Wild_FAP23e_Ch01_PPT_Analyzing and Recording

EDUCATION

1. Accounting in Business Chapter 1 Wild, Shaw, and Chiappetta Fundamental Accounting Principles 23rd Edition Copyright © 2017 McGraw-Hill Education.  All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 2 Chapter 1 Learning Objectives CONCEPTUAL C1 Explain the purpose and importance of accounting. C2 Identify users and uses of, and opportunities in, accounting. C3 Explain why ethics are crucial to accounting. C4 Explain generally accepted accounting principles and define and apply several accounting principles. C5 Appendix 1B Identify and describe the three major activities of organizations. ANALYTICAL A1 Define and interpret the accounting equation and each of its components. A2 Compute and interpret return on assets. A3 Appendix 1A Explain the relation between return and risk. PROCEDURAL P1 Analyze business transactions using the accounting equation. P2 Identify and prepare basic financial statements and explain how they interrelate.

3. C1: Explain the purpose and i mportance of accounting . 3 Learning Objective

4. Importance of Accounting For example, the sale by Apple of an iPhone. Keep a chronological log of transactions. Prepare reports such as financial statements. 4 Learning Objective C1 : Explain the purpose and importance of accounting. Accounting is an information and measurement system that identifies, records, and communicates information about an organization’s business activities. Exhibit 1.1

5. 5 Learning Objective C2: Identify u sers and u ses of, and o pportunities in, a ccounting .

6. Users of Financial Information Accounting is called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Accounting serves many users who can be divided into two groups: external users and internal users. 6 Learning Objective C2 : I dentify users and uses of, and opportunities in, accounting. Exhibit 1.2

7. Opportunities in Accounting Accounting information is in all aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we use accounting. 7 Learning Objective C2 : I dentify users and uses of, and opportunities in, accounting. Exhibit 1.3

8. NEED-TO-KNOW 1-1 Identify the following users of accounting information as either an (a) external or (b) internal user. Regulator CEO Shareholder Controller Executive Employee External Auditor Production Manager Nonexecutive Employee a) External user b) Internal user a) External user b) Internal user b) Internal user a) External user b) Internal user a) External user External users of accounting information are NOT directly involved in running the organization. Internal users of accounting information ARE directly involved in managing and operating an organization. 8 Learning Objective C1 : Explain the Purpose and Importance of Accounting . Learning Objective C2 : I dentify users and uses of, and opportunities in, accounting.

9. 9 Learning Objective C3: Explain w hy e thics are c rucial to a ccounting .

10. Ethics – A Key Concept The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. 10 Learning Objective C3 : Explain why ethics are crucial to accounting. Exhibit 1.6

11. Fraud Triangle Three factors must exist for a person to commit fraud: opportunity, pressure, and rationalization. Envision a way to commit fraud with a low perceived risk of getting caught Fails to see the criminal nature of the fraud or justifies the action Must have some pressure to commit fraud, like unpaid bills 11 Learning Objective C3 : Explain why ethics are crucial to accounting.

12. Sarbanes–Oxley (SOX) Congress passed the Sarbanes–Oxley Act to help curb financial abuses at companies that issue their stock to the public. SOX requires that these public companies apply both accounting oversight and stringent internal controls. The desired results include more transparency, accountability, and truthfulness in reporting transactions. 12 Learning Objective C3 : Explain why ethics are crucial to accounting.

13. Dodd-Frank Wall Street Reform and Consumer Protection Act This act was designed to: promote accountability and transparency in the financial system, put an end to the notion of “too big to fail,” protect the taxpayer by ending bailouts, and protect consumers from abusive financial services. 13 Learning Objective C3 : Explain why ethics are crucial to accounting.

