Acct 2001 Chapter 1 Student Lecture

Chapter
Chapter 1
1
Accounting In
Action
Financial Accounting, Sixth Edition
What
What is
is Accounting?
Accounting?
The purpose of accounting is to:
(1) identify, 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
Accounting process
The accounting process includes

the bookkeeping function.
SO 1 Explain what accounting is.
Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Management
IRS
Investors
Human
Resources
Labor
Unions
Finance
Creditors
Marketing
Customers
SEC
External
Users
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,
WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
SO 3 Understand why ethics is a fundamental business concept .
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Various users
need financial
information
The accounting profession

has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Financial Statements
Balance
Balance Sheet
Sheet
Income
Income Statement
Statement
Retained
Retained Earnings
Earnings Statement
Statement
Statement
Statement of
of Cash
Cash Flows
Flows
Note
Note Disclosure
Disclosure
Generally Accepted
Accounting
Principles (GAAP)
SO 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:
Securities and Exchange Commission (SEC)
http://www.sec.gov/
Financial Accounting Standards Board (FASB)

http://www.fasb.org/
International Accounting Standards Board

(IASB)
http://www.iasb.org/
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
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, whereas market value is often
subjective.
Fair value information may be more useful.
Assumptions
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.
Corporation.
Forms of
Business Ownership
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
Forms
Forms of
of Business
Business Ownership
Ownership
Proprietorship
Partnership
Generally owned
by one person.
Owned by two or
more persons.
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
Corporation
Ownership
divided into
shares of stock
Separate legal
entity organized
under state
corporation law
Limited liability
Partnership
agreement
SO 5 Explain the monetary unit assumption
and the economic entity assumption.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Stockholders
Equity
Provides the underlying framework for recording and

summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership
claims.
SO 6 State the accounting equation, and define

assets, liabilities, and stockholders equity.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Stockholders
Equity
Resources a
business owns.
Provide future
services or
benefits.
Cash, Supplies,
Equipment, etc.
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Stockholders
Equity
Claims against assets

(debts and obligations).
Creditors - party to whom
money is owed.
Accounts payable, Notes
payable, etc.

The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets
Liabilities
Stockholders
Equity
Ownership claim
on total assets.
Referred to as
residual equity.
2 parts are :
Paid-in Capital,
Retained Earnings
(Corporation).

Stockholders
Stockholders Equity
Equity
Illustration 1-6
Increases to Stockholders Equity:

Investment by stockholders (Paid in Capital) are
amounts paid in by stockholders in exchange for ownership
interests called common stock.

Stockholders
Stockholders Equity
Equity
Illustration 1-6
Increases to Stockholders Equity:

Revenues result from business activities entered into for
the purpose of earning income.
Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
Stockholders
Stockholders Equity
Equity
Illustration 1-6
Decreases to Stockholders Equity:

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.
Stockholders
Stockholders Equity
Equity
Illustration 1-6
Decreases to Stockholders Equity:

Dividends are the distribution of cash or other assets to
stockholders.
Dividends reduce retained earnings, however dividends are
not an expense.
Using
Using The
The Basic
Basic 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.
SO 7 Analyze the effects of business transactions

on the accounting equation.
Transactions
Transactions
Question: Are the following events recorded in the
accounting records?
An employee
is hired.
Dividends are
paid to
stockholders.
Event
Supplies are
purchased
on account.
Criterion
Is the financial position (assets, liabilities, or

stockholders equity) of the company changed?
Record/
Dont Record
Transactions
Transactions (Problem)
(Problem)
P1-1A: Barones Repair Shop was started on May.
Prepare a tabular analysis of the following transactions
for the month of May.
1. Stockholders invested $10,000 cash to start the
repair shop.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common
+ Receivable + Equipment = Payable + Stock
1.

Transactions
(Problem)
2. Purchased equipment for $5,000 cash.
Cash
1. +10,000
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common
+ Receivable + Equipment = Payable + Stock
+10,000
Investment
2.

Transactions
(Problem)
3. Paid $400 cash for May office rent.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
+ Receivable + Equipment = Payable + Stock + Earnings
1. +10,000
2.
-5,000
+10,000
+5,000
3.

Transactions
(Problem)
4. Received $5,100 from customers for repair service.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
1. +10,000
2.
-5,000
3.
4.
-400
+10,000
+5,000
-400

Transactions
(Problem)
5. Paid dividends of $1,000 cash.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
1. +10,000
2.
-5,000
3.
4.
-400
+5,100
+10,000
+5,000
-400
+5,100
5.

