1. Accounting in Business Chapter 1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Wild, Shaw, and Chiappetta Financial & Managerial Accounting 6th Edition Wild, Shaw, and Chiappetta Financial & Managerial Accounting 6th Edition

2. 01-C1: Explain the Purpose and Importance of Accounting. 2

3. 1 - 3 Importance of Accounting C1 For example, the sale by Apple of an iPhone. Keep a chronological log of transactions. Prepare reports such as financial statements. 3

4. 01-C2: Identify Users and Uses of, and Opportunities in, Accounting. 4

5. 1 - 5 Users of Financial Information C2 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. 5

6. 1 - 6 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. 6 C2

7. 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 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. 7

8. 01-C3: Explain Why Ethics Are Crucial to Accounting. 8

9. 1 - 9 Ethics – A Key Concept C3 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. 9

10. 1 - 10 Fraud Triangle C3 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 10

11. Explain Generally Accepted Accounting Principles and Define and Apply Several Accounting Principles. 11 01-C4:

12. 1 - 12 Generally Accepted Accounting Principles (GAAP) C4 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. 12

13. 1 - 13 International Standards C4 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. 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 13

14. 1 - 14 Conceptual Framework and Convergence C4 14

15. 1 - 15 Principles and Assumptions of Accounting C4 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. 15

16. 1 - 16 Accounting Principles C4 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 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received. 16

17. 1 - 17 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. C4 17

18. 1 - 18 Proprietorship, Partnership, and Corporation Here are some of the major attributes of proprietorships, partnerships, and corporations: C4 18 A business entity can take one of three legal forms: proprietorship, partnership, or corporation

19. 1 - 19 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. 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. C4 19 Here are some recent accounting scandals.

20. 1 - 20 Dodd-Frank Wall Street Reform and Consumer Protection Act This act was designed to: 1.promote accountability and transparency in the financial system, 2. put an end to the notion of “too big to fail,” 3. protect the taxpayer by ending bailouts, and 4. protect consumers from abusive financial services. This act was designed to: 1.promote accountability and transparency in the financial system, 2. put an end to the notion of “too big to fail,” 3. protect the taxpayer by ending bailouts, and 4. protect consumers from abusive financial services. 20 C4

21. 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 21 C3/C4

22. NEED-TO-KNOW Part 1: that would impact users' decisions. Full disclosure principleA company must report the details behind financial statements Disclosures are often in the footnotes to the financial statements. Expense recognition principleAlso 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 principleAlso 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 principleGoverns the timing of revenues recognized on the income statement. Revenue is recognized when earned. 22 C3/C4

23. NEED-TO-KNOW 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. 23 C3/C4

24. NEED-TO-KNOW Part 1: Answers 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 a) Principle b) Assumption a) Principle Materiality Measurement Business Entity Going Concern Expense Recognition Accounting Today 36,000$ 7,800$ 6,500 800 2,200 17,300 18,700$ 26,000$ 10,000$ 21,000 10,400 49,000 10,000 105,400 116,400$ $ Total assetsTotal liabilities & equity LandStockholder's Equity Office equipmentCommon stock CashAccounts payable Accounts receivable Office supplies Balance Sheet December 31, 2014 AssetsLiabilities Total expenses Net income (loss) Miscellaneous expense Income Statement For Month Ended December 31, 2014 Revenues: Consulting fees earned Expenses: Rent expense Salaries expense Telephone expense Footnotes to financial statements 24 C3/C4 Retained earnings1,000 Total equity106,400

25. Need Part 2 of the Need to Know activity. Complete the following table with either a yes or a no regarding the attributes of a partnership and a corporation. 25 NEED-TO-KNOW Part 2

26. 01-A1: Define and Interpret the Accounting Equation and Each of Its Components. 26

27. 1 - 27 Transaction Analysis and the Accounting Equation The Accounting Equation Expanded Accounting Equation: A1 Net Income 27 Liabilities Equity Assets =+ Equity Assets = Liabilities + Contributed Capital + Retained Earnings = Liabilities + Common Stock - Dividends + Revenues - Expenses

28. 1 - 28 NEED-TO-KNOW (1-3) Use the accounting equation to compute the missing financial statement amounts. AssetsLiabilitiesEquity Bose$150$30$120 Vogue$400$100$300 = + Use the expanded accounting equation to compute the missing financial statement amounts. AssetsLiabilitiesEquity Common Stock DividendsRevenuesExpenses Nikon$200$80$120$100$0$60($40) YouTube$400$160$240$220($10)$120($90) = + + - 28

29. 01-P1: Analyze Business Transactions Using the Accounting Equation. 29

30. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Common Stock (equity) Chas Taylor invests $30,000 cash to start a company. P1

