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Fundamental Accounting Principles Wild/Larson/Chiappetta 18th Edition Chapter 1 Accounting in Business Conceptual Chapter Objectives C1: Explain the purpose and importance of accounting in the information age C2: Identify users and uses of accounting

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Fundamental accounting principles l.jpg
Fundamental Accounting Principles

Wild/Larson/Chiappetta18th Edition


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Chapter 1

Accounting in Business


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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 in accounting

C5: Explain the meaning of GAAP, and define and apply several key accounting principles

C6: Appendix 1B: Identify and describe the three major activities in organizations


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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 relation 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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is a

system that

information

that is

Importance of Accounting

C1

Accounting

Identifies

Records

Relevant

Communicates

Reliable

to help users make better decisions.

Comparable


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Accounting Activities

C 1

  • Identifying Business Activities

  • Recording Business Activities

  • Communicating Business Activities


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Internal Users

External Users

  • Lenders

  • Shareholders

  • Governments

  • Consumer Groups

  • External Auditors

  • Customers

  • Managers

  • Officers/Directors

  • Internal Auditors

  • Sales Staff

  • Budget Officers

  • Controllers

Users of Accounting Information

C 2


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ExternalUsers

Financial accountingprovides external users with financial statements.

Users of Accounting Information

C 2

Internal Users

Managerial accounting provides information needs for internal decision makers.


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Financial

Managerial

Taxation

  • Preparation

  • Analysis

  • Auditing

  • Regulatory

  • Consulting

  • Planning

  • Criminal investigation

  • General accounting

  • Cost accounting

  • Budgeting

  • Internal auditing

  • Consulting

  • Controller

  • Treasurer

  • Strategy

  • Preparation

  • Planning

  • Regulatory

  • Investigations

  • Consulting

  • Enforcement

  • Legal services

  • Estate plans

  • Lenders

  • Consultants

  • Analysts

  • Traders

  • Directors

  • Underwriters

  • Planners

  • Appraisers

  • FBI investigators

  • Market researchers

  • Systems designers

  • Merger services

  • Business valuation

  • Human services

  • Litigation support

  • Entrepreneurs

Accounting-related

Opportunities in Accounting

C 3



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Ethics

Ethics—A Key Concept

C 4

Beliefs that distinguish right from wrong

Accepted standards of good and bad behavior


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Guidelines for Ethical Decisions

C 4

  • Make ethical decision

  • Identify ethical concerns

  • Analyze options

Use personal ethics to recognize ethical concern.

Consider all good and bad consequences.

Choose best option after weighing all consequences.


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Relevant Information

Affects the decision of its users.

Reliable Information

Is trusted by users.

Comparable Information

Is helpful in contrasting organizations.

Generally Accepted Accounting Principles

C 5

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).


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Setting Accounting Principles

C 5

Financial Accounting Standards Board is the private group that sets both broad and specific principles.

The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public.

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices.


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Now

Future

Objectivity Principle

Accounting information is supported by independent, unbiased evidence.

Cost Principle

Accounting information is based on actual cost.

Going-Concern Principle

Reflects assumption that the business will continue operating instead of being closed or sold.

Principles of Accounting

C 5


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  • Revenue Recognition Principle

  • Recognize revenue when it is earned.

  • Proceeds need not be in cash.

  • Measure revenue by cash received plus cash value of items received.

Monetary Unit Principle

Express transactions and events in monetary, or money, units.

Business Entity Principle

A business is accounted for separately from other business entities, including its owner.

Principles of Accounting

C 5


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Sole Proprietorship

Partnership

Corporation

Business Entity Forms

C 5


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*

*

Characteristics of Businesses

C 5

*Proprietorships and partnerships that are set up as LLCs provide limited liability.


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Owners of a corporation are called shareholders (or stockholders).

When a corporation issues only one class of stock, we call it capital stock.

