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Accounting in Business

Chapter 1

Wild, Shaw, and Chiappetta
Fundamental Accounting
Principles
23rd Edition
Copyright © 2017 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 1 Learning
Objectives
CONCEPTUAL
C1 Explain the purpose and importance of accounting.
C2 Identify users and uses of, and opportunities in, accounting.
C3 Explain why ethics are crucial to accounting.
C4 Explain generally accepted accounting principles and define and apply several
accounting principles.
C5 Appendix 1B Identify and describe the three major activities of
organizations.

ANALYTICAL
A1 Define and interpret the accounting equation and each of its components.
A2 Compute and interpret return on assets.
A3 Appendix 1A Explain the relation between return and risk.

PROCEDURAL
P1 Analyze business transactions using the accounting equation.
P2 Identify and prepare basic financial statements and explain how they
interrelate.
2

Learning
Objective
C1:
Explain the purpose and
importance of
accounting.

3

financial statements. records. the sale Keep a chronological Prepare reports such as by Apple of an iPhone. and communicates information about an organization’s business activities. . 4 Learning Objective C1: Explain the purpose and importance of accounting. log of transactions.1 For example. 1-4 Importance of Exhibit Accounting 1. Accounting is an information and measurement system that identifies.

accounting. Learning Objective C2: Identify users and uses of. and opportunities in. 5 .

1-6 Users of Financial Exhib Information it 1.2 Accounting is called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. 6 . Learning Objective C2: Identify users and uses of. and opportunities in. accounting. Accounting serves many users who can be divided into two groups: external users and internal users.

and plan for the future. 1-7 Opportunities in Exhib Accounting it 1. budget earnings. Learning Objective C2: Identify users and uses of. and opportunities in. When we earn money. accounting. invest savings. 7 .3 Accounting information is in all aspects of our lives. pay taxes. we use accounting.

Learning Objective C2: Identify users and uses of. accounting. Regulator a) External user CEO b) Internal user Shareholder a) External user Controller b) Internal user Executive Employee b) Internal user External Auditor a) External user Production Manager b) Internal user Nonexecutive Employee a) External user External users of accounting information are NOT directly involved in running the organization. Internal users of accounting information ARE directly involved in managing and operating an organization. and opportunities in. 8 . NEED-TO-KNOW 1-1 Identify the following users of accounting information as either an (a) external or (b) internal user. Learning Objective C1: Explain the Purpose and Importance of Accounting.

9 . Learning Objective C3: Explain why ethics are crucial to accounting.

Learning Objective C3: Explain why ethics are crucial to accounting. They are accepted standards of good and bad behavior.10 Ethics – A Key Concept Exhib it 1. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. 1 . For information to be useful. it must be trusted. 10 .6 The goal of accounting is to provide useful information for decisions.

Envision a way to commit Fails to see the criminal fraud with a low perceived nature of the fraud or risk of getting caught justifies the action Must have some pressure to commit fraud. 1 . .11 Fraud Triangle Three factors must exist for a person to commit fraud: opportunity. and rationalization. pressure. like unpaid bills 11 Learning Objective C3: Explain why ethics are crucial to accounting.

12 Sarbanes–Oxley (SOX) Congress passed the Sarbanes–Oxley Act to help curb financial abuses at companies that issue their stock to the public. and truthfulness in reporting transactions. Learning Objective C3: Explain why ethics are crucial to accounting. The desired results include more transparency. 1 . 12 . accountability. SOX requires that these public companies apply both accounting oversight and stringent internal controls.

13 Dodd-Frank Wall Street Reform and Consumer Protection Act This act was designed to: 1. protect consumers from abusive financial services. protect the taxpayer by ending bailouts. put an end to the notion of “too big to fail. 1 . Learning Objective C3: Explain why ethics are crucial to accounting. 2. promote accountability and transparency in the financial system.” 3. and 4. 13 .

Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. 14 .

reliable. 15 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. organizations. Relevant information Comparable information affects decisions is helpful in contrasting of users. 1 . Reliable information is trusted by users. GAAP aims to make information relevant.15 Generally Accepted Accounting Principles (GAAP) Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP). . and comparable.

