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NSU EMB 501 Accounting
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Chapter 1-1
Chapter 1-2
CHAPTER CHAPTER 11
ACCOUNTING IN ACCOUNTING IN ACTIONACTION
Accounting Principles, Eighth Edition
Chapter 1-3
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
LO 1 Explain what accounting is.LO 1 Explain what accounting is.
The purpose of accounting is to:
(1)(1) identifyidentify, recordrecord, and communicatecommunicate the economic events of an
(2) organization to
(3) interested users.
Chapter 1-4
Three Activities
What is Accounting?What is Accounting?What is Accounting?What is Accounting?
LO 1 Explain what accounting is.LO 1 Explain what accounting is.
Illustration 1-1Accounting process
The accounting process includes the bookkeeping function.
Chapter 1-5
Management
Common Questions
Human Resources
IRS
Labor Unions
SEC
Marketing
Finance
Investors
Creditors
Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.
Customers
Internal Users
External Users
Chapter 1-6
Common Questions Asked User
1. Can we afford to give our employees a pay raise?
Human Resources
2. Did the company earn a satisfactory income?
3. Do we need to borrow in the near future?
4. Is cash sufficient to pay dividends to the stockholders?
5. What price for our product will maximize net income?
Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.
6. Will the company be able to pay its short-term debts?
Investors
Management
Finance
Marketing
Creditors
Chapter 1-7
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
Ethics In Financial Reporting
LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.
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 passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound ethical behavior.
Chapter 1-8
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.
Review QuestionReview Question
EthicsEthicsEthicsEthics
LO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.
Chapter 1-9
Various users need financial information
Various users need financial information
The accounting profession has
attempted to develop a set of standards that are generally accepted and universally practiced.
Financial StatementsBalance SheetIncome StatementStatement of Owners’ EquityStatement of Cash FlowsNote Disclosure
Financial StatementsBalance SheetIncome StatementStatement of Owners’ EquityStatement of Cash FlowsNote Disclosure
Generally Generally Accepted Accepted
Accounting Accounting Principles Principles
(GAAP)(GAAP)
Generally Generally Accepted Accepted
Accounting Accounting Principles Principles
(GAAP)(GAAP)
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
LO 4 Explain generally accepted accounting principles and the LO 4 Explain generally accepted accounting principles and the cost principle.cost principle.
Chapter 1-10
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.
The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting
LO 4 Explain generally accepted accounting principles and the LO 4 Explain generally accepted accounting principles and the cost principle.cost principle.
Chapter 1-11
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.
Corporation.
AssumptionsAssumptionsAssumptionsAssumptions
LO 5 Explain the monetary unit LO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Forms of Business
Ownership
Chapter 1-12
Proprietorship
Partnership Corporation
Owned by two Owned by two or more or more persons.persons.
Often retail and Often retail and service-type service-type businessesbusinesses
Generally Generally unlimited unlimited personal personal liabilityliability
Partnership Partnership agreementagreement
Ownership Ownership divided into divided into shares of stockshares of stock
Separate legal Separate legal entity entity organized organized under state under state corporation lawcorporation law
Limited liabilityLimited liability
Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership
Generally Generally owned by one owned by one person.person.
Often small Often small service-type service-type businessesbusinesses
Owner receives Owner receives any profits, any profits, suffers any suffers any losses, and is losses, and is personally personally liable for all liable for all debts.debts.
LO 5 Explain the monetary unit LO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Chapter 1-13
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.
AssumptionsAssumptionsAssumptionsAssumptions
LO 5 Explain the monetary unit LO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Review QuestionReview Question
Chapter 1-14
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.
LO 5 Explain the monetary unit LO 5 Explain the monetary unit assumption and the economic assumption and the economic entity assumption.entity assumption.
Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership
Review QuestionReview Question
Chapter 1-15
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
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.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Chapter 1-16
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Resources a business owns.
Provide future services or benefits.
Cash, Supplies, Equipment, etc.
AssetAssetssAssetAssetss
Chapter 1-17
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Claims against assets (debts and obligations).
Creditors - party to whom money is owed.
Accounts payable, Notes payable, etc.
LiabilitiLiabilitiesesLiabilitiLiabilitieses
Chapter 1-18
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’ Owners’ EquityEquity
Owners’ Owners’ EquityEquity
= +
Provides the underlying framework for recording and summarizing economic events.
The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Ownership claim on total assets.
Referred to as residual equity.
Capital, Drawings, etc. (Proprietorship or Partnership).
Owners’ Owners’ EquityEquityOwners’ Owners’ EquityEquity
Chapter 1-19
Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
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.
Illustration 1-6
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Chapter 1-20
Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
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.
Illustration 1-6
LO 6 LO 6 State the accounting equation, and State the accounting equation, and define assets, liabilities, and owner’s define assets, liabilities, and owner’s equity.equity.
Chapter 1-21
Using The Basic Accounting Using The Basic Accounting EquationEquationUsing The Basic Accounting Using The Basic Accounting EquationEquation
Transactions are a business’s economic events recorded by accountants.
May be external or internal.
Not all activities represent transactions.
Each transaction has a dual effect on the accounting equation.
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
Chapter 1-22
Q1-15:Q1-15: Are the following events recorded in the accounting records?
Event
Supplies are
purchased on account.
Criterion
Is the financial position (assets, liabilities, or owner’s equity) of the company
changed?
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
An employee is hired.
Owner withdraws cash for
personal use.
Record/ Don’t Record
Transactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)
Chapter 1-23
P1-1A:P1-1A: Barone’s Repair Shop was started on May 1 by Nancy. Prepare a tabular analysis of the following transactions for the month of May.
