Accounting Principle Kieso 8e_Ch01

8/3/2019 Accounting Principle Kieso 8e_Ch01

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Chapter1-1

CHAPTER1

Accounting: AnOverview and

AnalysisAccounting Principles, Eighth Edition


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Chapter1-2

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 owners equity.

7. Analyze the effects of business transactions on theaccounting equation.

8. Understand the four financial statements and how they areprepared.

Study Objectives


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Chapter1-3

Accounting in Action

Ethics infinancial

reporting

Generally

accepted

accounting

principlesAssumptions

What is

Accounting?

The Building

Blocks of

Accounting

The Basic

Accounting

Equation

Using theBasic

AccountingEquation

Financial

Statements

Threeactivities

Who uses

accounting

data

Assets

Liabilities

Owners

equity

Transactionanalysis

Summary of

transactions

Incomestatement

Owners

equity

statement

Balance

sheet

Statement ofcash flows


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Chapter1-4

What is Accounting?

LO 1 Explain what accounting is.

The purpose of accounting is to:

(1) identify, record, and communicate theeconomic events of an

(2) organization to

(3) interested users.


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Chapter1-5

Three Activities

What is Accounting?

LO 1 Explain what accounting is.

Illustration 1-1

Accounting process

The accounting process includesthe bookkeeping function.


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Chapter1-6

Management

Common Questions

HumanResources

IRS

LaborUnions

SEC

Marketing

Finance

Investors

Creditors

Who Uses Accounting Data?

LO 2 Identify the users and uses of accounting.

Customers

Internal Users

ExternalUsers


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Chapter1-7

Common Questions Asked User

1. Can we afford to give ouremployees a pay raise? Human Resources

2. Did the company earn asatisfactory income?

3. Do we need to borrow in thenear future?

4. Is cash sufficient to paydividends to the stockholders?

5. What price for our productwill maximize net income?


LO 2 Identify the users and uses of accounting.

6. Will the company be able topay its short-term debts?

Investors

Management

Finance

Marketing

Creditors


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Chapter1-8

Discussion Question

LO 3 Understand why ethics is a fundamental business concept.

Q1. Accounting is ingrained in our society and it is

vital to our economic system. Do you agree? Explain.

See notes page for discussion



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Chapter1-9

The Building Blocks of Accounting

Ethics In Financial Reporting


Standards of conduct by which ones actions arejudged as right or wrong, honest or dishonest, fair ornot 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 soundethical behavior.


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Chapter1-10

Ethics are the standards of conduct by which one'sactions are judged as:

a. right or wrong.b. honest or dishonest.

c. fair or not fair.

d. all of these options.

Review Question

Ethics



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Chapter1-11

Various usersneed financialinformation

The accounting professionhas attempted to develop

a set of standards thatare generally acceptedand universally practiced.

Financial StatementsBalance SheetIncome StatementStatement of Owners EquityStatement of Cash FlowsNote Disclosure

Generally Accepted

AccountingPrinciples (GAAP)


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


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Chapter1-12

Organizations Involved in Standard Setting:

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

International Accounting Standards Board

(IASB)



http://www.fasb.org/

http://www.sec.gov/

http://www.iasb.org/
http://www.fasb.org/http://www.sec.gov/http://www.iasb.org/http://www.iasb.org/http://www.sec.gov/http://www.fasb.org/


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Chapter1-13

Cost Principle (Historical) dictates that companiesrecord assets at their cost.

Issues:

Reported at cost when purchased and also over thetime the asset is held.

Cost easily verified, whereas market value is oftensubjective.

Fair value information may be more useful.




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Chapter1-14

Monetary Unit Assumption include in theaccounting records only transaction data that can beexpressed in terms of money.

Economic Entity Assumption requires thatactivities of the entity be kept separate and distinctfrom the activities of its owner and all other economicentities.

Proprietorship.Partnership.

Corporation.

Assumptions

LO 5 Explain the monetary unit assumptionand the economic entity assumption.

Forms ofBusiness Ownership


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Chapter1-15

Proprietorship Partnership Corporation

Owned by two ormore persons.

Often retail andservice-typebusinesses

Generally

unlimitedpersonal liability

Partnershipagreement

Ownershipdivided into

shares of stockSeparate legalentity organizedunder statecorporation law

Limited liability

Forms of Business Ownership

Generally ownedby one person.