GAAP and IFRS are decreasing as the FASB and IASB pursue a convergence process aimed to achieve a single set of accounting standards for global use.S.16 International Standards In today’s global economy. . 1 . there is increased demand by external users for comparability in accounting reports. This demand often arises when companies wish to raise money from lenders and investors in different countries. 16 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. International Accounting International Financial Standards Board (IASB) Reporting Standards (IFRS) An independent group Identify preferred accounting (consisting of individuals practices from many countries). issues International Financial Reporting Standards (IFRS) Differences between U.

1 . .17 Conceptual Framework 17 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.

1 - 18

Principles and
Assumptions of Exhib
Accounting it
1.7

General principles are the Specific principles are detailed
basic assumptions, concepts, rules used in reporting
and guidelines for preparing business transactions and
financial statements. General events. Specific principles
principles stem from long- arise more often from the
used accounting practices. rulings of authoritative
18
groups.
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.

1 - 19

Accounting Principles

Measurement Principle Revenue Recognition Principle
(or Cost Principle) 1. Recognize revenue when it is
Accounting information is based earned.
on actual cost. Actual cost is 2. Proceeds need not be in cash.
considered objective. 3. Measure revenue by cash
received plus cash value of items
received.

Expense Recognition Principle
Full Disclosure Principle
(or Matching Principle)
A company is required to report the
A company must record its
details behind financial statements
expenses incurred to generate the
that would impact users’ decisions.
revenue reported.

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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.

1 - 20

Accounting Assumptions
Going-Concern Assumption
Monetary Unit Assumption
Reflects assumption that the
Express transactions and events
business will continue operating
in monetary, or money, units.
instead of being closed or sold.

Business Entity Assumption
A business is accounted for Time Period Assumption
separately from other business Presumes that the life of a company
entities, including its owner. can be divided into time periods,
such as months and years.

20
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.

Partnership. partnerships. and corporations: 21 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.21 Proprietorship.8 Here are some of the major attributes of proprietorships. 1 . Exhib and Corporation it 1. .

disclosed. 22 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. .Accounting Constraints Materiality Cost-benefit Only information that would Only information with benefits influence the decisions of a of disclosure greater than their reasonable person need be cost need be disclosed.

. Materiality Measurement Business entity Going concern Expense recognition Time period Full disclosure Revenue recognition Learning Objective C3: Explain why ethics are crucial to accounting. (b) assumption. NEED-TO-KNOW 1-2 Part 1 Identify the following terms/phrases as either an accounting (a) principle. 23 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. or (c) constraint.

Revenue recognition principle Governs the timing of revenues recognized on the income statement. Full disclosure principle A company must report the details behind financial statements that would impact users' decisions. Disclosures are often in the footnotes to the financial statements. Expense recognition principle Also called the matching principle Governs the timing of expenses reported on the income statement. Measurement principle Also called the cost principle Cost is measured on a cash or equal-to-cash basis. Revenue is recognized when earned. Expenses are recognized in the same time period as the revenues they help generate. Learning Objective C3: Explain why ethics are crucial to accounting. . NEED-TO-KNOW 1-2 Part 1 Principles: Govern the amount and/or timing of information to be reported in financial statements. Governs valuation of assets and liabilities on the balance sheet. 24 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.

Benefits exceed cost The benefits of the information disclosed must be greater than the costs of providing the information. Materiality is a function of the nature of the item and/or dollar amount. . Monetary unit assumption We can express transactions and events in monetary units. Business entity assumption A business is accounted for separately from other business entities. 25 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. NEED-TO-KNOW 1-2 Part 1 Assumptions: Generally related to the financial statement headings. Learning Objective C3: Explain why ethics are crucial to accounting.. Accounting constraints: Reasonableness of information to be reported. Dollars.e. including its owner(s). Pesos. Going concern assumption Presumption that the business will continue operating instead of being closed or sold. Materiality Only information that would influence the decisions of a reasonable person needs to be disclosed. (i. and that useful reports can be prepared for those periods. Euros) Time period assumption Presumes that the life of a company can be divided into time periods.