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
+ + = +
1. Invested $10,000 cash to start the repair shop.
Investment
Assets Liabilities Equity
Chapter 1-24
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
Barone, Capital
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
2. Purchased equipment for $5,000 cash.
-5,0002. +5,000
+ + = +
Investment
Assets Liabilities Equity
Chapter 1-25
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
3. Paid $400 cash for May office rent.
-5,0002. +5,000
+ + = +
-4003. -400 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-26
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
4. Received $5,100 from customers for repair service.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-27
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
5. Withdrew $1,000 cash for personal use.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-28
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
6. Paid part-time employee salaries of $2,000.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-29
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
7. Incurred $250 of advertising costs, on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-30
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
8. Provided $750 of repair services on account.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e
Barone, Capital
Investment
Assets Liabilities Equity
Chapter 1-31
Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)
+10,000
1. +10,000
CashAccounts
Receivable Equipment
Accounts Payable
LO 7 LO 7 Analyze the effects of business Analyze the effects of business transactions on the accounting transactions on the accounting equation.equation.
9. Collected $120 cash for services previously billed.
-5,0002. +5,000
+ + = +
-4003. -400 Expense+5,1004. +5,100 Revenu
e-1,0005. -1,000 Drawings-2,0006. -2,000 Expense
+2507. -250 Expense+7508. +750 Revenu
e+1209. -120
Barone, Capital
Investment
Assets Liabilities Equity
6,820 + 630 + 5,000 = 250 + 12,200
Chapter 1-32
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Owners’ Equity
Statement
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Chapter 1-33
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Review QuestionReview Question
Chapter 1-34
Income Statement
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Reports the revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Revenues:
Service revenue 5,850$ Expenses:
Salary expense 2,000 Rent expense 400 Advertising expense 250
Total expenses 2,650 Net income 3,200$
Barone’s Repair Shop
I ncome Statement
For the Month Ended May 31, 2007
Chapter 1-35
Revenues:
Service revenue 5,850$ Expenses:
Salary expense 2,000 Rent expense 400 Advertising expense 250
Total expenses 2,650 Net income 3,200$
Barone’s Repair Shop
I ncome Statement
For the Month Ended May 31, 2007
Income Statement
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Barone's, Capital May 1 -$
Add: I nvestment 10,000
Net income 3,200
13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200$
Barone’s Repair Shop
Owners' Equity Statement
For the Month Ended May 31, 2007
Owners’ Equity Statement
Net income is needed to determine the ending balance in owner’s
equity.
Chapter 1-36
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Barone's, Capital May 1 -$
Add: I nvestment 10,000 Net income 3,200
13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200$
Barone’s Repair Shop
Owners' Equity Statement
For the Month Ended May 31, 2007
Owners’ Equity Statement
Statement indicates the reasons why owner’s equity has increased or decreased during the period.
Chapter 1-37
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Barone's, Capital May 1 -$
Add: I nvestment 10,000 Net income 3,200
13,200 Less: Drawings 1,000 Barone's, Capital May 31 12,200$
Barone’s Repair Shop
Owners' Equity Statement
For the Month Ended May 31, 2007
Owners’ Equity Statement
Assets
Cash 6,820$ Accounts receivable 630 Equipment 5,000
Total assets 12,450$
Liabilities
Accounts payable 250$ Owners' Equity
Barone's, capital 12,200
Total liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2007
The ending balance in owner’s equity is needed in preparing the
balance sheet
Balance Sheet
Chapter 1-38
Balance Sheet
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Reports the assets, liabilities, and owner’s equity at a specific date.
Assets listed at the top, followed by liabilities and owner’s equity.
Total assets must equal total liabilities and owner’s equity.
Assets
Cash 6,820$ Accounts receivable 630 Equipment 5,000
Total assets 12,450$
Liabilities
Accounts payable 250$ Owners' Equity
Barone's, capital 12,200 Total liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2007
Chapter 1-39
Balance Sheet
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Assets
Cash 6,820$
Accounts receivable 630 Equipment 5,000
Total assets 12,450$
Liabilities
Accounts payable 250$ Owners' Equity
Barone's, capital 12,200 Total liab. & equity 12,450$
Balance Sheet
Barone’s Repair Shop
May 31, 2007 Cash flow from Operations
Cash receipts f rom customers 5,220$ Cash paid f or expenses (2,400) Cash provided by operations 2,820
Cash flow from I nvesting
Purchase of equipment (5,000) Cash flow from Financing
I nvestment by owners 10,000 Drawings by owners (1,000) Cash provided by financing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2007
Statement of Cash Flows
Chapter 1-40
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Cash flow from Operations
Cash receipts f rom customers 5,220$ Cash paid f or expenses (2,400) Cash provided by operations 2,820
Cash flow from I nvesting
Purchase of equipment (5,000) Cash flow from Financing
I nvestment by owners 10,000 Drawings by owners (1,000) Cash provided by financing 9,000
Net increase in cash 6,820
Cash balance, May 1 -
Cash balance, May 31 6,820$
Statement of Cash Flows
Barone’s Repair Shop
For the Month Ended May 31, 2007
Statement of Cash Flows
Information for a specific period of time.
Answers the following:1. Where did cash
come from?
2. What was cash used for?
3. What was the change in the cash balance?
Chapter 1-41
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 StatementsFinancial StatementsFinancial StatementsFinancial Statements
LO 8 Understand the four financial statements and how they are LO 8 Understand the four financial statements and how they are prepared.prepared.
Review QuestionReview Question