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Classroom Policies

Present • Punctual and present for entire session

• Attendance part of grade

Prepared • Complete any pre-work/pre-reading

• Expect cold calling

Participating • Contribute to classroom learning

• No electronic devices

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Learning Objectives

Identify the activities and users associated with accounting.

Explain the building blocks of accounting: ethics, principles, and assumptions.

State the accounting equation, and define its components.3

Analyze the effects of business transactions on the accounting equation.

Describe the four financial statements and how they are prepared.5

Accounting in Action1

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Accounting consists of three basic activities—it

u identifies,

u records, and

u communicates

the economic events of an organization to interested users.

LEARNING OBJECTIVE

Identify the activities and users associated with accounting.1

LO 1

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Illustration 1-1 The activities of the accounting process

The accounting process includes the bookkeeping function.

Three Activities

LO 1

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INTERNAL USERS

Illustration 1-2 Questions that internal users ask

Who Uses Accounting Data

LO 1

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Illustration 1-3 Questions that external users ask

Who Uses Accounting Data

EXTERNAL USERS

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1DO IT! 1 Indicate whether the following statements are true or false.

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

2. Bookkeeping encompasses all steps in the accounting process.

3. Accountants prepare, but do not interpret, financial reports.

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

5. Managerial accounting activities focus on reports for internal users.

LO 1

Basic Concepts

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Ethics in Financial Reporting u Recent financial scandals include: Enron, WorldCom,

HealthSouth, AIG, and other companies.

u Regulators and lawmakers concerned that economy would suffer if investors lost confidence in corporate accounting. In response,

► Congress passed Sarbanes-Oxley Act (SOX).

u Effective financial reporting depends on sound ethical behavior.

LO 2

LEARNING OBJECTIVE

Explain the building blocks of accounting: ethics, principles, and assumptions.

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Illustration 1-4 Steps in analyzing ethics cases and situations

Ethics in Financial Reporting

LO 2

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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.

Question

Ethics in Financial Reporting

LO 2

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Various users need financial

information

The accounting profession has developed standards that are

generally accepted and universally practiced.

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

Generally Accepted Accounting Principles

(GAAP)

Generally Accepted Accounting Principles

LO 2

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Generally Accepted Accounting Principles (GAAP) – Standards that are generally accepted and universally practiced. These standards indicate how to report economic events.

Standard-setting bodies:

► Financial Accounting Standards Board (FASB)

► Securities and Exchange Commission (SEC)

► International Accounting Standards Board (IASB)

Generally Accepted Accounting Principles

LO 2

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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.

LO 2

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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.

u Proprietorship

u Partnership

u Corporation

Forms of Business Ownership

Assumptions

LO 2

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Proprietorship Partnership Corporation

u Owned by two or more persons

u Often retail and service-type businesses

u Generally unlimited personal liability

u Partnership agreement

u Ownership divided into shares of stock

u Separate legal entity organized under state corporation law

u Limited liability

u Owned by one person

u Owner is often manager/operator

u Owner receives any profits, suffers any losses, and is personally liable for all debts

Forms of Business Ownership

LO 2

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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.

LO 2

Assumptions

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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.

Question

LO 2

Assumptions

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

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

2. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB).

3. The historical 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.

LO 2

DO IT! 2 Building Blocks of Accounting

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4. Relevance means that financial information matches what really happened; the information is factual.

5. A business owner’s personal expenses must be separated from expenses of the business to comply with accounting’s economic entity assumption.

LO 2

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

DO IT! 2 Building Blocks of Accounting

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Assets Liabilities Owner's Equity= +

LO 3

LEARNING OBJECTIVE

State the accounting equation, and define its components.3

Basic Accounting Equation u Provides the underlying framework for recording and summarizing

economic events.

u Assets are claimed by either creditors or owners.

u If a business is liquidated, claims of creditors must be paid before ownership claims.

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Assets Liabilities Owner's Equity= +

u Resources a business owns.

u Provide future services or benefits.

u Cash, Supplies, Equipment, etc.

Assets

LO 3

Basic Accounting Equation

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Assets Liabilities Owner's Equity= +

Basic Accounting Equation

u Claims against assets (debts and obligations).

u Creditors (party to whom money is owed).

u Accounts Payable, Notes Payable, Salaries and Wages Payable, etc.

