ch01 weygandt

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Chapter 1 Accounting in ActionLearning Objectives

After studying this chapter, you should be able to:

1. Explain what accounting is.

2. Identi! the users and uses o accounting.

". #nderstand wh! ethics is a unda$ental business concept.

%. Explain accounting standards and the $easure$ent principles.

&. Explain the $onetar! unit assu$ption and the econo$ic entit!assu$ption.

'. (tate the accounting e)uation* and deine its co$ponents.

+. Anal!,e the eects o business transactions on the accounting e)uation.

. #nderstand the our inancial state$ents and how the! are prepared.


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Preview of Chapter 1

Financial Accounting

IFRS Second Edition

Weygandt Kimmel Kieso


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1-% LO 1 Explain what accounting is.

Accountingconsists o three basic activities - it

identiies,

records, and

co$$unicates

the economic events of an organization to interested users.

hat is Accounting/


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0hree Activities

Illustration 1-1

The activities of the

accounting process

The accounting process includes

the booeepingfunction.

hat is Accounting/

LO 1 Explain what accounting is.


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anage$ent

3u$an

4esources0axing

Authorities

Labor

#nions

4egulator!Agencies

areting

5inance

Investors

Creditors

Custo$ers

Internal

#sers

External#sers

ho #ses Accounting 6ata

LO 2 Identi! the users and uses o accounting.


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Common Questions Asked User

1. Can we afford to give ouremployees a pay raise 3u$an 4esources

!. "id the company earn a

satisfactory income

#. $hould any product lines %eeliminated

&. 's cash sufficient to pay dividendsto shareholders

(. )hat price for our product willma*imize net income

+. )ill the company %e a%le to payits de%ts

Investors

anage$ent

5inance

areting

Creditors

ho #ses Accounting 6ata

LO 2 Identi! the users and uses o accounting.


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Ethics In 5inancial 4eporting

LO " #nderstand wh! ethics is a unda$ental business concept.

$tandards of conduct %y which ones actions are -udged as

right or wrong, honest or dishonest, fair or not fair, are

ethics.

ecent financial scandals include/ 0nronU$A2,

3armalat'TA2, $atyam Computer $ervices '4"2,A'5

U$A2, and others.

0ffective financial reporting depends on sound ethical

%ehavior.

0he 7uilding 7locs o Accounting


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Ethics In 5inancial 4eportingIllustration 1-%

$teps in analyzing ethics cases

and situations



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0thics are the standards of conduct %y which one6s actions are

-udged as/

a. right or wrong.

%. honest or dishonest.

c. fair or not fair.

d. all of these options.

:uestion


Ethics in 5inancial 4eporting


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'nternational 7inancial eporting $tandards '7$2

LO % Explain accounting standards and the $easure$ent principles.

7inancial Accounting $tandards 8oard 7A$82

http/99www.fas%.org9

'nternational Accounting $tandards 8oard 'A$82

http/99www.ias%.org9

5enerally Accepted Accounting 3rinciples 5AA32


Accounting (tandards
http://www.fasb.org/http://www.iasb.org/http://www.iasb.org/http://www.fasb.org/


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Cost ;rinciple: or historical cost principle, dictates that

companies record assets at their cost.

5air


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onetar! #nit: include in the accounting records only

transaction data that can %e e*pressed in money terms.

Econo$ic Entit!: re;uires that activities of the entity %ekept separate and distinct from the activities of its owner and

all other economic entities.

;roprietorship.

;artnership.

Corporation.

LO & Explain the $onetar! unit assu$ptionand the econo$ic entit! assu$ption.

5or$s o 7usiness

Ownership

Assu$ptions



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;roprietorship ;artnership Corporation


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'ndicate whether each of the following statements presented %elowis trueor alse.


1. The three steps in the accounting process are

identification, recording, and communication.

!. The two most common types of e*ternal users are

investors and company officers.

#. $hareholders in a corporation en-oy limited legal

lia%ility as compared to partners in a partnership.

True

7alse

True


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7alse

True


&. The primary accounting standard=setting %ody outside

the United $tates is the 'nternational Accounting

$tandards 8oard 'A$82.

(. The cost principle dictates that companies record

assets at their cost. 'n later periods, however, the fair

value of the asset must %e used if fair value is higher

than its cost.

'ndicate whether each of the following statements presented %elowis trueor alse.


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:uestionCom%ining the activities of ?ellogg and 5eneral @ills would

violate the

a. cost principle.

%. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.




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A %usiness organized as a separate legal entity under law

having ownership divided into ordinary shares is a

a. proprietorship.

%. partnership.

c. corporation.

d. sole proprietorship.


:uestion

5or$s o 7usiness Ownership


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AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities E)uit!E)uit!E)uit!E)uit!= >

3rovides the underl!ing ra$eworfor recording andsummarizing economic events.

Applies to all economic entities regardless of size.

0he 7asic Accounting E)uation

LO ' (tate the accounting e)uation* and deine its co$ponents.


