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.
 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 explainhowthey
interrelate.
2
 Learning
Objective
C1:
Explain the purpose and
importance of
accounting.

3
 1-4

Importance of Exhibit
Accounting 1.1

For example, the sale Keep a chronological Prepare reports such as

by Apple of an iPhone. log of transactions. financial statements.

Accounting is an information and measurement system that identifies,

records, and communicates information about an organizations
business activities.
4
Learning Objective C1: Explain the purpose and importance of accounting.
 Learning
Objective
C2:
Identify users and uses
of, and
opportunities in,
accounting.

5
 1-6

Users of Financial Exhib

Information it
1.2
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.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. 6
 1-7

Opportunities in Exhib
Accounting it
1.3

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.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. 7
 NEED-TO-KNOW 1-1
Identify the following users of accounting information as either an (a) external or (b) internal user.

Regulator a) External user

CEO b) Internal user
Shareholder a) External user
Controller b) Internal user
Executive Employee b) Internal user
External Auditor a) External user
Production Manager b) Internal user
Nonexecutive Employee 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.

Learning Objective C1: Explain the Purpose and Importance of Accounting.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. 8
 Learning
Objective
C3:
Explain why ethics
are crucial to
accounting.

9
 1 - 10

Ethics A Key Concept Exhib

it
1.6
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.

Learning Objective C3: Explain why ethics are crucial to accounting. 10

 1 - 11

Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.

Envision a way to commit Fails to see the criminal

fraud with a low perceived nature of the fraud or
risk of getting caught justifies the action

Must have some pressure to

commit fraud, like unpaid bills
11
Learning Objective C3: Explain why ethics are crucial to accounting.
 1 - 12

SarbanesOxley (SOX)
Congress passed the SarbanesOxley 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.

Learning Objective C3: Explain why ethics are crucial to accounting. 12

 1 - 13

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.

Learning Objective C3: Explain why ethics are crucial to accounting. 13

 Learning
Objective
C4:
Explain generally
accepted accounting
principles and define and
apply several
accounting principles.
14
 1 - 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.
Reliable information is
trusted by users.

Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.

15
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 16

International Standards
In todays 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.
International Accounting International Financial
Standards Board (IASB) Reporting Standards (IFRS)

An independent group Identify preferred accounting

(consisting of individuals practices
from many countries), issues
International Financial
Reporting Standards (IFRS)

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.

16
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 17

Conceptual Framework

17
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 18

Principles and
Assumptions of Exhib
Accounting it
1.7

General principles are the Specific principles are detailed

basic assumptions, concepts, rules used in reporting
and guidelines for preparing business transactions and
financial statements. General events. Specific principles
principles stem from long- arise more often from the
used accounting practices. rulings of authoritative
18
groups.
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 19

Accounting Principles

Measurement Principle Revenue Recognition Principle

(or Cost Principle) 1. Recognize revenue when it is
Accounting information is based earned.
on actual cost. Actual cost is 2. Proceeds need not be in cash.
considered objective. 3. Measure revenue by cash
received plus cash value of items
received.

Expense Recognition Principle

Full Disclosure Principle
(or Matching Principle)
A company is required to report the
A company must record its
details behind financial statements
expenses incurred to generate the
that would impact users decisions.
revenue reported.

19
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 20

Accounting Assumptions
Going-Concern Assumption
Monetary Unit Assumption
Reflects assumption that the
Express transactions and events
business will continue operating
in monetary, or money, units.
instead of being closed or sold.

Business Entity Assumption

A business is accounted for Time Period Assumption
separately from other business Presumes that the life of a company
entities, including its owner. can be divided into time periods,
such as months and years.

20
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 1 - 21

Proprietorship, Partnership,
Exhib
and Corporation it
1.8
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.
Accounting Constraints
Materiality
Cost-benefit
Only information that would
Only information with benefits
influence the decisions of a
of disclosure greater than their
reasonable person need be
cost need be disclosed.
disclosed.

22
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW 1-2 Part 1
Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.

Materiality
Measurement
Business entity
Going concern
Expense recognition
Time period
Full disclosure
Revenue recognition

Learning Objective C3: Explain why ethics are crucial to accounting.