Liabilities

LO 3

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Owner's Equity

Assets Liabilities Owner's Equity= +

Basic Accounting Equation

LO 3

u Ownership claim on total assets.

u Referred to as residual equity.

u Investment by owners and revenues (+)

u Drawings and expenses (-).

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u Investments by owner are the assets the owner puts into the business.

u Revenues result from business activities entered into for the purpose of earning income.

► Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent.

Owner’s Equity

Increases in Owner’s Equity

Illustration 1-6 Expanded accounting equation

LO 3

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u Drawings An owner may withdraw cash or other assets for personal use.

u Expenses are the cost of assets consumed or services used in the process of earning revenue.

► Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc.

Owner’s Equity

Decreases in Owner’s Equity

Illustration 1-6 Expanded accounting equation

LO 3

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Expense Decrease

Revenue Increase

Drawings Decrease

Classification

Classify the following items as investment by owner, owner’s drawings, revenue, or expenses. Then indicate whether each item increases or decreases owner’s equity.

1. Rent Expense

2. Service Revenue

3. Drawings

4. Salaries and Wages Expense

Effect on Equity

LO 3

DO IT! 3 Owner's Equity Effects

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Transactions are a business’s economic events recorded by accountants.

u May be external or internal.

u Not all activities represent transactions.

u Each transaction has a dual effect on the accounting equation.

LO 4

LEARNING OBJECTIVE

Analyze the effects of business transactions on the accounting equation.4

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Illustration: Are the following events recorded in the accounting records?

Event Purchase computer

Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed?

Discuss product design with

potential customer Pay rent

Record/ Don’t Record

Transaction Analysis

LO 4

Illustration 1-7

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Transaction Analysis

TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start a smartphone app development company which he names Softbyte. On September 1, 2017, he invests $15,000 cash in the business. This transaction results in an equal increase in assets and owner’s equity.

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Owner's Capital

1. +15,000 +15,000

Assets = Liabilities + Owner's Equity

+ -+++ =

LO 4

Owner's Drawings Rev. Exp.+ -

Illustration 1-8 Tabular summary of Softbyte transactions

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

5. +250 -250

4. +1,200 +1,200

7. -1,700 -600 -900 -200

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

6. +1,500 +2,000 +3,500

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte Inc. purchases computer equipment for $7,000 cash.

Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

5. +250 -250

4. +1,200 +1,200

7. -1,700 -600 -900 -200

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

6. +1,500 +2,000 +3,500

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc. purchases for $1,600 headsets and other accessories expected to last several months. The supplier allows Softbyte to pay this bill in October.

Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

5. +250 -250

7. -1,700 -600 -900 -200

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

6. +1,500 +2,000 +3,500

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc. receives $1,200 cash from customers for app development services it has performed. Illustration 1-8

LO 4

4. +1,200 +1,200

Owner's Capital

Owner's Drawings Rev. Exp.+ -

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

7. -1,700 -600 -900 -200

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

6. +1,500 +2,000 +3,500

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte Inc. receives a bill for $250 from the Daily News for advertising on its online website but postpones payment until a later date. Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

4. +1,200 +1,200

5. +250 -250

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

7. -1,700 -600 -900 -200

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT. Softbyte performs $3,500 of services. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.

Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

4. +1,200 +1,200

6. +1,500 +2,000 +3,500

5. +250 -250

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the following expenses in cash for September: office rent $600, salaries and wages of employees $900, and utilities $200. Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

4. +1,200 +1,200

7. -1,700 -600 -900 -200

6. +1,500 +2,000 +3,500

5. +250 -250

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc. pays its $250 Daily News bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in Accounts Payable.

Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

4. +1,200 +1,200

7. -1,700 -600 -900 -200

6. +1,500 +2,000 +3,500

5. +250 -250

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8. -250 -250

9. +600 -600

10. -1,300 -1,300

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950 $1,300+ ++++ = - -

TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc. receives $600 in cash from customers who had been billed for services (in Transaction 6). Illustration 1-8

LO 4

Owner's Capital

Owner's Drawings Rev. Exp.+ -

4. +1,200 +1,200

7. -1,700 -600 -900 -200

6. +1,500 +2,000 +3,500

5. +250 -250

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$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $1,300 $4,700 $1,950

8. -250 -250

9. +600 -600

10. -1,300 -1,300

Trans- action Cash

Accounts Receivable Supplies Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+++ =

1. +15,000 +15,000

2. -7,000 +7,000

3. +1,600 +1,600

+ -+++ = + -

TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal withdraws $1,300 in cash in cash from the business for his personal use.