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AssetsAssetsAssetsAssets


esources a %usiness owns. 3rovide future services or %enefits.

Cash, 'nventory, 0;uipment, etc.

Assets

LiabilitiesLiabilitiesLiabilitiesLiabilities E)uit!E)uit!E)uit!E)uit!= >




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Liabilities

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities= >

E)uit!E)uit!E)uit!E)uit!



Claims against assets de%ts and o%ligations2. Creditors = party to whom money is owed.

Accounts paya%le, 4otes paya%le, etc.


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4evenuesresult from %usiness activities entered into for the purpose

of earning income.

5enerally results from selling merchandise, performing services,

renting property, and lending money.

Illustration 1-+




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Expensesare the cost of assets consumed or services used in the

process of earning revenue.

Common e*penses are salaries e*pense, rent e*pense, interest

e*pense, property ta* e*pense, etc.

Illustration 1-+




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6ividends are the distri%ution of cash or other assets to shareholders.

educe retained earnings

4ot an e*pense

Illustration 1-+




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Classification

Classify the following items as issuance of shares, dividends,revenues, or e*penses. Then indicate whether each item

increases or decreases e;uity.

1. ent e*pense

!. $ervice revenue

#. "ividends

&. $alaries e*pense


0ffect on 0;uity0*pense "ecrease

evenue 'ncrease

0;uity "ecrease

0*pense "ecrease


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0ransactionsare a %usinesss economic events recorded%y accountants.

@ay %e externalor internal.

4ot all activities represent transactions.

0ach transaction has a dual effect on the accounting

e;uation.

LO + Anal!,e the eects o business transactions on the accounting e)uation.

#sing the Accounting E)uation


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Illustration?Are the following events recorded in the accountingrecords

Event;urchase

co$puter.

Criterion 's the financial position assets, lia%ilities, or e;uity2of the company changed

6iscuss

product

design with

custo$er.

;a! rent.

4ecord@

6ont 4ecord

LO + Anal!,e the eects o business transactions on the accounting e)uation.


Illustration 1-


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1-"2 LO + Anal!,e the eects o business transactions on the accounting e)uation.


Illustration 1-8

0*panded accounting e;uation

0ransaction Anal!sis


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0ransaction B1. Invest$ent b! (hareholders. ay and 8ar%ara 4eal

decides to open a computer programming service which he names$oft%yte.


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Illustration 1-19

0ransaction B2. ;urchase o E)uip$ent or Cash. $oft%yte purchases

computer e;uipment for B, cash.


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Illustration 1-19

0ransaction B". ;urchase o (upplies on Credit. $oft%yte purchases for

B1,+ from Acme $upply Company computer paper and other suppliese*pected to last several months. The purchase is on account.


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Illustration 1-19

0ransaction B%. (ervices ;rovided or Cash. $oft%yte receives B1,!

cash from customers for programming services it has provided.


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Illustration 1-19

0ransaction B&. ;urchase o Advertising on Credit. $oft%yte receives a

%ill for B!( from the "aily 4ews for advertising %ut postpones paymentuntil a later date.


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Illustration 1-19

0ransaction B'. (ervices ;rovided or Cash and Credit.$oft%yte

provides B#,( of programming services for customers. The companyreceives cash of B1,( from customers, and it %ills the %alance of B!,

on account.


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Illustration 1-19

0ransaction B+. ;a!$ent o Expenses. $oft%yte pays the following

e*penses in cash for $eptem%er/ store rent B+, salaries and wages ofemployees BD, and utilities B!.


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Illustration 1-19

0ransaction B. ;a!$ent o Accounts ;a!able.$oft%yte pays its B!(

"aily 4ews %ill in cash.


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Illustration 1-19

0ransaction B8. 4eceipt o Cash on Account.$oft%yte receives B+ in

cash from customers who had %een %illed for services Ein Transaction +2F.


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Illustration 1-19

0ransaction B19. 6ividends.The corporation pays a dividend of B1,# in

cash.


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Companies prepare ourfinancial statements /

$tatement

of 7inancial

3osition

'ncome

$tatement

$tatement

of Cash

7lows

etained

0arnings

$tatement

LO #nderstand the our inancial state$ents and how the! are prepared.

5inancial (tate$ents


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4et income will result during a time period when/

a. assets e*ceed lia%ilities.

%. assets e*ceed revenues.

c. e*penses e*ceed revenues.

d. revenues e*ceed e*penses.



:uestion

4et income is needed to determine the


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4et income is needed to determine the

ending %alance in retained earnings.5inancial (tate$ents

LO

Illustration 1-11

7inancial statements and

their interrelationships

The ending %alance in retained earnings is


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The ending %alance in retained earnings is

needed in preparing the %alance sheet5inancial (tate$ents

Illustration 1-11

LO

The %alance sheet and income statement are


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The %alance sheet and income statement are

needed to prepare statement of cash flows.5inancial (tate$ents

Illustration 1-11

LO


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)hich of the following financial statements is prepared as

of a specific date

a. $tatement of financial position.