31. Let’s use the Accounting Equation: Transaction 1: Chas Taylor invests $30,000 cash to start the business, Fast Forward. P1

32. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Let’s try another transaction.. Company purchased supplies paying $2,500 cash. P1

33. Transaction Analysis Transaction 2: Company purchased supplies paying $2,500 cash... Accounting Equation must remain in balance!! P1

34. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Let’s try another transaction... Purchased equipment for $26,000 cash. P1

35. Using the Accounting Equation: Transaction 3: Purchased equipment for $26,000 cash. Accounting Equation still remains in balance!! P1

36. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) Transaction Analysis Purchased supplies of $7,100 on account. P1

37. Using the Accounting Equation Accounting Equation still remains in balance!! P1 Transaction 4: Purchased Supplies of $7,100 on account.

38. Transaction Analysis Now, let’s look at transactions involving revenues, expenses and dividends. P1

39. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Provided consulting services to a customer and received $4,200 cash right away. P1

40. Transaction Analysis P1 Transaction 5: Provided consulting services to a customer and received $4,200 cash right away.

41. The accounts involved are: (1) Cash (asset) (2) Rent expense (equity) (3) Salaries expense (equity) Transaction Analysis 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. P1

42. Transaction Analysis Remember that expenses decrease equity. P1 Transactions 6 and 7: Paid rent of $1,000 and salaries of $700 to employees.

43. The accounts involved are: (1) Accounts receivable (asset) (2) Consulting Revenues (equity) (3) Rental Revenue (equity) Transaction Analysis Provided consulting services of $1,600 and rents facilities for $300 to a customer for credit. P1

44. Transaction Analysis P1 Transaction 8: Provided consulting services of $1,600 and rents facilities for $300 to a customer for credit.

45. The accounts involved are: (1) Cash (asset) (2) Accounts receivable (asset) Transaction Analysis Client in transaction 8 pays $1,900 for consulting services. P1

46. Transaction Analysis P1 Transaction 9: Client from transaction 8 pays $1,900 for consulting services.

47. The accounts involved are: (1) Cash (asset) (2) Accounts payable (liability) Transaction Analysis FastForward pays $900 as partial payment for supplies purchased in transaction 4. P1

48. Transaction Analysis P1 Transaction 10: FastForward pays $900 as partial payment for supplies purchased in transaction 4.

49. The accounts involved are: (1) Cash (asset) (2) Dividends (equity) Transaction Analysis Dividends of $200 are paid to shareholders. Remember that the Dividend account actually increases (just like our Expenses account... ) But, total Equity decreases because dividends cause equity to go down !! P1

50. Transaction Analysis P1 Transaction 11: Dividends of $200 are paid to shareholders.

51. NEED-TO-KNOW (1-4) Jan. 1Jamsetji invested $4,000 cash in the Tata Company in exchange of common stock. Jan. 5The company purchased $2,000 of equipment on credit. Jan. 14The company provided $540 of services for a client on credit. Jan. 21The 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; Common Stock; Dividends; Revenues; and Expenses. Liabilities CashAccounts Receivable EquipmentAccounts Payable + Common Stock - Dividends+ Revenues- Expenses Jan. 1$4,000 Jan. 5$2,000 Jan. 14$540 Jan. 21($250) $3,750$540$2,000 $4,000$0$540($250) + EquityAssets = Total Assets$6,290 Total Liabilities2,000 Total Equity$4,290 51

52. 01-P2: Identify and Prepare Basic Financial Statements and Explain How They Interrelate. 52

53. 1 - 53 Financial Statements The four financial statements and their purposes are: 1. 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. 2. Statement of retained earnings— explains changes in equity from net income (or loss) and from any dividends over a period of time. 3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. The four financial statements and their purposes are: 1. 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. 2. Statement of retained earnings— explains changes in equity from net income (or loss) and from any dividends over a period of time. 3. Balance sheet — describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows — identifies cash inflows (receipts) and cash outflows (payments) over a period of time. P2 53

54. 1 - 54 NEED-TO-KNOW (1-5) Income StatementStatement of Retained EarningsBalance Sheet AssetsDetail of Assets LiabilitiesDetail of Liabilities Equity: + Common stock Beginning Retained Earnings - Dividends + Ending Retained Earnings + RevenuesDetail of Revenues ± Net income (loss) - Expenses Detail of ExpensesEnding Retained Earnings Net income (loss) Prepare the (a) income statement, (b) statement of retained earnings, and (c) balance sheet, for Apple using the following condensed data from its fiscal year ended September 28, 20X3. 54 Accounts payable$22,367Investments and other assets$163,042 Other liabilities61,084Land and equipment16,597 Cost of sales (expense)119,724Selling and other expense14,149 Cash14,259Accounts receivable13,102 Retained Earnings, Sept. 29, 20X2101,289Net income37,037 Dividends in fiscal year 20X334,070Retained Earnings, Sept. 28, 20X3104,256 Revenues170,910 Common stock 19,293 Common stock