$18,050 $18,050

Illustration 1-8

LO 4

7. -1,700 -600 -900 -200

6. +1,500 +2,000 +3,500

5. +250 -250

Owner's Capital

Owner's Drawings Rev. Exp.+ -

4. +1,200 +1,200

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1. Each transaction is analyzed in terms of its effect on:

a. The three components of the basic accounting equation.

b. Specific of items within each component.

2. The two sides of the equation must always be equal.

Summary of Transactions

LO 4

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Transactions made by Virmari & Co., a public accounting firm, for the month of August are shown below. Prepare a tabular analysis which shows the effects of these transactions on the expanded accounting equation, similar to that shown in Illustration 1-8.

1. The owner invested $25,000 cash in the business.

2. The company purchased $7,000 of office equipment on credit.

3. The company received $8,000 cash in exchange for services performed.

4. The company paid $850 for this month’s rent.

5. The owner withdrew $1,000 cash for personal use.

LO 4

DO IT! 4 Tabular Analysis

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1. +25,000 +25,000

Trans- action Cash Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+ =

1. The owner invested $25,000 cash in the business.

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 $7,000 $7,000 $25,000 $8,000 $850 $1,000+ ++ = - -

$18,050 $18,050 LO 4

Owner's Drawings Rev. Exp.+ -

DO IT! 4 Tabular Analysis

Owner's Capital

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1. +25,000 +25,000

Trans- action Cash Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+ =

2. The company purchased $7,000 of office equipment on credit.

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 $7,000 $7,000 $25,000 $8,000 $850 $1,000+ ++ = - -

$18,050 $18,050 LO 4

Owner's Drawings Rev. Exp.+ -

DO IT! 4 Tabular Analysis

Owner's Capital

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1. +25,000 +25,000

Trans- action Cash Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+ =

3. The company received $8,000 cash in exchange for services performed.

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 $7,000 $7,000 $25,000 $8,000 $850 $1,000+ ++ = - -

$18,050 $18,050 LO 4

Owner's Drawings Rev. Exp.+ -

DO IT! 4 Tabular Analysis

Owner's Capital

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1. +25,000 +25,000

Trans- action Cash Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+ =

4. The company paid $850 for this month’s rent.

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 $7,000 $7,000 $25,000 $8,000 $850 $1,000+ ++ = - -

$18,050 $18,050 LO 4

Owner's Drawings Rev. Exp.+ -

DO IT! 4 Tabular Analysis

Owner's Capital

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1. +25,000 +25,000

Trans- action Cash Equipment

Accounts Payable

Assets = Liabilities + Owner's Equity

+ -+ =

5. The owner withdrew $1,000 cash for personal use.

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150 $7,000 $7,000 $25,000 $1,000 $8,000 $850+ -+ = +

$38,150 $38,150 LO 4

Owner's Drawings Rev. Exp.+ -

DO IT! 4 Tabular Analysis

Owner's Capital

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Companies prepare four financial statements :

Balance Sheet

Income Statement

Statement of Cash Flows

Owner’s Equity

Statement

LEARNING OBJECTIVE

Describe the four financial statements and how they are prepared.5

LO 5

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Financial Statements

Net income will result during a time period when:

a. assets exceed liabilities.

b. assets exceed revenues.

c. expenses exceed revenues.

d. revenues exceed expenses.

Question

LO 5

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Net income is needed to determine the ending balance in owner’s equity.Financial Statements

LO 5

Illustration 1-9 Financial statements and their interrelationships

SOFTBYTE Income Statement

For the Month Ended September 30, 2017

SOFTBYTE Owner’s Equity Statement

For the Month Ended September 30, 2017

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The ending balance in owner’s equity is needed in preparing the balance sheet.

Illustration 1-9

Illustration 1-9 Financial statements and their interrelationships

SOFTBYTE Owner’s Equity Statement

For the Month Ended September 30, 2017

SOFTBYTE Balance Sheet

September 30, 2017

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Balance sheet and income statement are needed to prepare statement of cash flows.

