Accounting 280 Week 1 PowerPoint Professor Arlint Chapter 1-1 Accounting in Action The Building The Basic Using the What is Basic Financial Blocks of Accounting Accounting? Accounting Statements Accounting Equation Equation Three Ethics in Assets Transaction Income activities financial Liabilities analysis statement reporting Who uses Stockholders' Summary of Statement of accounting Generally equity transactions retained data accepted earnings accounting Balance principles sheet Assumptions Statement of cash flows Chapter 1-2 What is Accounting? The purpose of accounting is to: (1) identify, record, and communicate the economic events of an (2) organization to (3) interested users. Chapter 1-3 SO 1 Explain what accounting is. Who Uses Accounting Data? Internal Users Management IRS Human Investors Resources Labor Unions Finance Common Questions Creditors Marketing SEC Customers External Users Chapter 1-4 SO 2 Identify the users and uses of accounting. Who Uses Accounting Data? Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? Investors 3. Do we need to borrow in the near future? Management 4. Is cash sufficient to pay dividends to the stockholders? Finance 5. What price for our product will maximize net income? Marketing 6. Will the company be able to pay its short-term debts? Creditors Chapter 1-5 SO 2 Identify the users and uses of accounting. Who Uses Accounting Data? Discussion Question Q1. “Accounting is ingrained in our society and it is vital to our economic system.” Do you agree? Explain. See notes page for discussion Chapter 1-6 SO 3 Understand why ethics is a fundamental business concept. Accounting in Action The Building The Basic Using the What is Basic Financial Blocks of Accounting Accounting? Accounting Statements Accounting Equation Equation Three Ethics in Assets Transaction Income activities financial Liabilities analysis statement reporting Who uses Stockholders' Summary of Statement of accounting Generally equity transactions retained data accepted earnings accounting Balance principles sheet Assumptions Statement of cash flows Chapter 1-7 The Building Blocks of Accounting Ethics In Financial Reporting 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, AIG, and others. Congress passed Sarbanes-Oxley Act of 2002. Effective financial reporting depends on sound ethical behavior. Chapter 1-8 SO 3 Understand why ethics is a fundamental business concept. Ethics Review Question 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. Chapter 1-9 SO 3 Understand why ethics is a fundamental business concept. The Building Blocks of Accounting Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) http://www.sec.gov/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ International Accounting Standards Board (IASB) http://www.iasb.org/ Chapter 1-10 SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting Financial Statements Various users Balance Sheet need financial Income Statement Retained Earnings Statement information Statement of Cash Flows Note Disclosure The accounting profession has attempted to develop Generally Accepted a set of standards that Accounting are generally accepted Principles (GAAP) and universally practiced. Chapter 1-11 SO 4 Explain generally accepted accounting principles and the cost principle. Different Types of Accounting There are different types of accounting Managerial Financial Income Tax Chapter 1-12 SO 4 Identify the basic assumptions used by accountants. Assumptions Assumptions provide a foundation for the accounting process. Monetary Unit Economic Entity Time Period Going Concern Chapter 1-13 SO 4 Identify the basic assumptions used by accountants. Assumptions Monetary Unit Only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity. Chapter 1-14 SO 4 Identify the basic assumptions used by accountants. Assumptions Economic Entity Economic events can be identified with a particular unit of accountability. Chapter 1-15 SO 4 Identify the basic assumptions used by accountants. Forms of Business Ownership Proprietorship Partnership Corporation Generally owned Owned by two or Ownership by one person. more persons. divided into shares of stock Often small Often retail and service-type service-type Separate legal businesses businesses entity organized under state Owner receives Generally corporation law any profits, unlimited suffers any personal liability Limited liability losses, and is Partnership personally liable agreement for all debts. Chapter SO 5 Explain the monetary unit assumption 1-16 and the economic entity assumption. Forms of Business Ownership Review Question 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. Chapter SO 5 Explain the monetary unit assumption 1-17 and the economic entity assumption. Assumptions Time Period The economic life of a business can be divided into artificial time periods. Chapter 1-18 SO 4 Identify the basic assumptions used by accountants. Assumptions Going Concern The enterprise will continue in operation long enough to carry out its existing objectives. Chapter 1-19 SO 4 Identify the basic assumptions used by accountants. Assumptions Group Question Illustration: Identify which basic assumption of accounting is best described in each item below. (a) The economic activities of FedEx Corporation are divided into 12-month periods for the Periodicity purpose of issuing annual reports. (b) Solectron Corporation, Inc. does not adjust Monetary amounts in its financial statements for the Unit effects of inflation. (c) Walgreen Co. reports current and noncurrent classifications in its balance sheet. Going Concern (d) The economic activities of General Electric and its subsidiaries are merged for Economic accounting and reporting purposes. Entity Chapter 1-20 SO 4 Identify the basic assumptions used by accountants. Principles Accounting principles dictate how economic events should be recorded and reported. Revenue Recognition Matching (Expense Recognition) Full Disclosure Cost Chapter 1-21 SO 5 Identify the basic principles of accounting. Principles Revenue Recognition - companies should recognize revenue in the accounting period in which it is earned. Chapter 1-22 SO 5 Identify the basic principles of accounting. Principles Matching - efforts (expenses) should be matched with accomplishment (revenues) whenever it is reasonable and practicable to do so. “Let the expense follow the revenues.” Illustration 7-4 Expense Recognition Chapter 1-23 SO 5 Identify the basic principles of accounting. Principles Full Disclosure – Provided through financial statements, notes to the financial statements, and supplementary information. Illustration 7-5 Basic Principles Chapter 1-24 SO 5 Identify the basic principles of accounting. Principles Cost Principle – the price, established by the exchange transaction, is the “cost”. Illustration 7-5 Basic Principles Chapter 1-25 SO 5 Identify the basic principles of accounting. Principles Group Question Illustration: Identify which basic principle of accounting is best described in each item below. (a) Norfolk Southern Corporation reports revenue Revenue in its income statement when it is earned instead of Recognition when the cash is collected. (b) Yahoo, Inc. recognizes depreciation expense for a machine over the 2-year period during which that Matching machine helps the company earn revenue. (c) Oracle Corporation reports information about Full pending lawsuits in the notes to its financial Disclosure statements. (d) Eastman Kodak Company reports land on its balance sheet at the amount paid to acquire it, even Cost though the estimated fair market value is greater. Chapter 1-26 SO 5 Identify the basic principles of accounting. Constraints in Accounting Constraints permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information. Materiality Conservatism Chapter 1-27 SO 6 Identify the two constraints in accounting. Constraints in Accounting Materiality - an item is material if its inclusion or omission would influence or change the judgment of a reasonable person. Illustration 7-6 Constraints Chapter 1-28 SO 6 Identify the two constraints in accounting. Constraints in Accounting Conservatism - When in doubt, choose the method that will be least likely to overstate assets and income. Illustration 7-6 Constraints Chapter 1-29 SO 6 Identify the two constraints in accounting. Constraints in Accounting Group Question Illustration What accounting constraints are illustrated by the items below? (a) Crimson Tide Corporation does not accrue a Conservatism contingent lawsuit gain of $650,000. (b) Sun Devil Corporation expenses the cost of Materiality wastebaskets in the year they are acquired. Chapter 1-30 SO 6 Identify the two constraints in accounting. Objectives of Financial Reporting Qualitative characteristics of useful financial information: •Relevance •Reliability •Comparability •Consistency Chapter SO 6 State the accounting equation,