26 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. or (c) constraint. (b) assumption. Materiality c) Constraint Measurement a) Principle Business Entity b) Assumption Going Concern b) Assumption Expense Recognition a) Principle Time Period b) Assumption Full Disclosure a) Principle Revenue Recognition a) Principle Learning Objective C3: Explain why ethics are crucial to accounting. . NEED-TO-KNOW Part 1 Solution Identify the following terms/phrases as either an accounting (a) principle.

. 27 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. NEED-TO-KNOW 1-2 Part 2 Complete the following table with either a yes or a no regarding the attributes of a partnership and a corporation. Attribute Present Partnership Corporation Business taxed no yes Limited liability no yes Legal entity no yes Unlimited life no yes Learning Objective C3: Explain why ethics are crucial to accounting.

28 . Learning Objective A1: Define and interpret the accounting equation and each of its components.

1 . Net Income 29 .29 Transaction Analysis and the Accounting Equation The Accounting Equation Assets = Liabilities + Equity Expanded Accounting Equation: Learning Objective A1: Define and interpret the accounting equation and each of its components.

. . Assets = Liabilities + Equity Bose $150 = $30 + $120 Vogue $400 = $100 + $300 Use the expanded accounting equation to compute the missing financial statement amounts.Owner. + Revenues . NEED-TO-KNOW 1-3 Use the accounting equation to compute the missing financial statement amounts.Expenses Assets = Liabilities + Equity Capital Withdrawals Tesla $200 $80 $120 $100 $0 $60 ($40) YouTube $400 $160 $240 $220 ($10) $120 ($90) 30 Learning Objective A1: Define and interpret the accounting equation and each of its components. + Owner.

31 . Learning Objective P1: Analyze business transactions using the accounting equation.

. The accounts involved are: (1) Cash (asset) (2) C. Capital (equity) Learning Objective P1: Analyze business transactions using the accounting equation. Taylor. Transaction 1: Chas Taylor invests $30.000 cash to start a company.

Fast Forward. . Accounting Equation: Chas Taylor invests $30.000 cash to start the business. Learning Objective P1: Analyze business transactions using the accounting equation.

Transaction 2: Company purchased supplies paying $2.500 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Learning Objective P1: Analyze business transactions using the accounting equation. .

Accounting Equation: Company purchased supplies paying $2. .500 cash. Accounting Equation must remain in balance!! Learning Objective P1: Analyze business transactions using the accounting equation.

000 cash. Transaction 3: Purchased equipment for $26. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Learning Objective P1: Analyze business transactions using the accounting equation. .

Accounting Equation still remains in balance!! Learning Objective P1: Analyze business transactions using the accounting equation. . Accounting Equation: Purchased equipment for $26.000 cash.

. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) Learning Objective P1: Analyze business transactions using the accounting equation.100 on credit. Transaction 4: Purchased supplies of $7.

Accounting Equation still remains in balance!! Learning Objective P1: Analyze business transactions using the accounting equation. Accounting Equation: Purchased Supplies of $7. .100 on credit.

expenses and withdrawals. . let’s look at transactions involving revenues. Learning Objective P1: Analyze business transactions using the accounting equation. Transaction Analysis Now.

. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Learning Objective P1: Analyze business transactions using the accounting equation.200 cash right away. Transaction 5: Provided consulting services to a customer and received $4.

Learning Objective P1: Analyze business transactions using the accounting equation.200 cash right away. . Accounting Equation: Provided consulting services to a customer and received $4.

because expenses reduce equity.000 and salaries of $700 to employees. . Learning Objective P1: Analyze business transactions using the accounting equation. The accounts involved are: (1) Cash (asset) (2) Rent expense (equity) Remember(3) Salaries that the balance expense (equity) in the Expense accounts actually increase. Transactions 6 and 7: Paid rent of $1. But. total Equity decreases.

.000 and salaries of $700 to employees. Learning Objective P1: Analyze business transactions using the accounting equation. Remember that expenses decrease equity. Accounting Equation: Paid rent of $1.