Often smallservice-typebusinesses

Owner receives

any profits,suffers anylosses, and ispersonally liablefor all debts.



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Chapter1-16

Combining the activities of Kellogg and GeneralMills would violate the

a. cost principle.b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

Assumptions


Review Question


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Chapter1-17

A business organized as a separate legal entityunder state law having ownership divided intoshares of stock is a

a. proprietorship.

b. partnership.

c. corporation.d. sole proprietorship.


Forms of Business Ownership

Review Question


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Chapter1-18

Assets Liabilities OwnersEquity

= +

Provides the underlying frameworkfor recording andsummarizing economic events.

Assets are claimed by either creditors or owners.

Claims of creditors must be paid before ownershipclaims.

The Basic Accounting Equation

LO 6 State the accounting equation, and defineassets, liabilities, and owners equity.


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Chapter1-19


= +




Resources a business owns.Provide future services or benefits.

Cash, Supplies, Equipment, etc.

Assets


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Chapter1-20


= +




Claims against assets (debts and obligations).Creditors - party to whom money is owed.

Accounts payable, Notes payable, etc.

Liabilities


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Chapter1-21


= +




Ownership claim on total assets.Referred to as residual equity.

Capital, Drawings, etc. (Proprietorship orPartnership).

Owners Equity


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Chapter1-22

Owners Equity

Revenuesresult 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.

Illustration 1-6



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Chapter1-23

Owners 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.

Illustration 1-6



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Chapter1-24

Using The Basic Accounting Equation

Transactionsare a businesss economic eventsrecordedby accountants.

May be external or internal.

Not all activities represent transactions.

Each transaction has a dual effect on theaccounting equation.

LO 7 Analyze the effects of business transactionson the accounting equation.


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Chapter1-25

Q1-15:Are the following events recorded in theaccounting records?

EventSupplies arepurchasedon account.

Criterion Is the financial position (assets, liabilities, orowners equity) of the company changed?


An employeeis hired.

Ownerwithdrawscash for

personal use.

Record/Dont Record

Transactions (Question?)


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Chapter1-26

Discussion QuestionQ18. In February 2008, Paula King invested an

additional $10,000 in her business, Kings

Pharmacy, which is organized as a proprietorship.Kings accountant, Lance Jones, recorded this

receipt as an increase in cash and revenues. Is

this treatment appropriate? Why or why not?


Transactions



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Chapter1-27

P1-1A:Barones Repair Shop was started on May 1 byNancy. Prepare a tabular analysis of the followingtransactions for the month of May.

Transactions (Problem)

+10,0001. +10,000

CashAccounts

Receivable EquipmentAccountsPayable

Barone,Capital


+ + = +

1. Invested $10,000 cash to start the repair shop.

Investment

Assets Liabilities Equity


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Chapter1-28


+10,0001. +10,000

CashAccounts


Barone,Capital


2. Purchased equipment for $5,000 cash.

-5,0002. +5,000

+ + = +

Investment



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Chapter1-29


+10,0001. +10,000

CashAccounts



3. Paid $400 cash for May office rent.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

Barone,Capital

Investment



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Chapter1-30


+10,0001. +10,000

CashAccounts



4. Received $5,100 from customers for repair service.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

Barone,Capital

Investment



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Chapter1-31


+10,0001. +10,000

CashAccounts



5. Withdrew $1,000 cash for personal use.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

Barone,Capital

Investment



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Chapter1-32


+10,0001. +10,000

CashAccounts



6. Paid part-time employee salaries of $2,000.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

Barone,Capital

Investment



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Chapter1-33


+10,0001. +10,000

CashAccounts



7. Incurred $250 of advertising costs, on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

+2507. -250 Expense

Barone,Capital

Investment



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Chapter1-34


+10,0001. +10,000

CashAccounts



8. Provided $750 of repair services on account.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

+2507. -250 Expense+7508. +750 Revenue

Barone,Capital

Investment



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Chapter1-35


+10,0001. +10,000

CashAccounts



9. Collected $120 cash for services previously billed.

-5,0002. +5,000

+ + = +

-4003. -400 Expense

+5,1004. +5,100 Revenue

-1,0005. -1,000 Drawings

-2,0006. -2,000 Expense

+2507. -250 Expense+7508. +750 Revenue

+1209. -120

Barone,Capital

Investment


6,820 + 630 + 5,000 = 250 + 12,200


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Chapter1-36

Companies prepare four financial statements fromthe summarized accounting data:

BalanceSheet

IncomeStatement

Statementof CashFlows

OwnersEquity

Statement

Financial Statements

LO 8 Understand the four financial statements and how they are prepared.