14. 14 Learning Objective Explain g enerally accepted accounting p rinciples and d efine and a pply s everal a ccounting p rinciples . C4:

15. Generally Accepted Accounting Principles (GAAP) Financial accounting is governed by concepts and rules known as generally accepted accounting principles (GAAP) . GAAP aims to make information relevant, reliable, and comparable . Relevant information affects decisions of users. Reliable information is trusted by users. Comparable information is helpful in contrasting organizations. 15 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

16. International Standards In today’s global economy, there is increased demand by external users for comparability in accounting reports. This demand often arises when companies wish to raise money from lenders and investors in different countries. Differences between U.S. GAAP and IFRS are decreasing as the FASB and IASB pursue a convergence process aimed to achieve a single set of accounting standards for global use. International Accounting Standards Board (IASB) An independent group (consisting of individuals from many countries), issues International Financial Reporting Standards (IFRS) International Financial Reporting Standards (IFRS) Identify preferred accounting practices 16 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

17. Conceptual Framework 17 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

18. Principles and Assumptions of Accounting General principles are the basic assumptions, concepts, and guidelines for preparing financial statements. General principles stem from long-used accounting practices. Specific principles are detailed rules used in reporting business transactions and events. Specific principles arise more often from the rulings of authoritative groups. 18 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles. Exhibit 1.7

19. Accounting Principles Measurement Principle (or Cost Principle) Accounting information is based on actual cost. Actual cost is considered objective. Expense Recognition Principle (or Matching Principle) A company must record its expenses incurred to generate the revenue reported. Full Disclosure Principle A company is required to report the details behind financial statements that would impact users’ decisions. Revenue Recognition Principle Recognize revenue when it is earned. Proceeds need not be in cash. Measure revenue by cash received plus cash value of items received. 19 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

20. Accounting Assumptions Monetary Unit Assumption Express transactions and events in monetary, or money, units. Business Entity Assumption A business is accounted for separately from other business entities, including its owner. Time Period Assumption Presumes that the life of a company can be divided into time periods, such as months and years. Going-Concern Assumption Reflects assumption that the business will continue operating instead of being closed or sold. 20 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

21. Proprietorship, Partnership, and Corporation Here are some of the major attributes of proprietorships, partnerships, and corporations: 21 Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles. Exhibit 1.8

22. 22 Accounting Constraints Cost-benefit Only information with benefits of disclosure greater than their cost need be disclosed. Materiality Only information that would influence the decisions of a reasonable person need be disclosed. Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

23. NEED-TO-KNOW 1-2 Part 1 Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint. Time period Full disclosure Revenue recognition Materiality Measurement Business entity Going concern Expense recognition 23 Learning Objective C3 : Explain why ethics are crucial to accounting. Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

24. NEED-TO-KNOW 1-2 Part 1 that would impact users' decisions. Full disclosure principle A company must report the details behind financial statements Disclosures are often in the footnotes to the financial statements. Expense recognition principle Also called the matching principle Governs the timing of expenses reported on the income statement. Expenses are recognized in the same time period as the revenues they help generate. Principles: Govern the amount and/or timing of information to be reported in financial statements. Measurement principle Also called the cost principle Cost is measured on a cash or equal-to-cash basis. Governs valuation of assets and liabilities on the balance sheet. Revenue recognition principle Governs the timing of revenues recognized on the income statement. Revenue is recognized when earned. 24 Learning Objective C3 : Explain why ethics are crucial to accounting. Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

25. NEED-TO-KNOW 1-2 Part 1 Assumptions: Generally related to the financial statement headings. Going concern assumption Monetary unit assumption Time period assumption Business entity assumption Presumption that the business will continue operating instead of being closed or sold. We can express transactions and events in monetary units. (i.e., Dollars, Pesos, Euros) Presumes that the life of a company can be divided into time periods, and that useful reports can be prepared for those periods. A business is accounted for separately from other business entities, including its owner(s). Accounting constraints: Reasonableness of information to be reported. Materiality Benefits exceed cost Only information that would influence the decisions of a reasonable person needs to be disclosed. Materiality is a function of the nature of the item and/or dollar amount. The benefits of the information disclosed must be greater than the costs of providing the information. 25 Learning Objective C3 : Explain why ethics are crucial to accounting. Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

26. NEED-TO-KNOW Part 1 Solution Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint. Time Period Full Disclosure Revenue Recognition a) Principle c) Constraint a) Principle b) Assumption b) Assumption a) Principle b) Assumption a) Principle Materiality Measurement Business Entity Going Concern Expense Recognition 26 Learning Objective C3 : Explain why ethics are crucial to accounting. Learning Objective C4 : Explain generally accepted accounting principles and define and apply several accounting principles.

