12,450 The ending balance in owners equity is
needed in preparing the balance sheet
Chapter
1-42 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Balance Sheet
Reports the assets,
Barones Repair Shop
Balance Sheet liabilities, and owners
May 31, 2007 equity at a specific date.
Assets
Cash
Accounts receivable
$ 6,820
630
Assets listed at the top,
Equipment 5,000 followed by liabilities
Total assets $ 12,450
Liabilities
and owners equity.
Accounts payable $ 250
Owners' Equity Total assets must equal
Barone's, capital 12,200 total liabilities and
Total liab. & equity $ 12,450
owners equity.
Chapter
1-43 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Statement of Cash Flows
Balance Sheet
Barones Repair Shop
Barones Repair Shop Statement of Cash Flows
Chapter
1-44 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Information for a
Statement of Cash Flows
specific period of time. Barones Repair Shop
Statement of Cash Flows
For the Month Ended May 31, 2007
Answers the following: Cash flow from Operations
Cash receipts from customers $ 5,220
1. Where did cash come Cash paid for expenses (2,400)
from? Cash provided by operations 2,820
Cash flow from Investing
2. What was cash used Purchase of equipment (5,000)
Cash flow from Financing
for? Investment by owners 10,000
Drawings by owners (1,000)
3. What was the change Cash provided by financing 9,000
Chapter
1-45 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Review Question
Chapter
1-46 LO 8 Understand the four financial statements and how they are prepared.
Financial
Financial Statements
Statements
Discussion Question
Q19. A companys net income appears directly
on the income statement and the owners equity
statement, and it is included indirectly in the
companys balance sheet. Do you agree? Explain.
Chapter
1-47 LO 8 Understand the four financial statements and how they are prepared.
Copyright
Copyright
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information contained herein.
Chapter
1-48