© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw1in

Fundamental Accounting PrinciplesFundamental Accounting Principles

17th Edition

Larson Wild Chiappetta

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw2in

Accounting in Business

Chapter

1

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw3in

Learning objectivesLearning objectives

Conceptual: 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 to accounting. C5: Explain the meaning of GAAP, and define and

apply several key principles of accounting.

Analytical: Define and interpret the accounting equation and each

of its components.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw4in

Learning objectiveLearning objective

C1: Explain the purpose and importance of accounting in the information age.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw5in

IdentifiesIdentifies

RecordsRecords

CommunicatesCommunicatesRelevantRelevant

ReliableReliable

ComparableComparable

Importance of AccountingImportance of Accounting

AccountingAccountingis a

system that

information

that is

to help users make better decisions.

to help users make better decisions.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw6in

Identifying Business Activities

Recording Business Activities

Communicating

Business Activities

Accounting ActivitiesAccounting Activities

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw7in

What is the relation between accounting and bookkeeping? What is the relation between accounting and bookkeeping?

Bookkeeping is the recording of financial transactions and events, either manually or electronically.

Accounting is much more. It includes identifying, measuring, recording, reporting, and analyzing business events and transactions, and helps information users to make economic decisions.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw8in

Learning objectiveLearning objective

C2: Identify users and uses of accounting.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw9in

Users of Accounting InformationUsers of Accounting Information

External Users

•Lenders

•Shareholders

•Governments

•Consumer Groups

•External Auditors

•Customers

Internal Users

•Managers

•Officers

•Internal Auditors

•Sales Staff

•Budget Officers

•Controllers

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw10in

Users of Accounting InformationUsers of Accounting Information

External Users

Financial accounting provides external users with financial

statements.

Internal Users

Managerial accounting provides information needs for internal

decision makers.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw11in

Users of Accounting Information-ExternalUsers of Accounting Information-External

Lenders: Whether the firm (borrower) can repay the money?

Shareholders: whether to buy, hold, or sell stocks?

Governments: whether the firm pay all due tax?

Customers: whether the firm can exist to provide post-sale services?

External Auditors: whether the financial statements are prepared according to GAAP?

Etc.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw12in

Users of Accounting Information-InternalUsers of Accounting Information-Internal

Marketing managers: target customers, set price, monitor sales.

Production managers: monitor cost and ensure quality.

Purchasing managers: what, when and where to purchase materials.

Human resource managers: employees’ performance and compensation.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw13in

Learning objectiveLearning objective

C3: Identify opportunities in accounting and related fields.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw14in

Opportunities in AccountingOpportunities in Accounting

FinancialFinancial

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

•Preparation•Analysis•Auditing•Regulatory•Consulting•Planning•Criminal investigation

ManagerialManagerial

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

•General accounting •Cost accounting•Budgeting•Internal auditing•Consulting•Controller•Treasurer•Strategy

TaxationTaxation

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

•Preparation•Planning•Regulatory•Investigations•Consulting•Enforcement•Legal services•Estate planning

Accounting-related

Accounting-related

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•Lenders•Consultants•Analysts•Traders•Directors•Underwriters•Planners•Appraisers

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

•FBI investigators•Market researchers•Systems designers•Merger services•Business valuation•Human services•Litigation support•Entrepreneurs

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw15in

Accounting Jobs by AreaAccounting Jobs by Area

Private accounting

60%Public accounting

25%

Government, not-for-profit, & education

15%

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw16in

Learning objectiveLearning objective

C4: Explain why ethics are crucial to accounting.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw17in

Beliefs that distinguish right from

wrong

Accepted standards of good and bad

behavior

Ethics

Ethics—A Key ConceptEthics—A Key Concept

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw18in

Identify ethical concerns

Analyze options

Make ethical decision

Use personal ethics to

recognize ethical concern.

Consider all good and bad

consequences.

Choose best option after weighing all

consequences.

Guidelines for Ethical Decision MakingGuidelines for Ethical Decision Making

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw19in

Learning objectiveLearning objective

C5: Explain the meaning of GAAP, and define and apply several key principles

of accounting.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw20in

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Financial accounting practice is governed by concepts and rules known as generally accepted

accounting principles (GAAP).

Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles

Relevant Information

Relevant Information

Affects the decision of its users.

Affects the decision of its users.

Reliable InformationReliable Information Is trusted by users.

Is trusted by users.

Comparable Information

Comparable Information

Is helpful in contrasting organizations.