27. 27 NEED-TO-KNOW 1-2 Part 2 Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. Complete the following table with either a yes or a no regarding the attributes of a partnership and a corporation. Corporation no yes Attribute Present Limited liability Legal entity Unlimited life Partnership Business taxed no no no yes yes yes Learning Objective C3: Explain why ethics are crucial to accounting.

28. A1: Define and i nterpret the a ccounting e quation and e ach of its c omponents . 28 Learning Objective

29. Transaction Analysis and the Accounting Equation The Accounting Equation Expanded Accounting Equation: Net Income 29 Liabilities Equity Assets = + Learning Objective A1 : Define and interpret the accounting equation and each of its components.

30. NEED-TO-KNOW 1-3 Use the accounting equation to compute the missing financial statement amounts. Assets Liabilities Equity Bose $150 $30 $120 Vogue $400 $100 $300 = + = + = + Use the expanded accounting equation to compute the missing financial statement amounts. Assets Liabilities Equity Owner, Capital Owner, Withdrawals Revenues Expenses Tesla $200 $80 $120 $100 $0 $60 ($40) YouTube $400 $160 $240 $220 ($10) $120 ($90) = + + - + - 30 Learning Objective A1 : Define and interpret the accounting equation and each of its components.

31. P1: Analyze b usiness t ransactions u sing the accounting e quation . 31 Learning Objective

32. Transaction 1: The accounts involved are: (1) Cash (asset ) (2) C. Taylor, Capital (equity ) Chas Taylor invests $30,000 cash to start a company. Learning Objective P1: Analyze business transactions using the accounting equation.

33. Accounting Equation: Chas Taylor invests $30,000 cash to start the business, Fast Forward . Learning Objective P1: Analyze business transactions using the accounting equation.

34. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction 2: Company purchased supplies paying $2,500 cash. Learning Objective P1: Analyze business transactions using the accounting equation.

35. Accounting Equation: Company purchased supplies paying $2,500 cash. Accounting Equation must remain in balance!! Learning Objective P1: Analyze business transactions using the accounting equation.

36. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction 3: Purchased equipment for $26,000 cash. Learning Objective P1: Analyze business transactions using the accounting equation.

37. Accounting Equation: Purchased equipment for $26,000 cash. Accounting Equation still remains in balance!! Learning Objective P1: Analyze business transactions using the accounting equation.

38. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) Transaction 4: Purchased supplies of $7,100 on credit. Learning Objective P1: Analyze business transactions using the accounting equation.

39. Accounting Equation: Purchased Supplies of $7,100 on credit. Accounting Equation still remains in balance!! Learning Objective P1: Analyze business transactions using the accounting equation.

40. Transaction Analysis Now, let’s look at transactions involving revenues, expenses and withdrawals. Learning Objective P1: Analyze business transactions using the accounting equation.

41. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction 5: Provided consulting services to a customer and received $4,200 cash right away. Learning Objective P1: Analyze business transactions using the accounting equation.

42. Accounting Equation: Provided consulting services to a customer and received $4,200 cash right away. Learning Objective P1: Analyze business transactions using the accounting equation.

43. The accounts involved are: (1) Cash ( asset) (2) Rent expense ( equity ) (3) Salaries expense ( equity) Transactions 6 and 7: Paid rent of $1,000 and salaries of $700 to employees. But, total Equity decreases, because expenses reduce equity. Remember that the balance in the Expense accounts actually increase . Learning Objective P1: Analyze business transactions using the accounting equation.

