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Transcript of financial accounting
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Financial Accounting Fundamentals
John J. Wild
2009 Edition
John J. Wild
2009 Edition
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All
rights reserved.
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Chapter 1
Introducing Financial Accounting
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Conceptual Chapter Objectives
C1: Explain the purpose and importance of accounting in the information age.
C2: Identify users and uses of accounting.C3: Identify opportunities in accounting and
related fields.C4: Explain why ethics are crucial to
accounting.C5: Explain GAAP, and define and apply
several key accounting principles.C6: Appendix 1B: Identify and describe the
three major activities of organizations.1-3
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Analytical Chapter Objectives
A1: Define and interpret the accounting equation and each of its components.
A2: Analyze business transactions using the accounting equation.
A3: Compute and interpret return on assets.
A4: Appendix 1A: Explain the relationship between return and risk.
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Procedural Chapter Objectives
P1: Identify and prepare basic financial statements and explain how they interrelate.
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IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Importance of Accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
C1
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Identifying Business Activities
Recording Business Activities
Communicating Business Activities
Accounting ActivitiesC 1
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Users of Accounting Information
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
C 2
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Users of Accounting Information
External Users
Financial accounting provides external users with financial
statements.
Internal Users
Managerial accounting provides information needs for internal
decision makers.
C 2
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Opportunities in Accounting
FinancialFinancial
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation
ManagerialManagerial
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy
TaxationTaxation
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate plans
•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate plans
Accounting-related
Accounting-related
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Forensic accountant•Litigation support•Entrepreneurs
•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Forensic accountant•Litigation support•Entrepreneurs
C 3
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Accounting Jobs by Area
Government, not-for-profit, & education
15%
Public accounting
25%
Private accounting
60%
C 3
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Beliefs that distinguish right from
wrong
Accepted standards of good and bad
behavior
Ethics
Ethics—A Key ConceptC 4
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Identify ethical concerns
Analyze options
Make ethical decision
Use personal ethics to
recognize ethical concern.
Consider all good and bad
consequences.
Choose best option after weighing all
consequences.
Guidelines for Ethical DecisionsC 4
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Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Generally Accepted Accounting Principles
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
C 5
Comparable Information
Comparable Information
Used in comparisons across years & companies.
Used in comparisons across years & companies.
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The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.
The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.
Setting Accounting Principles
The Financial Accounting Standards Board is the private group that sets both broad and specific principles.
The Financial Accounting Standards Board is the private group that sets both broad and specific principles.
C 5
The International Accounting Standards Board (IASB) issues inter-national standards that identify preferred accounting practicesin other countries. The IASB does not have authority to imposeits standards on companies.
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Principles of AccountingC 5
Cost principle means that accounting information is based on actual cost.
Going-concern means that accounting information reflects a presumption the business will continue operating.
Monetary unit means we can express transactions in money.
Revenue recognition principle provides guidance on when a company must recognize revenue.
Business entity means that a business is accounted for separately from its owner or other business entities.
Matching Principle prescribes that a company must record its expenses incurred to generate the revenue.
Full disclosure principle requires a company to report the details behind financial statements that would impact users’ decisions.
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Business Entity Forms
Sole Proprietorship
Sole Proprietorship
PartnershipPartnership CorporationCorporation
C 5
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AssetsLiabilities & Equity
Accounting Equation
LiabilitiesLiabilities EquityEquityAssetsAssets = +
A1
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LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
AssetsA1
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Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
LiabilitiesA1
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Owner’sclaim on
assets
Owner’sclaim on
assets
DividendsDividends
Contributed Capital
Contributed Capital
Retained Earnings
Retained Earnings
EquityA1
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Expanded Accounting Equation
RevenuesRevenues ExpensesExpensesCommon
StockCommon
StockDividendsDividends__ ++ __
Retained Earnings
LiabilitiesLiabilities EquityEquityAssetsAssets = +
A1
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Transaction Analysis
J. Scott invests $20,000 cash to start the business in return for stock.
A2
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Transaction Analysis
Purchased supplies paying $1,000 cash.
A2
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Transaction Analysis
Purchased equipment for $15,000 cash.
A2
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Transaction Analysis
Purchased Supplies of $200 and Equipment of $1,000 on account.
A2
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Transaction Analysis
Borrowed $4,000 from 1st American Bank.
A2
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Transaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
A2
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Transaction Analysis
Now, let’s look at transactions involving revenue, expenses and
dividends.
A2
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Transaction Analysis
Provided consulting services receiving $3,000 cash.
A2
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Transaction Analysis
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
A2
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Transaction Analysis
Remember that dividends decrease equity.
Dividends of $500 are paid to shareholders.
A2
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Financial Statements
Let’s prepare the Financial Statements reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
P1
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Net income is the difference between
Revenues and Expenses.
Net income is the difference between
Revenues and Expenses.
The 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.
The 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.
Income StatementP1
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The net income of $2,200 increases Retained Earnings by $2,200.
The net income of $2,200 increases Retained Earnings by $2,200.
Statement of Retained EarningsP1
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The Balance Sheet describes a company’s financial position at a point in time.
The Balance Sheet describes a company’s financial position at a point in time.
Balance SheetP1
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Statement of Cash FlowsP1
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ROA is viewed as an indicator of operating
efficiency.
ROA is viewed as an indicator of operating
efficiency.
Return on Assets (ROA)
Net incomeAverage total assets
Return onassets
=
A3
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End of Chapter 1
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