Accounting principles 8th weygars kieso kimmel chapter 01

Chapter
1-1


CHAPTER 1

ACCOUNTING IN
ACTION
Accounting Principles, Eighth Edition
Chapter
1-2


Study
Study Objectives
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 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 owner’s equity.

7.

Analyze the effects of business transactions on the
accounting equation.

8.

Understand the four financial statements and how they are
prepared.

Chapter
1-3


Accounting
Accounting in
in Action
Action

What
Whatisis
Accounting?
Accounting?
Three
activities
Who uses
accounting
data

Chapter
1-4

The
TheBuilding
Building
Blocks
Blocksof
of
Accounting
Accounting
Ethics in
financial
reporting
Generally
accepted
accounting
principles
Assumptions

The
TheBasic
Basic
Accounting
Accounting
Equation
Equation
Assets
Liabilities
Owner’s
equity

Using
Usingthe
the
Basic
Basic
Accounting
Accounting
Equation
Equation
Transaction
analysis
Summary of
transactions

Financial
Financial
Statements

Statements
Income
statement
Owner’s
equity
statement
Balance
sheet
Statement of
cash flows


What
What is
is Accounting?
Accounting?
The purpose of accounting is to:
(1) identify,
identify record,
record and communicate the

economic events of an

(2) organization to
(3) interested users.

Chapter
1-5

LO 1 Explain what accounting is.

What
What is
is Accounting?
Accounting?
Three Activities

Illustration 1-1
Accounting process

The accounting process includes
the bookkeeping function.
Chapter
1-6

LO 1 Explain what accounting is.


Who
Who Uses
Uses Accounting
Accounting Data?
Data?
Internal Users
Human
Resources
Finance

Management

IRS
Investors

There are two broad
groups of users of
financial information:
internal users and
external users.

Marketing
Customers
Chapter
1-7

SEC

Labor
Unions
Creditors
External
Users

LO 2 Identify the users and uses of accounting.


Who
Who Uses
Uses Accounting
Accounting Data?

Data?
Common Questions Asked
1. Can we afford to give our
employees a pay raise?

User
Human Resources

2. Did the company earn a
satisfactory income?

Investors

3. Do we need to borrow in the
near future?
4. Is cash sufficient to pay
dividends to the stockholders?

Management
Finance

5. What price for our product
will maximize net income?

Marketing

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

Creditors

Chapter
1-8

LO 2 Identify the users and uses of accounting.


Who
Who Uses
Uses Accounting
Accounting Data?
Data?

Discussion Question
Q1. “Accounting is ingrained in our society and it is
vital to our economic system.” Do you agree? Explain.

See notes page for discussion
Chapter
1-9

LO 3 Understand why ethics is a fundamental business concept .


The
The Building
Building Blocks
Blocks of
of Accounting
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,
WorldCom, HealthSouth, AIG, and others.
Congress passedSarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound
ethical behavior.
Chapter
1-10

LO 3 Understand why ethics is a fundamental business concept .


Ethics
Ethics

Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

Chapter
1-11

LO 3 Understand why ethics is a fundamental business concept .

Ethics
Ethics

Review Question
Ethics are the standards of conduct by which one's
actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.

Chapter
1-12

LO 3 Understand why ethics is a fundamental business concept .


The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Various users
need financial
information

The accounting profession

has attempted to develop
a set of standards that
are generally accepted
and universally practiced.
Chapter
1-13

Financial Statements
Balance Sheet
Income Statement
Statement of Owner’s Equity
Statement of Cash Flows
Note Disclosure

Generally Accepted
Accounting
Principles (GAAP)

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


The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Organizations Involved in Standard Setting:
Securities and Exchange Commission (SEC)
/>

Financial Accounting Standards Board (FASB)
/>
International Accounting Standards Board
/>(IASB)
Chapter
1-14

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


The
The Building
Building Blocks
Blocks of
of Accounting
Accounting
Cost Principle (Historical) – dictates that companies
record assets at their cost.
Issues:
Reported at cost when purchased and also over the
time the asset is held.
Cost easily verified, whereas market value is often
subjective.
Fair value information may be more useful.

Chapter
1-15

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

Assumptions
Assumptions
Monetary Unit Assumption – include in the

accounting records only transaction data that can be
expressed in terms of money.

Economic Entity Assumption – requires that

activities of the entity be kept separate and distinct
from the activities of its owner and all other economic
entities.
Proprietorship.
Partnership.

Forms of
Business Ownership

Corporation.
Chapter
1-16

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


Forms
Forms of
of Business

Business Ownership
Ownership
Proprietorship

Chapter
1-17

Partnership

Corporation

Generally owned
by one person.

Owned by two or
more persons.

Often small
service-type
businesses

Often retail and
service-type
businesses

Ownership
divided into
shares of stock

Owner receives

any profits,
suffers any
losses, and is
personally liable
for all debts.

Generally
unlimited
personal liability

Separate legal
entity organized
under state
corporation law
Limited liability

Partnership
agreement
LO 5 Explain the monetary unit assumption
and the economic entity assumption.


Assumptions
Assumptions

Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.

c. monetary unit assumption.
d. ethics principle.

Chapter
1-18

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


Assumptions
Assumptions

Review Question
Combining the activities of Kellogg and General
Mills would violate the
a. cost principle.
b. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.

Chapter
1-19

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


Forms
Forms of

of Business
Business Ownership
Ownership

Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.
b. partnership.
c. corporation.
d. sole proprietorship.
Chapter
1-20

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


Forms
Forms of
of Business
Business Ownership
Ownership

Review Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a
a. proprietorship.

b. partnership.
c. corporation.
d. sole proprietorship.
Chapter
1-21

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


The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets

=

Liabilities

+

Owner’s
Equity

Provides the underlying framework for recording and
summarizing economic events.
Assets are claimed by either creditors or owners.
Claims of creditors must be paid before ownership

claims.

Chapter
1-22

LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.


The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets

=

Liabilities

+

Owner’s
Equity

Provides the underlying framework for recording and
summarizing economic events.
Assets
Resources a business owns.
Provide future services or benefits.

Cash, Supplies, Equipment, etc.
Chapter
1-23

LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.


The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets

=

Liabilities

+

Owner’s
Equity

Provides the underlying framework for recording and
summarizing economic events.
Liabilities
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.

Chapter
1-24

LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.


The
The Basic
Basic Accounting
Accounting Equation
Equation
Assets

=

Liabilities

+

Owner’s
Equity

Provides the underlying framework for recording and
summarizing economic events.
Owner’s Equity
Ownership claim on total assets.
Referred to as residual equity.

Chapter

1-25

Capital, Drawings, etc. (Proprietorship or
Partnership).

LO 6 State the accounting equation, and define
assets, liabilities, and owner’s equity.