44. Accounting Equation: Remember that expenses decrease equity. Paid rent of $1,000 and salaries of $700 to employees. Learning Objective P1: Analyze business transactions using the accounting equation.

45. The accounts involved are: (1) Accounts receivable ( asset) (2) Consulting Revenues ( equity) (3) Rental Revenue ( equity) Transaction 8: Provided consulting services of $1,600 and rents facilities for $300 to a customer for credit. Learning Objective P1: Analyze business transactions using the accounting equation.

46. Accounting Equation: Provided consulting services of $1,600 and rents facilities for $300 to a customer for credit. Learning Objective P1: Analyze business transactions using the accounting equation.

47. The accounts involved are: (1) Cash (asset ) (2) Accounts receivable (asset) Transaction 9: Client in transaction 8 pays $1,900 for consulting services from account receivable. Learning Objective P1: Analyze business transactions using the accounting equation.

48. Accounting Equation: Client in transaction 8 pays $1,900 for consulting services. Learning Objective P1: Analyze business transactions using the accounting equation.

49. The accounts involved are: (1) Cash (asset ) (2) Accounts payable (liability) Transaction 10: FastForward pays $900 as partial payment for supplies purchased in transaction 4. Learning Objective P1: Analyze business transactions using the accounting equation.

50. Accounting Equation: FastForward pays $900 as partial payment for supplies purchased in transaction 4. Learning Objective P1: Analyze business transactions using the accounting equation.

51. The accounts involved are: (1) Cash ( asset) (2) Withdrawals ( equity) Transaction 11: Withdrawal of Cash by Owner. Remember that the Withdrawal account actually increases (just like our Expenses account . . . ) But, total Equity decreases because withdrawals cause equity to go down !! Learning Objective P1: Analyze business transactions using the accounting equation.

52. Accounting Equation: $ 200 cash is withdrawn by owner. Learning Objective P1: Analyze business transactions using the accounting equation.

53. NEED-TO-KNOW 1-4 Jan. 1 Jamsetji invested $4,000 cash in the Tata company. Jan. 5 The company purchased $2,000 of equipment on credit. Jan. 14 The company provided $540 of services for a client on credit. Jan. 21 The company paid $250 cash for an employee’s salary Assume Tata began operations on January 1 and completed the following transactions during its first month of operations. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment; Accounts Payable; J. Tata, Capital; J. Tata, Withdrawals; Revenues; and Expenses. Liabilities Cash Accounts Receivable Equipment Accounts Payable + J. Tata, Capital - J. Tata, Withdrawals + Revenues - Expenses Jan. 1 $4,000 $4,000 Jan. 5 $2,000 $2,000 Jan. 14 $540 $540 Jan. 21 ($250) ($250) $3,750 $540 $2,000 $2,000 $4,000 $0 $540 ($250) + Equity Assets = Total Assets $6,290 Total Liabilities 2,000 Total Equity $4,290 53 Learning Objective P1: Analyze business transactions using the accounting equation.

54. P2: Identify and p repare b asic f inancial statements and e xplain h ow they interrelate . 54 Learning Objective

55. Financial Statements The four financial statements and their purposes are: Income statement — describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Statement of owner’s equity — explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. 55 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.

56. 56 Exhibit 1.10 Financial Statements and Their Links (cont. next slide) Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.

57. E xhibit 1.10 Financial Statements and Their Links 57 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.

58. NEED-TO-KNOW 1-5 Income Statement Statement of Owner’s Equity Balance Sheet Assets Detail of Assets Liabilities Detail of Liabilities Equity: + Owner investments Beginning Capital - Owner w ithdrawals - Owner withdrawals Ending Owner, Capital + Revenues Detail of Revenues ± Net income (loss) - Expenses Detail of Expenses Ending Capital Net income (loss) + Owner investments Accounts payable $35,490 Investments and other assets $230,039 Other liabilities 135,634 Land and equipment (net) 22,471 Cost of sales 140,089 Selling, general and other expenses 40,232 Cash 21,120 Accounts receivable 16,849 Owner, Capital, September 27, 2014 111,547 Net income 53,394 Withdrawals in fiscal year 2015 45,586 Owner, Capital, September 26, 2015 119,355 Revenues 233,715 Prepare the (a) income statement, (b) statement of owner's equity, and (c) balance sheet, for Apple using the following condensed data from its fiscal year ended September 26, 2015. 58 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.

