Ch01 Accounting in Action Rev

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

Weygandt Kimmel Kieso
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1-2
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 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.
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1-3
Accounting in 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
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1-4
What is Accounting?
The purpose of accounting:

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

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

External
Internal Users
Human Taxing
Users
Resources Authorities
Labor
Unions
Finance
Management Customers
Creditors
Marketing Regulatory
Agencies
Investors
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1-7 SO 2 Identify the users and uses of accounting.
What is 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
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1-8 SO 2 Identify the users and uses of accounting.
The Building Blocks of Accounting
Ethics In Financial Reporting

Standards of conduct by which one’s 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.
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1-9 SO 3 Understand why ethics is a fundamental business concept.
The Basic Accounting Equation
Assets = Liabilities + Equity
Provides the underlying framework for recording and

summarizing economic events.
Applies to all economic entities regardless of size.
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1-10 SO 6 State the accounting equation, and define its components.

Assets
Resources a business owns.
Provide future services or benefits.
Cash, Inventory, Equipment, etc.
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Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
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Equity
Ownership claim on total assets.
Referred to as residual equity.
Share capital and retained earnings.
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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.
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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.
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Illustration 1-7
Dividends are the distribution of cash or other assets to shareholders.

 Reduce retained earnings
 Not an expense
Slide
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
Slide Solution on
1-17 notes page SO 6 State the accounting equation, and define its components.
Using The Accounting Equation
Transactions are a business’s 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.
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1-18 SO 7 Analyze the effects of business transactions on the accounting equation.
Illustration: Are the following events recorded in the

accounting records? Illustration 1-8
Discuss
Purchase product
Event Pay rent.
computer. design with
customer.
Criterion Is the financial position (assets, liabilities, or

equity) of the company changed?
Record/
Don’t Record
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Transaction Analysis
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Transactions 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:
Slide Solution on SO 7 Analyze the effects of business transactions

notes page
1-21 on the accounting equation.
Transaction (2). Purchase of Equipment for Cash. Softbyte

purchases computer equipment for $7,000 cash.

notes page
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.

notes page
Transaction (4). Services Provided for Cash. Softbyte

receives $1,200 cash from customers for programming services
it has provided.

notes page
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.

notes page
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.

notes page
Transaction (7). Payment of Expenses. Softbyte pays the

following Expenses in cash for September: store rent $600,
salaries of employees $900, and utilities $200.

notes page
Transaction (8). Payment of Accounts Payable. Softbyte

pays its $250 Daily News bill in cash.

notes page
Transaction (9). Receipt of Cash on Account. Softbyte

receives $600 in cash from customers who had been billed for
services [in Transaction (6)].

notes page
Transaction (10). Dividends. The corporation pays a dividend

of $1,300 in cash.

notes page
Illustration 1-10
Summary of Transactions Tabular summary of
Softbyte transactions
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Financial Statements
Companies prepare four financial statements from the

summarized accounting data:
Retained Statement Statement

Income
Earnings of Financial of Cash
Statement
Statement Position Flows
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1-32 SO 8 Understand the four financial statements and how they are prepared.
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
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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
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Net income is needed to determine the
Financial Statements ending balance in retained earnings.
Illustration 1-11
Financial statements and
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1-35 SO 8
Retained Earnings
Financial Statements Statement
Statement indicates the reasons why Illustration 1-11

retained earnings has increased or their interrelationships
decreased during the period.
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Financial
Statements
The ending
balance in
retained
earnings is
needed in
preparing the
statement of
financial position
Illustration 1-11
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Financial Statements Balance Sheet
Illustration 1-11
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Financial
Statements
Illustration 1-11
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1-39
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
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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

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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.

The accounting process includes

Who Uses Accounting Data

Ethics In Financial Reporting

Recent financial scandals include: Enron (USA),

Effective financial reporting depends on sound ethical

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.

Classify the following items as issuance of

1. Rent expense Expense Decrease

2. Service revenue Revenue Increase

3. Dividends Dividends Decrease

4. Salaries expense Expense Decrease

Transactions are a business’s economic events

Not all activities represent transactions.

Each transaction has a dual effect on the accounting

Illustration: Are the following events recorded in the

Criterion Is the financial position (assets, liabilities, or

Transaction (1). Investment by Shareholders. Ray and

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (2). Purchase of Equipment for Cash. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (3). Purchase of Supplies on Credit. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (4). Services Provided for Cash. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (5). Purchase of Advertising on Credit. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (6). Services Provided for Cash and Credit.

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (7). Payment of Expenses. Softbyte pays the

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (8). Payment of Accounts Payable. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (9). Receipt of Cash on Account. Softbyte

Slide Solution on SO 7 Analyze the effects of business transactions

Transaction (10). Dividends. The corporation pays a dividend

Slide Solution on SO 7 Analyze the effects of business transactions

Companies prepare four financial statements from the

Retained Statement Statement

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

Statement indicates the reasons why Illustration 1-11

Statement of Cash Flows

Answers the following:

1. Where did cash come from?

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