Is helpful in contrasting organizations.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw21in

The Securities and Exchange Commission is the government group that establishes

reporting requirements for companies that issue stock to the public.

The Securities and Exchange Commission is the government group that establishes

reporting requirements for companies that issue stock to the public.

Setting Accounting PrinciplesSetting Accounting Principles

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.

Financial Accounting Standards Board is the private group that sets both broad and

specific principles.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw22in

Setting Accounting PrinciplesSetting Accounting Principles

Hong Kong: • Hong Kong Institute of Certified Public Accountants

(HKICPA)

China• Ministry of Finance People’s Republic of China

International Accounting Standard Board (IASB)• International Financial Reporting Standards

(IFRS)

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw23in

Principles of AccountingPrinciples of Accounting

General principles: basic assumptions, concepts, and guidelines for preparing financial statements.

Usually stem from long-used accounting practice.

Specific principles: detailed rules used in reporting business transactions and events.

Usually created by a pronouncement from an authoritative body.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw24in

Principles of Accounting— General PrinciplesPrinciples of Accounting— General Principles

Objectivity PrincipleAccounting information is supported by independent,

unbiased evidence. It is intended to make financial statements useful by ensuring they report reliable and

verifible information.

Source documents.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw25in

Principles of AccountingPrinciples of Accounting

Cost PrincipleAccounting information is based on actual

cost.Cost is measured on a cash or equal-to cash basis

Information based on cost is considered objective.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw26in

Principles of AccountingPrinciples of Accounting

Now Future

Going-Concern PrincipleReflects assumption that the business will continue

operating instead of being closed or sold.

The assets are reported at cost but not reported at liquidation value that assume closure.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw27in

Principles of AccountingPrinciples of Accounting

Monetary Unit PrincipleExpress transactions and events in monetary, or

money, units.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw28in

Principles of AccountingPrinciples of Accounting

Revenue Recognition Principle

Provides guidance on when a company must recognize revenue.

1.Recognize revenue when it is earned.2.Proceeds need not be in cash (Credit sales).3.Measure revenue by cash received plus cash

value of items received.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw29in

Principles of AccountingPrinciples of Accounting

Business Entity PrincipleA business is accounted for separately from other business entities, including its owner.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw30in

Business Entity FormsBusiness Entity Forms

ProprietorshipProprietorship PartnershipPartnership CorporationCorporation

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw31in

Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes

*

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

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

Characteristics of BusinessesCharacteristics of Businesses

Exh.1.8

*

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw32in

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).

CorporationCorporation

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw33in

Learning objectiveLearning objective

Define and interpret the accounting equation and each of its components.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw34in

AssetsLiabilities & Equity

Accounting EquationAccounting Equation

LiabilitiesLiabilities EquityEquityAssetsAssets = +

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw35in

Accounting EquationAccounting Equation

Assets are resources with future benefits that are owned or controlled by a company.

Liabilities are what a company owes its creditors in future products or services.

Equity refers to the claims of its owner(s).

Forms of funds=Sources of funds (資金佔用＝資金來源)

What resources does the firm have? (Assets) = Where do those resources come from? (Liabilities and Equity)

A firm acquires assets by funds. Liabilities and equity are the sources of funds to acquire those assets.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw36in

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

VehiclesVehicles

Store Supplies

Store Supplies

Notes Receivable

Notes Receivable

Accounts Receivable

Accounts Receivable

Resources owned or controlled

by a company

Resources owned or controlled

by a company

AssetsAssets

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw37in

Taxes Payable

Taxes Payable

Wages Payable

Wages Payable

Notes Payable

Notes Payable

Accounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LiabilitiesLiabilities

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw38in

Owner’sclaims

on assets

Owner’sclaims

on assets

RevenuesRevenues

Owner Investments

Owner Investments

Owner Withdrawals

Owner Withdrawals

ExpensesExpenses

EquityEquity

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw39in

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Expanded Accounting EquationExpanded Accounting Equation

RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital

Owner Withdrawals

Owner Withdrawals

_ + _

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw40in

Expanded Accounting EquationExpanded Accounting Equation

Revenues: gross increase in equity from a company’s earnings activities.

Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.

Owner investments: the assets an owner puts into the company.

Owner withdrawals: the assets take away from the company for personal use.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw41in

End of Chapter 1

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irw42in

Chapter 1 HomeworkChapter 1 Homework

Ex. 1-1,1-2,1-7 Problem 1-1A Due on June 12, 2006 (Monday)