Accounting in Action
Accounting in Action
Action
Chapter
1-1
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 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 stockholders’ equity.
7. Analyze the effects of business transactions on the
accounting equation.
8. Understand the four financial statements and how they are
prepared.
Chapter
1-2
Accounting in Action
Using the
The Building The Basic
What is Basic Financial
Blocks of Accounting
Accounting? Accounting Statements
Accounting Equation Equation
Chapter
1-3
What is Accounting?
Chapter
1-4 SO 1 Explain what accounting is.
What is Accounting?
Illustration 1-1
Three Activities Accounting process
Chapter
1-5 SO 1 Explain what accounting is.
Who Uses Accounting Data?
Internal Users
Management IRS
Human Investors
Resources
Labor
Unions
Finance Common Questions
Creditors
Marketing
Customers SEC
External
Users
Chapter
1-6 SO 2 Identify the users and uses of accounting.
Who Uses Accounting Data?
Common Questions Asked User
1. Can we afford to give our
employees a pay raise? Human Resources
2. Did the company earn a
satisfactory income? Investors
3. Do we need to borrow in the
near future? Management
4. Is cash sufficient to pay
dividends to the stockholders? Finance
5. What price for our product
will maximize net income? Marketing
6. Will the company be able to
pay its short-term debts? Creditors
Chapter
1-7 SO 2 Identify the users and uses of accounting.
Who Uses Accounting Data?
Discussion Question
Q1. “Accounting is ingrained in our society and it is
vital to our economic system.” Do you agree? Explain.
Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Chapter
1-10 SO 3 Understand why ethics is a fundamental business concept.
The Building Blocks of Accounting
Financial Statements
Various users Balance Sheet
need financial Income Statement
Retained Earnings Statement
information Statement of Cash Flows
Note Disclosure
Chapter
1-11 SO 4 Explain generally accepted accounting principles and the cost principle.
The Building Blocks of Accounting
Chapter
1-12 SO 4 Explain generally accepted accounting principles and the cost principle.
The Building Blocks of Accounting
Chapter
1-13 SO 4 Explain generally accepted accounting principles and the cost principle.
Assumptions
Review Question
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.
Review Question
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. corporation.
d. sole proprietorship.
Stockholders’
Assets = Liabilities +
Equity
Stockholders’
Assets = Liabilities +
Equity
Assets
Stockholders’
Assets = Liabilities +
Equity
Liabilities
Stockholders’
Assets = Liabilities +
Equity
Stockholders’ Equity
Record/
Don’t Record
Discussion Question
Q18. In February 2008, Paula King invested an
additional $10,000 in Hardy Company. Hardy’s
accountant, Lance Jones, recorded this receipt
as an increase in cash and revenues. Is this
treatment appropriate? Why or why not?
Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows
Chapter
1-37 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.
Chapter
1-38 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Income Statement
Chapter
1-39 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Retained Earnings
Income Statement Statement
Barone’s Repair Shop Barone’s Repair Shop
For the Month Ended May 31, 2007 For the Month Ended May 31, 2007
Chapter
1-40 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Retained Earnings
Statement
Statement indicates the Barone’s Repair Shop
Chapter
1-41 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet Retained Earnings
Barone’s Repair Shop Statement
Balance Sheet
Barone’s Repair Shop
May 31, 2007
Retained Earnings Statement
Assets
For the Month Ended May 31, 2007
Cash $ 6,820
Accounts receivable 630 Retained earnings, May 1 $ -
Equipment 5,000 Add: Net income 3,200
Total assets $ 12,450
Less: Dividends (1,000)
Liabilities Retained earnings, May 31 $ 2,200
Accounts payable $ 250
Stockholders' Equity
Common stock 10,000 The ending balance in retained
Retained earnings 2,200 earnings is needed in preparing the
Total liab. & equity $ 12,450 balance sheet.
Chapter
1-42 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet
Barone’s Repair Shop Reports the assets,
Balance Sheet
liabilities, and
May 31, 2007
Assets
stockholders’ equity at a
Cash $ 6,820 specific date.
Accounts receivable 630
Equipment 5,000 Assets listed at the top,
Total assets $ 12,450 followed by liabilities
Liabilities
and stockholders’ equity.
Accounts payable $ 250
Stockholders' Equity
Total assets must equal
Common stock 10,000
Retained earnings 2,200
total liabilities and
Total liab. & equity $ 12,450 stockholders’ equity.
Chapter
1-43 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Balance Sheet Statement of Cash Flows
Barone’s Repair Shop
Barone’s Repair Shop
Balance Sheet Statement of Cash Flows
May 31, 2007 For the Month Ended May 31, 2007
Assets Cash flow from Operations
Cash receipts from customers $ 5,220
Cash $ 6,820
Cash paid for expenses (2,400)
Accounts receivable 630 Cash provided by operations 2,820
Equipment 5,000 Cash flow from Investing
Total assets $ 12,450 Purchase of equipment (5,000)
Cash flow from Financing
Liabilities
Investment by owners 10,000
Accounts payable $ 250
Drawings by owners (1,000)
Stockholders' Equity Cash provided by financing 9,000
Common stock 10,000 Net increase in cash 6,820
Retained earnings 2,200 Cash balance, May 1 -
Cash balance, May 31 $ 6,820
Total liab. & equity $ 12,450
Chapter
1-44 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Statement of Cash Flows
Information for a
specific period of time. Barone’s 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
Chapter
1-45 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Statement of stockholders’ equity.
d. Statement of cash flows.
Chapter
1-46 SO 8 Understand the four financial statements and how they are prepared.
Financial Statements
Discussion Question
Q19. “A company’s net income appears directly
on the income statement and the retained
earnings statement, and it is included indirectly
in the company’s balance sheet.” Do you agree?
Explain.
Chapter
1-47 SO 8 Understand the four financial statements and how they are prepared.
All About You
Chapter
1-48
All About You
Some Facts:
After adjusting for inflation, private-college
tuition and fees have increased 37% over the
past decade; public-college tuition has risen 54%.
Chapter
1-49
All About You
Source: College
Board, Princeton
Review, as reported in
“College Admissions:
Is Gate Open or
Closed?,” Wall Street
Journal, March 25,
2006, p. A7.
Chapter
1-50
All About You
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Chapter
1-52