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Chapter1-37

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.



Review Question


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Chapter1-38

Income Statement



Reports the revenuesand expenses for a

specific period of time.

Net income revenuesexceed expenses.

Net loss expensesexceed revenues.

Revenues:

Service revenue 5,850$

Expenses:

Salary expense 2,000

Rent expense 400

Advertising expense 250

Total expenses 2,650

Net income 3,200$

Barones Repair Shop

Income Statement

For the Month Ended May 31, 2007


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Chapter1-39

Revenues:

Service revenue 5,850$

Expenses:

Salary expense 2,000

Rent expense 400

Advertising expense 250

Total expenses 2,650

Net income 3,200$

Barones Repair Shop

Income Statement


Income Statement



Barone's, Capital May 1 -$

Add: Investment 10,000

Net income 3,200

13,200

Less: Drawings 1,000

Barone's, Capital May 31 12,200$

Barones Repair Shop

Owners' Equity Statement


Owners Equity

Statement

Net income is needed to determinethe ending balance in owners equity.


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Chapter1-40





Net income 3,200

13,200



Barones Repair Shop



Owners Equity

StatementStatement indicates thereasons why owners

equity has increased ordecreased during theperiod.


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Chapter1-41





Net income 3,200

13,200



Barones Repair Shop



Owners Equity

Statement

Assets

Cash 6,820$

Accounts receivable 630

Equipment 5,000

Total assets 12,450$

Liabilities

Accounts payable 250$Owners' Equity

Barone's, capital 12,200

Total liab. & equity 12,450$

Balance Sheet

Barones Repair Shop

May 31, 2007

The ending balance in owners equity isneeded in preparing the balance sheet

Balance Sheet


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Chapter1-42

Balance Sheet



Reports the assets,liabilities, and ownersequity at a specific date.

Assets listed at the top,followed by liabilitiesand owners equity.

Total assets must equaltotal liabilities andowners equity.

Assets

Cash 6,820$


Equipment 5,000


Liabilities




Balance Sheet

Barones Repair Shop

May 31, 2007


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Chapter1-43

Balance Sheet



Assets

Cash 6,820$


Equipment 5,000


Liabilities




Balance Sheet

Barones Repair Shop

May 31, 2007 Cash flow from Operations

Cash receipts from customers 5,220$

Cash paid for expenses (2,400)Cash provided by operations 2,820

Cash flow from Investing

Purchase of equipment (5,000)

Cash flow from Financing

Investment by owners 10,000

Drawings by owners (1,000)Cash provided by financing 9,000

Net increase in cash 6,820

Cash balance, May 1 -

Cash balance, May 31 6,820$

Statement of Cash Flows

Barones Repair Shop




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Chapter1-44



Cash flow from Operations

Cash receipts from customers 5,220$

Cash paid for expenses (2,400)Cash provided by operations 2,820

Cash flow from Investing

Purchase of equipment (5,000)

Cash flow from Financing

Investment by owners 10,000

Drawings by owners (1,000)Cash provided by financing 9,000

Net increase in cash 6,820

Cash balance, May 1 -

Cash balance, May 31 6,820$


Barones Repair Shop


Statement of Cash FlowsInformation for aspecific period of time.

Answers the following:

1. Where did cash comefrom?

2. What was cash usedfor?

3. What was the changein the cash balance?


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Chapter1-45

Which of the following financial statements isprepared as of a specific date?

a. Balance sheet.b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.



Review Question


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Chapter1-46

Discussion QuestionQ19. A companys net income appears directly

on the income statement and the owners equity

statement, and it is included indirectly in thecompanys balance sheet. Do you agree? Explain.





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Chapter

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Accounting Principle Kieso 8e_Ch01

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