%. 'ncome statement.

c. etained earnings statement.

d. $tatement of cash flows.



:uestion


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5orensic Accounting

Uses accounting, auditing, and

investigative skills to conductinvestigations into theft and

fraud.

Dovern$ent

Careers with the ta*

authorities, law enforcementagencies, and corporate

regulators.

;rivate AccountingCareers in industry working in

cost accounting, %udgeting,

accounting information

systems, and ta*ation.

LO 8 Explain the career opportunities in accounting.

;ublic AccountingCareers in auditing, ta*ation,

and management consulting

serving the general pu%lic.

A;;E6IF 1A ACCO#0ID CA4EE4 O;;O40#I0IE(


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1-&1 LO 8 Explain the career opportunities in accounting.

A;;E6IF 1A ACCO#0ID CA4EE4 O;;O40#I0IE(

G(how e the one!H$alary estimates for -o%s in pu%lic and corporate accounting Illustration 1A-1

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


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e! ;oints @ost agree that there is a need for one set of international accounting

standards. Gere is why/

H @ultinational corporations. Todays companies view the entire world

as their market.H @ergers and ac;uisitions. The mergers %etween 7iat9Chrysler and

Iodafone9@annesmann suggest that we will see even more such

%usiness com%inations in the future.

H 'nformation technology. As communication %arriers continue to

topple through advances in technology, companies and individualsin different countries and markets are %ecoming more comforta%le

%uying and selling goods and services from one another.

H 7inancial markets. 7inancial markets are of international

significance today.

Another ;erspective


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e! ;oints 'n !!, the U.$. Congress issued the $ar%anes=


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e! ;oints '7$ tends to %e less detailed in its accounting and disclosure

re;uirements than 5AA3. This difference in approach has resulted in a

de%ate a%out the merits of principles=%ased'7$2 versus rules=

%ased5AA32 standards.

U.$. regulators have recently eliminated the need for foreign companies

that trade shares in U.$. markets to reconcile their accounting with

5AA3.

5AA3 is %ased on a conceptual framework that is similar to that used to

develop '7$.

Another ;erspective


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e! ;oints The three common forms of %usiness organization that are presented in

the chapter, proprietorships, partnerships, and corporations, are also

found in the United $tates. 8ecause the choice of %usiness organization

is influenced %y factors such as legal environment, ta* rates and

regulations, and degree of entrepreneurism, the relative use of each

form will vary across countries.

Transaction analysis is %asically the same under '7$ and 5AA3 %ut, as

you will see in later chapters, the different standards may impact how

transactions are recorded.

Another ;erspective


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e! ;oints The %asic definitions provided in this te*t%ook for the key elements of

financial statements are simplified versions of the official definitions

provided %y the 'A$8.

H

Assets 3ro%a%le future economic %enefits o%tained or controlled %ya particular entity as a result of past transactions or events.

H >ia%ilities 3ro%a%le future sacrifices of economic %enefits arising

from present o%ligations of a particular entity to transfer assets or

provide services to other entities in the future as a result of past

transactions or events.

Another ;erspective


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e! ;oints The %asic definitions provided in this te*t%ook for the key elements of

financial statements are simplified versions of the official definitions

provided %y the 'A$8.

H

0;uity The residual interest in the assets of an entity that remainsafter deducting its lia%ilities.

H evenues 'nflows or other enhancements of assets of an entity or

settlements of its lia%ilities or a com%ination of %oth2 from

delivering or producing goods, rendering services, or other

activities that constitute the entitys ongoing ma-or or centraloperations.

H 0*penses


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Looing to the 5uture8oth the 'A$8 and the 7A$8 are hard at work developing standards that will

lead to the elimination of ma-or differences in the way certain transactions

are accounted for and reported. Consider, for e*ample, that as a result of a

-oint pro-ect on the conceptual framework, the definitions of the most

fundamental elements assets, lia%ilities, e;uity, revenues, and e*penses2

may actually change. Gowever, whether the 'A$8 adopts internal control

provisions similar to those in $


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)hich of the following is not a reason why a single set of high=;uality

international accounting standards would %e %eneficial

a2 @ergers and ac;uisition activity.

%2 7inancial markets.

c2 @ultinational corporations.

d2 5AA3 is widely considered to %e a superior reporting system.

DAA; (el-0est :uestions

Another ;erspective


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The $ar%anes=


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'7$ is considered to %e more/

a2 principles=%ased and less rules=%ased than 5AA3.

%2 rules=%ased and less principles=%ased than 5AA3.

c2 detailed than 5AA3.

d2 4one of the a%ove.

DAA; (el-0est :uestions

Another ;erspective


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e*press written permission of the copyright owner is unlawful.

e;uest for further information should %e addressed to the

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or resale. The 3u%lisher assumes no responsi%ility for errors,

omissions, or damages, caused %y the use of these programs or from

the use of the information contained herein.O

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