1. Slide 1-1

2. Slide 1-2 Accounting in Action Financial Accounting, Seventh Edition

3. Slide 1-3 1. 1.Explain what accounting is. 2. 2.Identify the users and uses of accounting. 3. 3.Understand why ethics is a fundamental business concept. 4. 4.Explain generally accepted accounting principles and the measurement principle. 5. 5.Explain the monetary unit assumption and the economic entity assumption. 6. 6.State the accounting equation, and define its components. 7. 7.Analyze the effects of business transactions on the accounting equation. 8. 8.Understand the four financial statements and how they are prepared. Study Objectives

4. Slide 1-4 Ethics in financial reporting Generally accepted accounting principles Assumptions What is Accounting? The Building Blocks of Accounting The Basic Accounting Equation Using the Accounting Equation Financial Statements Three activities Who uses accounting data AssetsLiabilities Stockholders’ equity Transaction analysis Summary of transactions Income statement Retained earnings statement Balance sheet Statement of cash flows Accounting in Action

5. Slide 1-5 What is Accounting? SO 1 Explain what accounting is. The purpose of accounting is to: (1) identifyrecordcommunicate (1) identify, record, and communicate the economic events of an (2) organization to (3) interested users.

6. Slide 1-6 Three Activities What is Accounting? The accounting process includes the bookkeeping function. Illustration 1-1 The activities of the accounting process SO 1 Explain what accounting is.

7. Slide 1-7 Management There are two broad groups of users of financial information: internal users and external users. Human Resources IRS Labor Unions SEC Marketing Finance Investors Creditors Who Uses Accounting Data SO 2 Identify the users and uses of accounting. Customers Internal Users External Users

8. Slide 1-8 Common Questions AskedUser 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 SO 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

9. Slide 1-9 Discussion Question SO 3 Understand why ethics is a fundamental business concept. Q1. “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain. Who Uses Accounting Data Solution on notes page

10. Slide 1-10 The Building Blocks of Accounting Ethics In Financial Reporting SO 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.

11. Slide 1-11 The Building Blocks of Accounting Ethics In Financial Reporting SO 3 Understand why ethics is a fundamental business concept.

12. Slide 1-12 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 Question SO 3 Understand why ethics is a fundamental business concept. Solution on notes page The Building Blocks of Accounting 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.

13. Slide 1-13 Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Financial Statements Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) The Building Blocks of Accounting SO 4 Explain generally accepted accounting principles and the measurement principle.

14. Slide 1-14 Organizations Involved in Standard Setting: The Building Blocks of Accounting http://www.sec.gov/ SO 4 Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board (PCAOB) http://www.pcaobus.org/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ International Accounting Standards Board (IASB) http://www.iasb.org/

15. Slide 1-15 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 Accounting Measurement Principles SO 4 Explain generally accepted accounting principles and the measurement principle.

16. Slide 1-16 Fair Value Principle – indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). FASB indicates that most assets must follow the cost principle because market values are not representationally faithful. Only in situations where assets are actively traded, such as investment securities, is the fair value principle applied. The Building Blocks of Accounting SO 4 Explain generally accepted accounting principles and the measurement principle. Measurement Principles

17. Slide 1-17 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. Forms of Business Ownership Assumptions The Building Blocks of Accounting SO 5 Explain the monetary unit assumption and the economic entity assumption.

18. Slide 1-18 ProprietorshipPartnership Corporation Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability Forms of Business Ownership Generally owned by one person. Often small service-type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts. SO 5 Explain the monetary unit assumption and the economic entity assumption.

19. Slide 1-19 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. Review Question SO 5 Explain the monetary unit assumption and the economic entity assumption. The Building Blocks of Accounting Solution on notes page 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.

20. Slide 1-20 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. SO 5 Explain the monetary unit assumption and the economic entity assumption. Review Question The Building Blocks of Accounting 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. Solution on notes page

21. Slide 1-21 Indicate whether each of the following statements presented below is true or false. Solution on notes page SO 5 Explain the monetary unit assumption and the economic entity assumption. The Building Blocks of Accounting 1.The three steps in the accounting process are identification, recording, and communication. 2.The two most common types of external users are investors and company officers. 3.Congress passed the Sarbanes-Oxley Act of 2002 to reduce unethical behavior and decrease the likelihood of future corporate scandals. True False True

22. Slide 1-22 False True Indicate whether each of the following statements presented below is true or false. Solution on notes page SO 5 Explain the monetary unit assumption and the economic entity assumption. The Building Blocks of Accounting 4.The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB). 5.The cost principle dictates that companies record assets at their cost. In later periods, however, the fair value of the asset must be used if fair value is higher than its cost.