23
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW 1-2 Part 1
Principles: Govern the amount and/or timing of information to be reported in financial statements.

Measurement principle Also called the cost principle

Revenue recognition principle
Expense recognition principle
Cost is measured on a cash or equal-to-cash basis.
Governs valuation of assets and liabilities on the balance sheet.
Governs the timing of revenues recognized on the income
statement.
Revenue is recognized when earned.
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.

Full disclosure principle A company must report the details behind financial statements
that would impact users' decisions.
Disclosures are often in the footnotes to the financial
statements.

Learning Objective C3: Explain why ethics are crucial to accounting.

24
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 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 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.

Benefits exceed cost The benefits of the information disclosed must be greater than
the costs of providing the information.

Learning Objective C3: Explain why ethics are crucial to accounting.

25
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW Part 1 Solution
Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.

Materiality c) Constraint
Measurement a) Principle
Business Entity b) Assumption
Going Concern b) Assumption
Expense Recognition a) Principle
Time Period b) Assumption
Full Disclosure a) Principle
Revenue Recognition a) Principle

Learning Objective C3: Explain why ethics are crucial to accounting.

26
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW 1-2 Part 2
Complete the following table with either a yes or a no regarding the attributes of a partnership and a corporation.

Attribute Present Partnership Corporation

Business taxed no yes
Limited liability no yes
Legal entity no yes
Unlimited life no yes

Learning Objective C3: Explain why ethics are crucial to accounting.

27
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 Learning Objective

A1:
Define and interpret the
accounting equation and
each of its components.

28
 1 - 29

Transaction Analysis and the

Accounting Equation
The Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation:

Learning Objective A1: Define and interpret the accounting equation and each of its components.
Net Income
29
 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.

+ Owner, - Owner, + Revenues - Expenses

Assets = Liabilities + Equity
Capital Withdrawals
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.
 Learning Objective

P1:
Analyze business
transactions using the
accounting equation.

31
 Transaction 1:
Chas Taylor invests $30,000 cash to
start a company.

The accounts involved are:

(1) Cash (asset)
(2) C. Taylor, Capital (equity)

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

Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 2:
Company purchased supplies paying
$2,500 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

Learning Objective P1: Analyze business transactions using the accounting equation.
 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.
 Transaction 3:
Purchased equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Purchased equipment for $26,000 cash.

Accounting Equation
still remains in
balance!!

Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 4:
Purchased supplies of $7,100 on credit.

The accounts involved are:

(1) Supplies (asset)
(2) Accounts Payable
(liability)

Learning Objective P1: Analyze business transactions using the accounting equation.
 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.
 Transaction Analysis

Now, lets look at transactions

involving revenues, expenses
and withdrawals.

Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 5:
Provided consulting services to a customer
and received $4,200 cash right away.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

Learning Objective P1: Analyze business transactions using the accounting equation.
 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.
 Transactions 6 and 7:
Paid rent of $1,000 and
salaries of $700 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Rent expense
(equity)
Remember(3) Salaries
that the balance expense
(equity)
in the Expense accounts
actually increase.
But, total Equity
decreases, because
expenses reduce equity.

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

Remember that expenses decrease equity.

Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 8:
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

The accounts involved are:

(1) Accounts receivable (asset)
(2) Consulting Revenues
(equity)
(3) Rental Revenue (equity)

Learning Objective P1: Analyze business transactions using the accounting equation.
 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.
 Transaction 9:
Client in transaction 8 pays $1,900 for consulting
services from account receivable.

The accounts involved are:

(1) Cash (asset)
(2) Accounts receivable (asset)

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

Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 10:
FastForward pays $900 as partial payment for
supplies purchased in transaction 4.

The accounts involved are:

(1) Cash (asset)
(2) Accounts payable (liability)

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

Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 11:
Withdrawal of Cash by Owner.

The accounts involved are:

(1) Cash (asset)
(2) Withdrawals (equity)
Remember that the But, total Equity
Withdrawal decreases because
account actually withdrawals cause
increases (just like equity to go down !!
our Expenses
account . . . )

Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Dividends of $200 are paid to shareholders.