Corporation

C 5


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Accounting Equation

A1

EQUITY

=

+

Assets

Liabilities

Equity


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Sarbanes-Oxley Act

  • Also known as SOX

  • Passed by Congress to help curb financial abuses at companies that sell stock to the public

  • Requires accounting oversight and stringent internal controls

  • Penalties include stock market delisting and criminal prosecution


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Assets

A1

Cash

Accounts Receivable

Notes Receivable

Resources owned or controlled by a company

Vehicles

Land

Buildings

Store Supplies

Equipment


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Liabilities

A1

Accounts Payable

Notes Payable

Creditors’ claims on assets

Wages Payable

Taxes Payable


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Equity

A1

Owner Investments

CAPITAL


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Assets

Liabilities

Equity

_

_

=

+

Owner Capital

Owner Withdrawals

+

Revenues

Expenses

=

+

Assets

Liabilities

Equity

Owner's Equity

Expanded Accounting Equation

A1


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The accounting equation MUST remain in balance after each transaction.

=

+

Assets

Liabilities

Equity

Transaction Analysis Equation

A2


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The accounts involved are:

(1) Cash(asset)

(2) Owner Capital(equity)

Transaction Analysis

A2

J. Scott invests $20,000 cash to start the business.


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Transaction Analysis

A2

J. Scott invests $20,000 cash to start the business.


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The accounts involved are:

(1) Cash(asset)

(2) Supplies(asset)

Transaction Analysis

A2

Purchased supplies paying $1,000 cash.


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Transaction Analysis

A2

Purchased supplies paying $1,000 cash.


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The accounts involved are:

(1) Cash(asset)

(2) Equipment(asset)

Transaction Analysis

A2

Purchased equipment for $15,000 cash.


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Transaction Analysis

A2

Purchased equipment for $15,000 cash.


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Transaction Analysis

A2

Purchased Supplies of $200 and Equipment of $1,000 on account.

The accounts involved are:

(1) Supplies(asset)

(2) Equipment(asset)

(3) Accounts Payable(liability)


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Transaction Analysis

A2

Purchased Supplies of $200 and Equipment of $1,000 on account.


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Transaction Analysis

A2

Borrowed $4,000 from 1st American Bank.

The accounts involved are:

(1) Cash(asset)

(2) Notes payable(liability)


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Transaction Analysis

A2

Borrowed $4,000 from 1st American Bank.


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Transaction Analysis

A2

The balances so far appear below. Note that the Balance Sheet Equation is still in balance.


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Transaction Analysis

A2

Now, let’s look at transactions involving revenue, expenses and withdrawals.


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Transaction Analysis

A2

Provided consulting services receiving $3,000 cash.

The accounts involved are:

(1) Cash(asset)

(2) Revenues(equity)


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Transaction Analysis

A2

Provided consulting services receiving $3,000 cash.


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Transaction Analysis

A2

Paid salaries of $800 to employees.

The accounts involved are:

(1) Cash(asset)

(2) Salaries expense(equity)

Remember that the balance in the salaries expense account actually increases.

But, equity decreases because expenses reduce equity.


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Transaction Analysis

A2

Paid salaries of $800 to employees.

Remember that expensesdecreaseequity.


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Transaction Analysis

A2

A withdrawal of $500 is made by the owner.

The accounts involved are:

(1) Cash(asset)

(2) Withdrawals(equity)

Remember that the withdrawal account actually increases.

But, total equitydecreases because the withdrawal reduces equity.


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Transaction Analysis

A2

A withdrawal of $500 is made by the owner.

Remember that withdrawalsdecreaseequity.


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Financial Statements

P1

Let’s prepare the Financial Statements reflecting the transactions we have recorded.

  • Income Statement

  • Statement of Owner’s Equity

  • Balance Sheet

  • Statement of Cash Flows


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Income Statement

P1

Net income is the difference between Revenues and Expenses.

The income statementdescribes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.


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Statement of Owner’s Equity

P1

The net income of $2,200 increases Owner's Equity by $2,200.


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Balance Sheet

P1

TheBalance Sheetdescribes a company’s financial position at a point in time.



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Return onassets

Net incomeAverage total assets

=

Return on Assets (ROA)

A3

ROA is viewed as an indicator of operating efficiency.



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