23. Slide 1-23 SO 5 Explain the monetary unit assumption and the economic entity assumption.

24. Slide 1-24 AssetsAssetsLiabilitiesLiabilities Stockholder’s Equity = + 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 Equation SO 6 State the accounting equation, and define its components.

25. Slide 1-25 AssetsAssets Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Assets LiabilitiesLiabilities Stockholder’s Equity = + SO 6 State the accounting equation, and define its components.

26. Slide 1-26 Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation Claims against assets (debts and obligations). Creditors - party to whom money is owed. Accounts payable, Notes payable, etc. SO 6 State the accounting equation, and define its components. Liabilities AssetsAssetsLiabilitiesLiabilities Stockholder’s Equity = +

27. Slide 1-27 Provides the underlying framework for recording and summarizing economic events. The Basic Accounting Equation Ownership claim on total assets. Referred to as residual equity. Common stock and retained earnings. SO 6 State the accounting equation, and define its components. Stockholders’ Equity AssetsAssetsLiabilitiesLiabilities Stockholder’s Equity = +

28. Slide 1-28 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 SO 6 State the accounting equation, and define its components. The Basic Accounting Equation

29. Slide 1-29 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 SO 6 State the accounting equation, and define its components. The Basic Accounting Equation

30. Slide 1-30 Dividends are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings. However, dividends are not an expense. Illustration 1-6 SO 6 State the accounting equation, and define its components. The Basic Accounting Equation

31. Slide 1-31 Classification Classify the following items as issuance of stock, dividends, revenues, or expenses. Solution on notes page 1.Rent expense 2.Service revenue 3.Dividends 4.Salaries expense SO 6 State the accounting equation, and define its components. The Basic Accounting Equation Then indicate whether each item increases or decreases stockholders ’ equity. Effect on Equity ExpenseDecrease RevenueIncrease DividendsDecrease ExpenseDecrease

32. Slide 1-32 Using The Accounting Equation 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. SO 7 Analyze the effects of business transactions on the accounting equation.

33. Slide 1-33 Illustration: Are the following events recorded in the accounting records? Event Purchase computer. Criterion Is the financial position (assets, liabilities, or owner’s equity) of the company changed? SO 7 Analyze the effects of business transactions on the accounting equation. Discuss product design with customer. Pay rent. Record/ Don’t Record Using The Accounting Equation Illustration 1-7

34. Slide 1-34 Discussion Question Q1-19. In February 2011, Paula King invested an additional $10,000 in Hardy Company. Hardy’s accountant, Lance Jones, recorded this receipt as an increase in cash and revenues. Is this treatment appropriate? Why or why not? SO 7 Analyze the effects of business transactions on the accounting equation. Solution on notes page Using The Accounting Equation

35. Slide 1-35 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation.

36. Slide 1-36 Transaction (1). Investment by Stockholders. Transaction (1). Investment by Stockholders. Ray and Barbara Neal decides to open a computer programming service which he names Softbyte. On September 1, 2011, they invest $15,000 cash in exchange for common stock. The effect of this transaction on the basic equation is: Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation.

37. Slide 1-37 Transaction (2). Purchase of Equipment for Cash. Transaction (2). Purchase of Equipment for Cash. Softbyte purchases computer equipment for $7,000 cash. Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation.

38. Slide 1-38 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (3). Purchase of Supplies on Credit. Transaction (3). Purchase of Supplies on Credit. Softbyte purchases for $1,600 from Acme Supply Company computer paper and other supplies expected to last several months.

39. Slide 1-39 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (4). Services Provided for Cash. Transaction (4). Services Provided for Cash. Softbyte receives $1,200 cash from customers for programming services it has provided.

40. Slide 1-40 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (5). Purchase of Advertising on Credit. Transaction (5). Purchase of Advertising on Credit. Softbyte receives a bill for $250 from the Daily News for advertising but postpones payment until a later date.

41. Slide 1-41 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (6). Services Provided for Cash and Credit. Transaction (6). Services Provided for Cash and Credit. Softbyte provides $3,500 of programming services for customers. The company receives cash of $1,500 from customers, and it bills the balance of $2,000 on account.