Learning Objective P1: Analyze business transactions using the accounting equation.
 NEED-TO-KNOW 1-4
Assume Tata began operations on January 1 and completed the following transactions during its first month of
operations.

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 employees salary

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.

Assets = Liabilities + Equity

Cash Accounts Equipment Accounts + J. Tata, - J. Tata, + Revenues- Expenses
Receivable Payable Capital Withdrawals
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)

Total Assets $6,290

Total Liabilities 2,000
Total Equity $4,290

53
Learning Objective P1: Analyze business transactions using the accounting equation.
 Learning Objective

P2:
Identify and prepare basic
financial statements and
explain how they
interrelate.

54
 1 - 55

Financial Statements
The four financial statements and their purposes
are:
1. Income statement describes a companys
revenues and expenses along with the resulting
net income or loss over a period of time due to
earnings activities.
2. Statement of owners equity explains
changes in equity from net income (or loss) and
from any owner investments and withdrawals
over a period of time.
3. Balance sheet describes a companys
financial position (types and amounts of assets,
liabilities, and equity) at a point in time.
4. Statement of cash flows identifies cash
55
inflows (receipts) and cash outflows (payments)
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 1 - 56

Exhibit 1.10
Financial
Statements
and Their
Links

(cont. next slide)

56
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 1 - 57

Exhibit 1.10
Financial
Statements
and Their
Links

57
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 NEED-TO-KNOW 1-5
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.

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

Income Statement Statement of Owners Equity Balance Sheet

Assets Detail of Assets
Liabilities Detail of Liabilities
Equity: Beginning Capital
+ Owner investments + Owner investments
- Owner withdrawals - Owner withdrawals Ending Owner, Capital
+ Revenues Detail of Revenues Net income (loss)
- Expenses Detail of Expenses Ending Capital
Net income (loss)

58
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 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

APPLE APPLE
Income Statement Statement of Owner's Equity
For Fiscal Year Ended September 26, 2015 For Fiscal Year Ended September 26, 2015
Revenues $233,715 Owner, Capital, September 27, 2014 $111,547
Expenses Plus: Net income 53,394
Cost of sales (expense) $140,089 Less: Withdrawals by owner 45,586
Selling, general and other expenses 40,232 Owner, Capital, September 26, 2015 $119,355
Total expenses 180,321
Net income $53,394

APPLE
Balance Sheet
September 26, 2015
Assets Liabilities
Cash $21,120 Accounts payable $35,490
Accounts receivable 16,849 Other liabilities 135,634
Land and equipment (net) 22,471 Total liabilities 171,124
Investments and other assets 230,039 Equity
Owner, Capital, September 26, 2015 119,355

Total assets $290,479 Total liabilities and equity $290,479

59
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 1 - 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
 Learning Objective

A2:
Compute and interpret
return on assets.

61
 1 - 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
Return on assets =
Average total assets

62
Learning Objective A2: Compute and interpret return on assets.
 Learning
Objective
A3 (Appendix 1A):
Explain the relation
between return and risk.

63
 1 - 64

Appendix 1A Exhib
Return and Risk Analysis it
1A.1
Risk is the
Many different
uncertainty
returns may
about the return
be reported.
we will earn.
The lower the risk, the lower our expected return.
ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.

64
Learning Objective A3: Explain the relation between return and risk.
 1 - 65

Learning Objective

C5 (Appendix 1B):
Identify and describe the
three major activities of
organizations.

65
 1 - 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 financingresources contributed by the owner

along with any income the owner leaves in the organization.
Nonowner financingresources 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.
 1 - 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 managementdetermining the amount and type of

assets for operations.
Assetsinvested amounts.
Liabilitiescreditors claims.
Equityowners claim.

67
Learning Objective C5: Identify and describe the three major activities of organizations.
 1 - 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.
 1 - 69

Appendix 1B
Business Activities and the Accounting Equation

Exhib
Activities of Organizations it
1B.1

69
Learning Objective C5: Identify and describe the three major activities of organizations.
 1 - 70

End of Chapter 1

70