600 and rents facilities for $300 to a customer for credit. The accounts involved are: (1) Accounts receivable (asset) (2) Consulting Revenues (equity) (3) Rental Revenue (equity) Learning Objective P1: Analyze business transactions using the accounting equation. Transaction 8: Provided consulting services of $1. .

Accounting Equation: Provided consulting services of $1. .600 and rents facilities for $300 to a customer for credit. Learning Objective P1: Analyze business transactions using the accounting equation.

The accounts involved are: (1) Cash (asset) (2) Accounts receivable (asset) Learning Objective P1: Analyze business transactions using the accounting equation.900 for consulting services from account receivable. . Transaction 9: Client in transaction 8 pays $1.

. Accounting Equation: Client in transaction 8 pays $1.900 for consulting services. Learning Objective P1: Analyze business transactions using the accounting equation.

Transaction 10: FastForward pays $900 as partial payment for supplies purchased in transaction 4. . The accounts involved are: (1) Cash (asset) (2) Accounts payable (liability) Learning Objective P1: Analyze business transactions using the accounting equation.

Accounting Equation: FastForward pays $900 as partial payment for supplies purchased in transaction 4. Learning Objective P1: Analyze business transactions using the accounting equation. .

. total Equity Withdrawal decreases because account actually withdrawals cause increases (just like equity to go down !! our Expenses account . . Transaction 11: Withdrawal of Cash by Owner. ) Learning Objective P1: Analyze business transactions using the accounting equation. The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity) Remember that the But. .

. Learning Objective P1: Analyze business transactions using the accounting equation. Accounting Equation: Dividends of $200 are paid to shareholders.

21 The company paid $250 cash for an employee’s salary Arrange the following asset. 14 The company provided $540 of services for a client on credit. Assets = Liabilities + Equity Cash Accounts Equipment Accounts + J. J. liability. Revenues.000 of equipment on credit. 5 The company purchased $2.750 $540 $2. 14 $540 $540 Jan. 5 $2.000 cash in the Tata company. Jan. and Expenses. Jan.000 $4. J.000 $2.290 Total Liabilities 2. Jan. NEED-TO-KNOW 1-4 Assume Tata began operations on January 1 and completed the following transactions during its first month of operations. Tata. . . + Revenues. Withdrawals. Tata.290 53 Learning Objective P1: Analyze business transactions using the accounting equation. Tata.000 Total Equity $4. Equipment. Capital.000 $4. 1 $4. Jan.000 $2. and equity titles in a table: Cash. Accounts Payable.J. Accounts Receivable.000 $0 $540 ($250) Total Assets $6.000 Jan. Tata.000 Jan.Expenses Receivable Payable Capital Withdrawals Jan. 21 ($250) ($250) $3. 1 Jamsetji invested $4.

54 . Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.

4. and equity) at a point in time. Income statement — describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 3. 1 . 2. Balance sheet — describes a company’s financial position (types and amounts of assets. Statement of owner’s equity— explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time. liabilities. Statement of cash flows — identifies cash 55 inflows (receipts) and cash outflows (payments) Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.55 Financial Statements The four financial statements and their purposes are: 1. .

1 . next slide) 56 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.56 Exhibit 1. .10 Financial Statements and Their Links (cont.

1 .57 Exhibit 1.10 Financial Statements and Their Links 57 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. .

. 2015. general and other expenses 40. and (c) balance sheet.849 Owner.089 Selling. September 27. September 26.490 Investments and other assets $230. Capital + Revenues Detail of Revenues ±Net income (loss) .634 Land and equipment (net) 22.586 Owner. NEED-TO-KNOW 1-5 Prepare the (a) income statement. Capital. Capital.394 Withdrawals in fiscal year 2015 45. 2015 119.232 Cash 21.715 Income Statement Statement of Owner’s Equity Balance Sheet Assets Detail of Assets Liabilities Detail of Liabilities Equity: Beginning Capital + Owner investments + Owner investments .Owner withdrawals Ending Owner. 2014 111.039 Other liabilities 135.Expenses Detail of Expenses Ending Capital Net income (loss) 58 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. (b) statement of owner's equity. for Apple using the following condensed data from its fiscal year ended September 26.Owner withdrawals .471 Cost of sales 140.547 Net income 53. Accounts payable $35.120 Accounts receivable 16.355 Revenues 233.