42. Slide 1-42 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (7). Payment of Expenses. Transaction (7). Payment of Expenses. Softbyte pays the following Expenses in cash for September: store rent $600, salaries of employees $900, and utilities $200.

43. Slide 1-43 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (8). Payment of Accounts Payable. Transaction (8). Payment of Accounts Payable. Softbyte pays its $250 Daily News bill in cash.

44. Slide 1-44 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (9). Receipt of Cash on Account. Transaction (9). Receipt of Cash on Account. Softbyte receives $600 in cash from customers who had been billed for services [in Transaction (6)].

45. Slide 1-45 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Transaction (10). Dividends. Transaction (10). Dividends. The corporation pays a dividend of $1,300 in cash.

46. Slide 1-46 Transactions Analysis SO 7 Analyze the effects of business transactions on the accounting equation. Summary of Transactions Illustration 1-9 Tabular summary of Softbyte transactions

47. Slide 1-47 Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Retained Earnings Statement Financial Statements SO 8 Understand the four financial statements and how they are prepared.

48. Slide 1-48 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 Statements SO 8 Understand the four financial statements and how they are prepared. Review Question 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. Solution on notes page

49. Slide 1-49 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Income Statement Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. Illustration 1-10 Financial statements and their interrelationships

50. Slide 1-50 Financial Statements Net income is needed to determine the ending balance in retained earnings. Illustration 1-10 Financial statements and their interrelationships SO 8

51. Slide 1-51 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Statement indicates the reasons why retained earnings has increased or decreased during the period. Retained Earnings Statement Illustration 1-10 Financial statements and their interrelationships

52. Slide 1-52 Financial Statements The ending balance in retained earnings is needed in preparing the balance sheet Illustration 1-10 Financial statements and their interrelationships SO 8 Understand the four financial statements and how they are prepared.

53. Slide 1-53 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Balance Sheet Illustration 1-10 Financial statements and their interrelationships

54. Slide 1-54 Financial Statements Illustration 1-10 Financial statements and their interrelationships

55. Slide 1-55 Financial Statements SO 8 Understand the four financial statements and how they are prepared. 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? Statement of Cash Flows

56. Slide 1-56 Financial Statements SO 8 Understand the four financial statements and how they are prepared. Statement of Cash Flows Illustration 1-10 Financial statements and their interrelationships

57. Slide 1-57 SO 8 Understand the four financial statements and how they are prepared.

58. Slide 1-58 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 Statements SO 8 Understand the four financial statements and how they are prepared. Review Question Solution on notes page. 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.

59. Slide 1-59 Discussion Question Q1-20. “A company’s net income appears directly on the income statement and the retained earnings, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain. Financial Statements SO 8 Understand the four financial statements and how they are prepared. Solution on notes page

60. Slide 1-60  After adjusting for inflation, private-college tuition and fees have increased 37% over the past decade; public-college tuition has risen 54%.  Two-thirds (65.6%) of undergraduate students graduate with some debt.  Among graduating seniors, the average debt load is $19,202, according to an analysis of data from the Department of Education ’ s National Postsecondary Student Aid Study. That does not include any debt that their parents might incur. Ethics: Managing Personal Financial Reporting

61. Slide 1-61  Colleges are required to audit the FAFSA forms of at least one-third of their students; some audit 100%. (Compare that to the IRS, which audits a very small percentage of tax returns.) Thus, if you lie on your financial aid forms, there ’ s a very good chance you ’ ll get caught.

62. Slide 1-62

63. Slide 1-63 Consider the following and decide what action you would take: Suppose you have $4,000 in cash and $4,000 in credit card bills. The more cash and other assets that you have, the less likely you are to get financial aid. Also, if you have a lot of consumer debt (credit card bills), schools are not more likely to loan you money. To increase your chances of receiving aid, should you use the cash to pay off your credit card bills, and therefore make yourself look “ worse off ” to the financial aid decision makers? YES: You are playing within the rules. You are not hiding assets. You are restructuring your assets and liabilities to best conform with the preferences that are built into the federal aid formulas. NO: You are engaging in a transaction solely to take advantage of a loophole in the federal aid rules. You are potentially depriving someone who is actually worse off than you from receiving aid.

64. Slide 1-64 Public accounting Private accounting SO 9 Explain the career opportunities in accounting. Career Opportunities APPENDIX Government Forensic accounting “Show me the Money”

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