59. NEED-TO-KNOW Accounts payable $35,490 Investments and other assets $230,039 Other liabilities 135,634 Land and equipment (net) 22,471 Cost of sales 140,089 Selling, general and other expenses 40,232 Cash 21,120 Accounts receivable 16,849 Owner, Capital, September 26, 2014 111,547 Net income 53,394 Withdrawals in fiscal year 2015 45,586 Owner, Capital, September 26, 2015 119,355 Revenues 233,715 Owner, Capital, September 26, 2015 $119,355 Total liabilities 171,124 Owner, Capital, September 26, 2015 119,355 Total assets $290,479 Total liabilities and equity $290,479 APPLE Income Statement For Fiscal Year Ended September 26, 2015 APPLE Statement of Owner's Equity For Fiscal Year Ended September 26, 2015 Equity APPLE Balance Sheet September 26, 2015 $35,490 Revenues Owner, Capital, September 27, 2014 $111,547 Less: Withdrawals by owner 45,586 Assets Expenses Cost of sales (expense) $140,089 Cash $21,120 Accounts payable Other liabilities 135,634 Liabilities Plus: Net income 53,394 Total expenses 180,321 Selling, general and other expenses 40,232 Net income $53,394 Accounts receivable 16,849 Land and equipment (net) 22,471 Investments and other assets 230,039 59 Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate. $233,715

60. Sustainability and Accounting Sustainability Accounting Standards Board (SASB) Nonprofit entity engaged in creating and disseminating sustainability accounting standards for companies. Sustainability refers to environmental, social and governance. Environmental aspects include programs to reduce pollution and support green activities. Standards intended to complement financial accounting standards. SASB created their own Conceptual Framework. 60

61. A2: Compute and i nterpret r eturn on assets . 61 Learning Objective

62. Return on Assets Return on assets (ROA) is stated in ratio form as net income divided by the average total assets invested. Net income Average total assets Return on assets = 62 Learning Objective A2: Compute and interpret return on assets.

63. 63 Learning Objective A3 (Appendix 1A): Explain the relation between r eturn and risk.

64. Appendix 1A Return and Risk Analysis Many different returns may be reported. ROA Interest return on savings accounts. Interest return on corporate bonds. Risk is the uncertainty about the return we will earn. The lower the risk, the lower our expected return. 64 Learning Objective A3: Explain the relation between return and risk. Exhibit 1A.1

65. 65 C5 (Appendix 1B): Identify and describe the three major activities of o rganizations. Learning Objective

66. Appendix 1B Business Activities and the Accounting Equation Three major types of business activities : Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans . Owner financing — resources contributed by the owner along with any income the owner leaves in the organization. Nonowner financing — resources contributed by creditors (lenders). Financial management —the task of planning how to obtain these resources and to set the right mix between owner and creditor financing. 66 Learning Objective C5: Identify and describe the three major activities of organizations.

67. Appendix 1B Business Activities and the Accounting Equation Three major types of business activities : Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services . Asset management — determining the amount and type of assets for operations . Assets — invested amounts. Liabilities —creditors’ claims. Equity —owner’s claim. 67 Learning Objective C5: Identify and describe the three major activities of organizations.

68. Appendix 1B Business Activities and the Accounting Equation Three major types of business activities : Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services . Strategic management — the process of determining the right mix of operating activities for the type of organization, its plans, and its market. 68 Learning Objective C5: Identify and describe the three major activities of organizations.

69. Appendix 1B Business Activities and the Accounting Equation 69 Learning Objective C5: Identify and describe the three major activities of organizations. Activities of Organizations Exhibit 1B.1

70. End of Chapter 1 70