2015 Assets Liabilities Cash $21. 2015 119. September 27.232 Cash 21. 2015 Revenues $233. September 26. general and other expenses 40.355 Revenues 233.490 Investments and other assets $230.479 59 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. NEED-TO-KNOW Accounts payable $35.039 Other liabilities 135. Capital.849 Other liabilities 135.394 APPLE Balance Sheet September 26.124 Investments and other assets 230.547 Net income 53.715 APPLE APPLE Income Statement Statement of Owner's Equity For Fiscal Year Ended September 26. September 26.849 Owner.471 Total liabilities 171.039 Equity Owner. 2015 119.471 Cost of sales 140.394 Cost of sales (expense) $140.321 Net income $53. 2015 $119. 2015 For Fiscal Year Ended September 26.490 Accounts receivable 16.634 Land and equipment (net) 22. 2014 111.355 Total expenses 180. Capital.089 Less: Withdrawals by owner 45.120 Accounts payable $35.232 Owner.089 Selling. 2014 $111. Capital.586 Selling.479 Total liabilities and equity $290. Capital.634 Land and equipment (net) 22.586 Owner.120 Accounts receivable 16. Capital. September 26. September 26.547 Expenses Plus: Net income 53.715 Owner.355 Total assets $290.394 Withdrawals in fiscal year 2015 45. general and other expenses 40. .

 Sustainability refers to environmental.  Standards intended to complement financial accounting standards. 1 .  Environmental aspects include programs to reduce pollution and support green activities. social and governance. 60 .  SASB created their own Conceptual Framework.60 Sustainability and Accounting Sustainability Accounting Standards Board (SASB)  Nonprofit entity engaged in creating and disseminating sustainability accounting standards for companies.

Learning Objective A2: Compute and interpret return on assets. 61 .

62 Return on Assets Return on assets (ROA) is stated in ratio form as net income divided by the average total assets invested. 1 . . Net income Return on assets = Average total assets 62 Learning Objective A2: Compute and interpret return on assets.

Learning Objective A3 (Appendix 1A): Explain the relation between return and risk. 63 .

1 Risk is the Many different uncertainty returns may about the return be reported. The lower the risk. Interest return on corporate bonds. we will earn.64 Appendix 1A Exhib Return and Risk Analysis it 1A. the lower our expected return. . ROA Interest return on savings accounts. 64 Learning Objective A3: Explain the relation between return and risk. 1 .

65 Learning Objective C5 (Appendix 1B): Identify and describe the three major activities of organizations. 1 . 65 .

 Owner financing—resources contributed by the owner along with any income the owner leaves in the organization. 1 . buildings. .66 Appendix 1B Business Activities and the Accounting Equation Three major types of business activities: Financing activities provide the means organizations use to pay for resources such as land. and equipment to carry out plans. 66 Learning Objective C5: Identify and describe the three major activities of organizations.  Nonowner financing—resources contributed by creditors (lenders).  Financial management —the task of planning how to obtain these resources and to set the right mix between owner and creditor financing.

 Liabilities—creditors’ claims.  Asset management—determining the amount and type of assets for operations. 67 Learning Objective C5: Identify and describe the three major activities of organizations.  Equity—owner’s claim. .  Assets—invested amounts. 1 .67 Appendix 1B Business Activities and the Accounting Equation Three major types of business activities: Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services.

its plans. 68 Learning Objective C5: Identify and describe the three major activities of organizations. develop. 1 . and its market. produce.68 Appendix 1B Business Activities and the Accounting Equation Three major types of business activities: Operating activities involve using resources to research. distribute. purchase. .  Strategic management —the process of determining the right mix of operating activities for the type of organization. and market products and services.

69 Appendix 1B Business Activities and the Accounting Equation Exhib Activities of Organizations it 1B.1 69 Learning Objective C5: Identify and describe the three major activities of organizations. . 1 .

70 End of Chapter 1 70 . 1 .