SOFTBYTE Balance Sheet

September 30, 2017

SOFTBYTE Statement of Cash Flows

For the Month Ended September 30, 2017

Illustration 1-9 Financial statements and their interrelationships

Financial Statements

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u Reports the revenues and expenses for a specific period of time.

u Lists revenues first, followed by expenses.

u Shows net income (or net loss).

Income Statement

LO 5

u Does not include investment and withdrawal transactions between the owner and the business in measuring net income.

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u Reports the changes in owner’s equity for a specific period of time.

u The time period is the same as that covered by the income statement.

Owner’s Equity Statement

LO 5

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u Reports the assets, liabilities, and owner's equity at a specific date.

u Lists assets at the top, followed by liabilities and owner’s equity.

u Total assets must equal total liabilities and owner's equity.

u Is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end).

Balance Sheet

LO 5

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u Information on the cash receipts and payments for a specific period of time.

u Answers the following:

► Where did cash come from?

► What was cash used for?

► What was the change in the cash balance?

Statement of Cash Flows

LO 5

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Which of the following financial statements is prepared as of a specific date?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.

Financial Statements

Question

LO 5

1-61 LO 5

DO IT! 5 Financial Statement Items Presented below is selected information related to Flanagan Company at December 31, 2017. Flanagan reports financial information monthly. Equipment $10,000 Utilities Expense $ 4,000 Cash 8,000 Accounts Receivable 9,000 Service Revenue 36,000 Salaries and Wages Expense 7,000 Rent Expense 11,000 Notes Payable 16,500 Accounts Payable 2,000 Owner’s Drawings 5,000

(a) Determine the total assets of at December 31, 2017. (b) Determine the net income reported for December 2017. (c) Determine the owner’s equity at December 31, 2017.

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(a) Determine the total assets of at December 31, 2017.

The total assets are $27,000, comprised of

• Cash $8,000,

• Accounts Receivable $9,000, and

• Equipment $10,000.

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(b) Determine the net income reported for December 2017.

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Forensic Accounting Uses accounting, auditing, and investigative skills to conduct

investigations into theft and fraud.

GovernmentalAccounting Careers with the IRS, the FBI, the

SEC, public colleges and universities, and in state and local

governments.

Private Accounting Careers in industry working in cost accounting, budgeting, accounting information systems, and taxation.

Public Accounting Careers in auditing, taxation, and

management consulting serving the general public.

LEARNING OBJECTIVE

APPENDIX 1A: Explain the career opportunities in accounting.6

LO 6

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Salary estimates for jobs in public and corporate accounting Illustration 1A-1

Upper-level management salaries in corporate accounting Illustration 1A-2

LO 6

“Show Me the Money”

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Key Points Following are the key similarities and differences between GAAP and IFRS as related to accounting fundamentals.

Similarities

u The basic techniques for recording business transactions are the same for U.S. and international companies.

u Both international and U.S. accounting standards emphasize transparency in financial reporting. Both sets of standards are primarily driven by meeting the needs of investors and creditors.

LO 7

LEARNING OBJECTIVE

Describe the impact of international accounting standards on U.S. financial reporting.7

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Key Points

Similarities

u The three most common forms of business organizations, proprietorships, partnerships, and corporations, are also found in countries that use international accounting standards.

Differences

u International standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board. Accounting standards in the United States are referred to as generally accepted accounting principles (GAAP) and are developed by the Financial Accounting Standards Board.

LO 7

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Key Points

Differences

u IFRS tends to be simpler in its accounting and disclosure requirements; some people say it is more “principles-based.” GAAP is more detailed; some people say it is more “rules-based.”

u The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation.

LO 7

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Looking to the Future Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported.

LO 7

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The Sarbanes-Oxley Act determines:

a) international tax regulations.

b) internal control standards as enforced by the IASB.

c) internal control standards of U.S. publicly traded companies.

d) U.S. tax regulations.

A Look at IFRS

IFRS Self-Test Questions

LO 7

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IFRS is considered to be more:

a) principles-based and less rules-based than GAAP.

b) rules-based and less principles-based than GAAP.

c) detailed than GAAP.

d) None of the above.

A Look at IFRS

IFRS Self-Test Questions

LO 7

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