Financial accounting 9th kieso kimmel chapter 01

Preview of Chapter 1

Financial Accounting
Ninth Edition
Weygandt Kimmel Kieso
1-1


1

Accounting in Action

Accounting in Action

Learning Objectives
After studying this chapter, you should be able to:
[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.
[5] Explain the monetary unit assumption and the economic entity assumption.
[6] State the accounting equation, and define its components.
[7] Analyze the effects of business transactions on the accounting equation.
[8] Understand the four financial statements and how they are prepared.
1-2


What is Accounting?
Accounting consists of three basic activities—it


identifies,



records, and



communicates

the economic events of an organization to interested users.

1-3

LO 1


What is Accounting?
Three Activities

Illustration 1-1
The activities of the
accounting process

The accounting process includes
the bookkeeping function.

1-4

LO 1

1

Accounting in Action

Accounting in Action

Learning Objectives
After studying this chapter, you should be able to:
[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.
[5] Explain the monetary unit assumption and the economic entity assumption.
[6] State the accounting equation, and define its components.
[7] Analyze the effects of business transactions on the accounting equation.
[8] Understand the four financial statements and how they are prepared.
1-5


Who Uses Accounting Data
Internal
Users

Illustration 1-2
Questions that internal
users ask

1-6

LO 2


1-7

LO 2


Who Uses Accounting Data
External
Users

1-8

Illustration 1-3
Questions that external
users ask

LO 2


1

Accounting in Action

Accounting in Action

Learning Objectives
After studying this chapter, you should be able to:

[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.
[5] Explain the monetary unit assumption and the economic entity assumption.
[6] State the accounting equation, and define its components.
[7] Analyze the effects of business transactions on the accounting equation.
[8] Understand the four financial statements and how they are prepared.
1-9


The Building Blocks of Accounting
Ethics In Financial Reporting
United States regulators and lawmakers were very concerned
that the economy would suffer if investors lost confidence in
corporate accounting because of unethical financial reporting.

1-10



Recent financial scandals include: Enron, WorldCom,
HealthSouth, AIG, and others.



Congress passed Sarbanes-Oxley Act of (SOX).



Effective financial reporting depends on sound ethical
behavior.

LO 3


The Building Blocks of Accounting
Ethics In Financial Reporting

1-11

Illustration 1-4
Steps in analyzing ethics cases
and situations

LO 3


Ethics in Financial Reporting
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.

1-12

LO 3

1-13

LO 3


1

Accounting in Action

Accounting in Action

Learning Objectives
After studying this chapter, you should be able to:
[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.
[5] Explain the monetary unit assumption and the economic entity assumption.
[6] State the accounting equation, and define its components.
[7] Analyze the effects of business transactions on the accounting equation.
[8] Understand the four financial statements and how they are prepared.
1-14


Generally Accepted Accounting Principles
Various users
need financial
information

Financial Statements






The accounting profession
has attempted to develop a
set of standards that are
generally accepted and
universally practiced.
1-15

Balance Sheet
Income Statement
Statement of Stockholders’ Equity
Statement of Cash Flows
Note Disclosure

Generally Accepted
Accounting
Principles (GAAP)

LO 4


Generally Accepted Accounting Principles
Generally Accepted Accounting Principles (GAAP) –

Standards that are generally accepted and universally practiced.
These standards indicate how to report economic events.
Standard-setting bodies:

1-16

►

Financial Accounting Standards Board
(FASB)

►

Securities and Exchange Commission
(SEC)

►

International Accounting Standards
Board (IASB)

LO 4


Generally Accepted Accounting Principles
Measurement Principles
Historical Cost Principle (or cost principle) dictates that
companies record assets at their cost.

Fair Value Principle states that assets and liabilities should

be reported at fair value (the price received to sell an asset or
settle a liability).
Selection of which principle to follow
generally relates to trade-offs
between relevance and faithful
representation.
1-17

LO 4


1-18

LO 4


1

Accounting in Action

Accounting in Action

Learning Objectives
After studying this chapter, you should be able to:
[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.
[5] Explain the monetary unit assumption and the economic entity
assumption.

[6] State the accounting equation, and define its components.
[7] Analyze the effects of business transactions on the accounting equation.
1-19

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


Generally Accepted Accounting Principles
Assumptions
Monetary Unit Assumption requires that companies
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.


1-20

Proprietorship.



Partnership.



Corporation.

Forms of Business
Ownership
LO 5


Forms of Business Ownership
Proprietorship


Generally owned
by one person.



Owned by two or
more persons.



Often small
service-type
businesses



Often retail and
service-type
businesses

Owner receives

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





1-21

Partnership



Generally
unlimited
personal liability

Corporation


Ownership
divided into
shares of stock



Separate legal

entity organized
under state
corporation law



Limited liability

Partnership
agreement
LO 5


Indicate whether each of the following statements presented below
is true or false.

1-22

1.

The three steps in the accounting process are
identification, recording, and communication.

True

2.

The two most common types of external users are
investors and company officers.

False

3.

Congress passed the Sarbanes-Oxley Act to reduce
unethical behavior and decrease the likelihood of
future corporate scandals.

True

Advance slide in presentation mode to reveal answers.

LO 5


Indicate whether each of the following statements presented below
is true or false.
4.

5.

1-23

The primary accounting standard-setting body in the
United States is the Financial Accounting Standards
Board (FASB).
The cost principle dictates that companies record
assets at their cost. In later periods, however, the fair
value of the asset must be used if fair value is higher
than its cost.

Advance slide in presentation mode to reveal answers.

True

False

LO 5


Generally Accepted Accounting Principles
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.

1-24

Advance slide in presentation mode to reveal answers.

LO 5


Generally Accepted Accounting Principles
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.

1-25

Advance slide in presentation mode to reveal answers.

LO 5