Financial accounting
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Financial Accounting. John J. Wild 4th Edition. Information for Decisions. Chapter 1. Introducing 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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Financial accounting

Financial Accounting

John J. Wild

4th Edition

Information for Decisions


Chapter 1

Chapter 1

Introducing Accounting

in Business


Conceptual chapter objectives

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


Analytical chapter objectives

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


Procedural chapter objectives

Procedural Chapter Objectives

P1: Identify and prepare basic financial statements and explain how they interrelate


Importance of accounting

is a

system that

information

that is

Importance of Accounting

C1

Accounting

Identifies

Records

Relevant

Communicates

Reliable

to help users make better decisions.

Comparable


Accounting activities

Accounting Activities

C 1

  • Identifying Business Activities

  • Recording Business Activities

  • Communicating Business Activities


Users of accounting information

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


Users of accounting information1

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.


Opportunities in accounting

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


Accounting jobs by area

Accounting Jobs by Area

C 3


Ethics a key concept

Ethics

Ethics—A Key Concept

C 4

Beliefs that distinguish right from wrong

Accepted standards of good and bad behavior


Guidelines for ethical decisions

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.


Generally accepted accounting principles

Relevant Information

Affects the decision of its users.

Reliable Information

Is trusted by users.

Comparable Information

Used in comparisons across years & companies.

Generally Accepted Accounting Principles

C 5

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


Setting accounting principles

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 inter-

national standards that identify preferred accounting practices

in other countries. The IASB does not have authority to impose

its standards on companies.


Principles of accounting

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


Principles of accounting1

  • 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


Business entity forms

Sole Proprietorship

Partnership

Corporation

Business Entity Forms

C 5


Characteristics of businesses

*

*

Characteristics of Businesses

C 5

*Proprietorships and partnerships that are set up as LLC’s provide limited liability.


Corporation

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

When a corporation issues only one class of stock, we call it common stock(or capital stock).

Corporation

C 5


Accounting equation

=

+

Assets

Liabilities

Equity

Accounting Equation

A1

Liabilities & Equity

Assets


Assets

Assets

A1

Cash

Accounts Receivable

Notes Receivable

Resources owned or controlled by a company

Vehicles

Land

Buildings

Store Supplies

Equipment


Liabilities

Liabilities

A1

Accounts Payable

Notes Payable

Creditors’ claims on assets

Wages Payable

Taxes Payable


Equity

Equity

A1

Retained Earnings

Contributed Capital

Owner’s

claim on

assets

Dividends


Expanded accounting equation

Assets

Liabilities

Equity

_

_

=

+

Common Stock

Dividends

+

Revenues

Expenses

=

+

Assets

Liabilities

Equity

Retained Earnings

Expanded Accounting Equation

A1


Transaction analysis equation

The accounting equation MUST remain in balance after each transaction.

=

+

Assets

Liabilities

Equity

Transaction Analysis Equation

A2


Transaction analysis

The accounts involved are:

(1) Cash(asset)

(2) Common Stock(equity)

Transaction Analysis

A2

J. Scott invests $20,000 cash to start the business in exchange for stock.


Transaction analysis1

Transaction Analysis

A2

J. Scott invests $20,000 cash to start the business in return for stock.


Transaction analysis2

The accounts involved are:

(1) Cash(asset)

(2) Supplies(asset)

Transaction Analysis

A2

Purchased supplies paying $1,000 cash.


Transaction analysis3

Transaction Analysis

A2

Purchased supplies paying $1,000 cash.


Transaction analysis4

The accounts involved are:

(1) Cash(asset)

(2) Equipment(asset)

Transaction Analysis

A2

Purchased equipment for $15,000 cash.


Transaction analysis5

Transaction Analysis

A2

Purchased equipment for $15,000 cash.


Transaction analysis6

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)


Transaction analysis7

Transaction Analysis

A2

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


Transaction analysis8

Transaction Analysis

A2

Borrowed $4,000 from 1st American Bank.


Transaction analysis9

Transaction Analysis

A2

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


Transaction analysis10

Transaction Analysis

A2

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


Transaction analysis11

Transaction Analysis

A2

Provided consulting services receiving $3,000 cash.

The accounts involved are:

(1) Cash(asset)

(2) Revenues(equity)


Transaction analysis12

Transaction Analysis

A2

Provided consulting services receiving $3,000 cash.


Transaction analysis13

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.


Transaction analysis14

Transaction Analysis

A2

Paid salaries of $800 to employees.

Remember that expensesdecreaseequity.


Transaction analysis15

Transaction Analysis

A2

Dividends of $500 are paid to shareholders.

The accounts involved are:

(1) Cash(asset)

(2) Dividends(equity)

Remember that the Dividend account actually increases.

But,equitydecreases because dividends reduce equity.


Transaction analysis16

Transaction Analysis

A2

Dividends of $500 are paid to shareholders.

Remember that dividendsdecreaseequity.


Financial statements

Financial Statements

P1

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

  • Income Statement

  • Statement of Retained Earnings

  • Balance Sheet

  • Statement of Cash Flows


Income statement

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.


Statement of retained earnings

Statement of Retained Earnings

P1

The net income of $2,200 increases Retained Earnings by $2,200.


Balance sheet

Balance Sheet

P1

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


Statement of cash flows

Statement of Cash Flows

P1


Return on assets roa

Return onassets

Net incomeAverage total assets

=

Return on Assets (ROA)

P1

ROA is viewed as an indicator of operating efficiency.


End of chapter 1

End of Chapter 1


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