55. 1 - 55 NEED-TO-KNOW Retained Earnings, Sept. 28, 20X3$104,256 Total liabilities83,451 Common Stock 19,293 Total assets $207,000 Total liabilities and equity $207,000 APPLE Income Statement For Fiscal Year Ended September 28, 20X3 APPLE Statement of Retained Earnings For Fiscal Year Ended September 28, 20X3 Equity APPLE Balance Sheet September 28, 20X3 $22,367 Revenues$170,910Retained Earnings, Sept. 29, 20X2$101,289 Less: Dividends(34,070) Assets Expenses Cost of sales (expense)$119,724 Cash$14,259Accounts payable Other liabilities61,084 Liabilities Plus: Net income37,037 Total expenses133,873 Selling and other expense14,149 Net income$37,037 Accounts receivable13,102 Land and equipment16,597 Investments and other assets163,042 55 Accounts payable$22,367Investments and other assets$163,042 Other liabilities61,084Land and equipment16,597 Cost of sales (expense)119,724Selling and other expense14,149 Cash14,259Accounts receivable13,102 Retained Earnings, Sept. 29, 20X2101,289Net income37,037 Dividends in fiscal year 20X334,070Retained Earnings, Sept. 28, 20X3104,256 Revenues170,910 Common stock 19,293 Retained earnings 104,256 Total equity 123,549

56. 1 - 56 Global View Basic Principles of U.S. GAAP and IFRS  Both include broad and similar guidance for accounting.  Neither specifies particular account names nor the detail required.  IFRS does require reporting of certain minimum line and other minimum disclosures that U.S. GAAP does not.  GAAP requires disclosures for the current and prior two years for the income statement, statement of cash flows, and statement of retained earnings (equity)  IFRS requires disclosures for the current and prior year. Basic Principles of U.S. GAAP and IFRS  Both include broad and similar guidance for accounting.  Neither specifies particular account names nor the detail required.  IFRS does require reporting of certain minimum line and other minimum disclosures that U.S. GAAP does not.  GAAP requires disclosures for the current and prior two years for the income statement, statement of cash flows, and statement of retained earnings (equity)  IFRS requires disclosures for the current and prior year. 56

57. 1 - 57 Global View Transaction Analysis of U.S. GAAP and IFRS Both apply transaction analysis identically (as shown in this chapter). Although some variations exist in revenue and expense recognition and other principles, all of the transactions in this chapter are accounted for identically under these two systems. U.S. GAAP is sometimes considered more “rules-based” whereas IFRS is more principles-based, particularly in deciding how to account for certain transactions.  U.S. GAAP—more focused on strictly following the accounting rules.  IFRS—more focused on a review of the situation and how accounting can best reflect it. Transaction Analysis of U.S. GAAP and IFRS Both apply transaction analysis identically (as shown in this chapter). Although some variations exist in revenue and expense recognition and other principles, all of the transactions in this chapter are accounted for identically under these two systems. U.S. GAAP is sometimes considered more “rules-based” whereas IFRS is more principles-based, particularly in deciding how to account for certain transactions.  U.S. GAAP—more focused on strictly following the accounting rules.  IFRS—more focused on a review of the situation and how accounting can best reflect it. 57

58. 1 - 58 Global View Financial Statements Both U.S. GAAP and IFRS prepare the same four basic financial statements. To illustrate, a condensed version of Samsung’s income statement follows (numbers are in thousands of U.S. dollars). Financial Statements Both U.S. GAAP and IFRS prepare the same four basic financial statements. To illustrate, a condensed version of Samsung’s income statement follows (numbers are in thousands of U.S. dollars). 58

59. 1 - 59 Global View Status of IFRS Adoption 59

60. 01-A2: Compute and Interpret Return on Assets. 60

61. 1 - 61 Return on Assets A2 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 = 61

62. 01-A3 (Appendix 1A): Explain the Relation Between Return and Risk. 62

63. 1 - 63 Appendix 1A Return and Risk Analysis A3 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. 63

64. 1 - 64 64 01-C5 (Appendix 1B): Identify and Describe the Three Major Activities of Organizations.

65. 1 - 65 Appendix 1B Business Activities and the Accounting Equation C5 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. 65

66. 1 - 66 Appendix 1B Business Activities and the Accounting Equation C5 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. 66

67. 1 - 67 Appendix 1B Business Activities and the Accounting Equation C5 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. 67

68. 1 - 68 Appendix 1B Business Activities and the Accounting Equation C5 68

69. 1 - 69 End of Chapter 1 69