CH 01

Slide
1-1
Chapter 1
Accounting in Action
Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso
Slide
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 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.
Slide
1-3
Accounting
Accounting in
in Action
Action
The Building The Basic Using the

What is Financial
Blocks of Accounting Accounting
Accounting? Equation Statements
Accounting Equation
Three Ethics in Assets Transaction Income

activities financial Liabilities analysis statement
Who uses reporting Summary of Retained
Equity
accounting Accounting transactions earnings
data? standards statement
Assumptions Statement of
financial
position
Statement of
cash flows
Slide
1-4
What
What is
is Accounting?
Accounting?
The purpose of accounting:

(1) to identify,
identify record,
record and communicate the economic
events of an
(2) organization to
(3) interested users.
Slide
1-5 SO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Illustration 1-1
Three Activities The activities of the

accounting process
The accounting process includes

the bookkeeping function.
Slide
1-6 SO 1 Explain what accounting is.
What
What is
is Accounting?
Accounting?
Who Uses Accounting Data

External
Internal Users
Human Taxing
Users
Resources Authorities
Labor
Unions
Finance
Management Customers
Creditors
Marketing Regulatory
Agencies
Investors
Slide
1-7 SO 2 Identify the users and uses of accounting.
What
What is
is Accounting?
Accounting?
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. 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
Slide
1-8 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
1-9 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
1-10 SO 3 Understand why ethics is a fundamental business concept.
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:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Solution on
Slide
1-11 notes page SO 3 Understand why ethics is a fundamental business concept.
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
1-12 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
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
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.
Forms of Business
Partnership. Ownership
Corporation.
Slide
1-15 SO 5 Explain the monetary unit assumption and the economic entity assumption.
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Proprietorship Partnership Corporation
Generally owned Owned by two or Ownership divided

by one person. more persons. into shares
Often small Often retail and Separate legal
service-type service-type entity organized
businesses businesses under state
Owner receives corporation law
Generally unlimited
any profits, suffers personal liability Limited liability
any losses, and is
Partnership
personally liable for
agreement
all debts.
Slide
The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
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.
Solution on SO 5 Explain the monetary unit assumption

Slide
notes page
1-17 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
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.

Slide
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.
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

True
liability as compared to partners in a partnership.

Slide
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 True
Accounting Standards Board (IASB).
5. The cost principle dictates that companies

record assets at their cost. In later periods, False
however, the fair value of the asset must be
used if fair value is higher than its cost.

Slide
notes page
Answer on notes page
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets Liabilities Equity

= +
Provides the underlying framework for recording and

summarizing economic events.
Applies to all economic entities regardless of size.
Slide
1-22 SO 6 State the accounting equation, and define its components.
The
The Basic
Basic Accounting
Accounting Equation
Equation

= +

Assets
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.
Slide
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.
Slide
The
The Basic
Basic Accounting
Accounting Equation
Equation

= +

Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital and retained earnings.
Slide
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
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
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
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 Effect on Equity

1. Rent expense Expense Decrease
2. Service revenue Revenue Increase
3. Dividends Dividends Decrease
4. Salaries expense Expense Decrease
Solution on
Slide
1-29 notes page SO 6 State the accounting equation, and define its components.
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
1-30 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?
Discuss Illustration 1-8
Purchase product
Event Pay rent.
computer. design with
customer.
Criterion Is the financial position (assets, liabilities, or

equity) of the company changed?
Record/
Dont Record
Slide
Using
Using The
The Accounting
Accounting Equation
Equation
Transaction Analysis
Slide
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:
Solution on SO 7 Analyze the effects of business transactions

Slide
notes page
1-33 on the accounting equation.
Transactions
Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte
purchases computer equipment for $7,000 cash.

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

Slide
notes page
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
notes page
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
notes page
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
notes page
Transactions
Analysis
Transaction (8). Payment of Accounts Payable. Softbyte
pays its $250 Daily News bill in cash.

Slide
notes page
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
notes page
Transactions
Analysis
Transaction (10). Dividends. The corporation pays a dividend
of $1,300 in cash.

Slide
notes page
Transactions
Analysis
Illustration 1-10
Summary of Transactions Tabular summary of
Softbyte transactions
Slide
Financial
Financial Statements
Statements
Companies
Companiesprepare
preparefour
four financial
financialstatements
statementsfrom
from the
the
summarized
summarizedaccounting
accountingdata:
data:
Retained Statement Statement

Income
Earnings of Financial of Cash
Statement
Statement Position Flows
Slide
1-44 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
Financial
Statements Income Statement
Reports the revenues and expenses for a specific period of time.

Net income revenues exceed expenses.
Illustration 1-11
Net loss expenses exceed revenues. Financial statements and
their interrelationships
Slide
Net income is needed to determine the
Financial
Statements ending balance in retained earnings.
Illustration 1-11
Financial statements and
Slide
1-47 SO 8
Retained Earnings
Financial
Statements Statement
Statement indicates the reasons why Illustration 1-11

retained earnings has increased or Financial statements and
decreased during the period.
Slide
Financial
Financial
Statements
Statements
The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial position
Illustration 1-11
Slide
Financial
Statements Balance Sheet
Illustration 1-11
Slide
Financial
Financial
Statements
Statements
Illustration 1-11
Slide
1-51
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
Financial
Statements Statement of Cash Flows
Illustration 1-11
Slide
Answer on
notes page
Slide
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
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Key Differences Accounting in Action

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
1-56
Understanding
Understanding U.S.
U.S. GAAP
GAAP

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
1-57
Understanding
Understanding U.S.
U.S. GAAP
GAAP

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
1-58
Understanding
Understanding U.S.
U.S. GAAP
GAAP
Looking to the Future Accounting in Action

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
1-59
Career
Career Opportunities
Opportunities APPENDIX
Public accounting Government
Private accounting Forensic accounting
Show me
the Money
Slide
1-60 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
1-61

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Slide

Financial Accounting, IFRS Edition

The Building The Basic Using the

Three Ethics in Assets Transaction Income

The purpose of accounting:

(3) interested users.

Three Activities The activities of the

The accounting process includes

Who Uses Accounting Data

Recent financial scandals include: Enron (USA),

Effective financial reporting depends on sound ethical

International Accounting Standards Board (IASB)

International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

Generally Accepted Accounting Principles (GAAP)

Cost easily verified, market value is often subjective.

Fair value information may be more useful.

In determining which measurement principle to use, companies

Only in situations where assets are actively traded, such as

Economic Entity Assumption requires that activities of the

Proprietorship Partnership Corporation

Generally owned Owned by two or Ownership divided

Solution on SO 5 Explain the monetary unit assumption

Solution on 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

Solution on SO 5 Explain the monetary unit assumption

4. The primary accounting standard-setting body

5. The cost principle dictates that companies

Solution on SO 5 Explain the monetary unit assumption

Assets Liabilities Equity

Provides the underlying framework for recording and

Applies to all economic entities regardless of size.

Assets Liabilities Equity

Provides the underlying framework for recording and

Assets Liabilities Equity

Provides the underlying framework for recording and

Assets Liabilities Equity

Provides the underlying framework for recording and

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

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

Classification Effect on Equity

2. Service revenue Revenue Increase

3. Dividends Dividends Decrease

4. Salaries expense Expense Decrease

Transactions are a businesss economic events

Not all activities represent transactions.

Each transaction has a dual effect on the accounting

Criterion Is the financial position (assets, liabilities, or

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Solution on SO 7 Analyze the effects of business transactions

Retained Statement Statement

Reports the revenues and expenses for a specific period of time.

Statement indicates the reasons why Illustration 1-11