Transactions
(Problem)
6. Paid part-time employee salaries of $2,000.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
1. +10,000
+10,000
2.
-5,000
+5,000
3.
4.
-400
+5,100
-400
+5,100
5.
6.
-1,000
-1,000

Transactions
(Problem)
7. Incurred $250 of advertising costs, on account.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
1. +10,000
+10,000
2.
-5,000
+5,000
3.
4.
-400
+5,100
-400
+5,100
5.
6.
-1,000
-2,000
-1,000
-2,000
7.

Transactions
(Problem)
8. Provided repair services on account to customers $750.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
1. +10,000
+10,000
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
5.
6.
-1,000
-2,000
-1,000
-2,000
7.
8.
+5,000
+250
-250

Transactions
(Problem)
9. Collected $120 cash for services previously billed.
Cash
Liabilities
Stockholders Equity
Assets
Accounts
Accounts
Common Retained
1. +10,000
+10,000
2.
-5,000
3.
4.
-400
+5,100
-400
+5,100
5.
6.
-1,000
-2,000
-1,000
-2,000
7.
8.
+5,000
+250
+750
-250
+750
9.
Financial
Statements
Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:
Income
Statement
Retained
Earnings
Statement
Balance
Sheet
Statement
of Cash
Flows
SO 8 Understand the four financial statements and how they are prepared.
Financial
Statements
Income Statement
Reports the revenues
and expenses for a
specific period of time.
Net income revenues
exceed expenses.
Net loss expenses
exceed revenues.
Financial
Statements
Income Statement
Retained Earnings
Statement
Net income is needed to

determine the ending balance in
retained earnings.
Financial
Statements
Retained Earnings
Statement
Statement indicates the
reasons why retained
earnings has increased
or decreased during the
period.
Financial
Statements
Balance Sheet
Retained Earnings
Statement
The ending balance in retained

earnings is needed in preparing the
balance sheet.
Financial
Statements
Balance Sheet
Reports the assets,
liabilities, and
stockholders equity at a
specific date.
Assets listed at the top,
followed by liabilities
and stockholders equity.
Total assets must equal
total liabilities and
stockholders equity.
Financial
Statements
Balance Sheet
Statement of Cash Flows

Barones Repair Shop
For the Month Ended May 31, 2007
Cash flow from Operations
Cash receipts from customers
Cash paid for expenses
Cash provided by operations
Cash flow from Investing
5,220
(2,400)
2,820
Purchase of equipment
Cash flow from Financing
(5,000)
Investment by owners
Drawings by owners
Cash provided by financing
Net increase in cash
10,000
(1,000)
9,000
6,820
Cash balance, May 1
6,820
Cash balance, May 31
Financial
Statements
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?

Barones Repair Shop
For the Month Ended May 31, 2007
Cash flow from Operations
Cash receipts from customers
Cash paid for expenses
Cash provided by operations
Cash flow from Investing
5,220
(2,400)
2,820
Purchase of equipment
Cash flow from Financing
(5,000)
Investment by owners
Drawings by owners
Cash provided by financing
Net increase in cash
10,000
(1,000)
9,000
6,820
Cash balance, May 1

Cash balance, May 31
6,820
Copyright
Copyright
Copyright 2008 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
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caused by the use of these programs or from the use of the
information contained herein.

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Acct 2001 Chapter 1 Student Lecture

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Chapter

SO 1 Explain what accounting is.

The accounting process includes

SO 2 Identify the users and uses of accounting.

The accounting profession

SO 4 Explain generally accepted accounting principles and the cost principle.

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

SO 4 Explain generally accepted accounting principles and the cost principle.

SO 4 Explain generally accepted accounting principles and the cost principle.

accounting records only transaction data that can be

Economic Entity Assumption requires that

activities of the entity be kept separate and distinct

Often retail and

Provides the underlying framework for recording and

SO 6 State the accounting equation, and define

Claims against assets

SO 6 State the accounting equation, and define

SO 6 State the accounting equation, and define

Increases to Stockholders Equity:

SO 6 State the accounting equation, and define

Increases to Stockholders Equity:

Decreases to Stockholders Equity:

Decreases to Stockholders Equity:

May be external or internal.

SO 7 Analyze the effects of business transactions

Is the financial position (assets, liabilities, or

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

SO 7 Analyze the effects of business transactions

Net income is needed to

The ending balance in retained

Statement of Cash Flows

Cash balance, May 1

Cash balance, May 31

2. What was cash used

3. What was the change

in the cash balance?

Statement of Cash Flows

Cash balance, May 1

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