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Chapter 1 Accounting in ActionLearning Objectives
After studying this chapter, you should be able to:
1. Explain what accounting is.
2. Identi! the users and uses o accounting.
". #nderstand wh! ethics is a unda$ental business concept.
%. Explain accounting standards and the $easure$ent principles.
&. Explain the $onetar! unit assu$ption and the econo$ic entit!assu$ption.
'. (tate the accounting e)uation* and deine its co$ponents.
+. Anal!,e the eects o business transactions on the accounting e)uation.
. #nderstand the our inancial state$ents and how the! are prepared.
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Preview of Chapter 1
Financial Accounting
IFRS Second Edition
Weygandt Kimmel Kieso
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1-% LO 1 Explain what accounting is.
Accountingconsists o three basic activities - it
identiies,
records, and
co$$unicates
the economic events of an organization to interested users.
hat is Accounting/
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0hree Activities
Illustration 1-1
The activities of the
accounting process
The accounting process includes
the booeepingfunction.
hat is Accounting/
LO 1 Explain what accounting is.
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anage$ent
3u$an
4esources0axing
Authorities
Labor
#nions
4egulator!Agencies
areting
5inance
Investors
Creditors
Custo$ers
Internal
#sers
External#sers
ho #ses Accounting 6ata
LO 2 Identi! the users and uses o accounting.
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Common Questions Asked User
1. Can we afford to give ouremployees a pay raise 3u$an 4esources
!. "id the company earn a
satisfactory income
#. $hould any product lines %eeliminated
&. 's cash sufficient to pay dividendsto shareholders
(. )hat price for our product willma*imize net income
+. )ill the company %e a%le to payits de%ts
Investors
anage$ent
5inance
areting
Creditors
ho #ses Accounting 6ata
LO 2 Identi! the users and uses o accounting.
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Ethics In 5inancial 4eporting
LO " #nderstand wh! ethics is a unda$ental business concept.
$tandards of conduct %y which ones actions are -udged as
right or wrong, honest or dishonest, fair or not fair, are
ethics.
ecent financial scandals include/ 0nronU$A2,
3armalat'TA2, $atyam Computer $ervices '4"2,A'5
U$A2, and others.
0ffective financial reporting depends on sound ethical
%ehavior.
0he 7uilding 7locs o Accounting
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0he 7uilding 7locs o Accounting
Ethics In 5inancial 4eportingIllustration 1-%
$teps in analyzing ethics cases
and situations
LO " #nderstand wh! ethics is a unda$ental business concept.
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0thics are the standards of conduct %y which one6s actions are
-udged as/
a. right or wrong.
%. honest or dishonest.
c. fair or not fair.
d. all of these options.
:uestion
LO " #nderstand wh! ethics is a unda$ental business concept.
Ethics in 5inancial 4eporting
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1-11
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'nternational 7inancial eporting $tandards '7$2
LO % Explain accounting standards and the $easure$ent principles.
7inancial Accounting $tandards 8oard 7A$82
http/99www.fas%.org9
'nternational Accounting $tandards 8oard 'A$82
http/99www.ias%.org9
5enerally Accepted Accounting 3rinciples 5AA32
0he 7uilding 7locs o Accounting
Accounting (tandards
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Cost ;rinciple: or historical cost principle, dictates that
companies record assets at their cost.
5air
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onetar! #nit: include in the accounting records only
transaction data that can %e e*pressed in money terms.
Econo$ic Entit!: re;uires that activities of the entity %ekept separate and distinct from the activities of its owner and
all other economic entities.
;roprietorship.
;artnership.
Corporation.
LO & Explain the $onetar! unit assu$ptionand the econo$ic entit! assu$ption.
5or$s o 7usiness
Ownership
Assu$ptions
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;roprietorship ;artnership Corporation
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'ndicate whether each of the following statements presented %elowis trueor alse.
LO & Explain the $onetar! unit assu$ptionand the econo$ic entit! assu$ption.
1. The three steps in the accounting process are
identification, recording, and communication.
!. The two most common types of e*ternal users are
investors and company officers.
#. $hareholders in a corporation en-oy limited legal
lia%ility as compared to partners in a partnership.
True
7alse
True
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7alse
True
LO & Explain the $onetar! unit assu$ptionand the econo$ic entit! assu$ption.
&. The primary accounting standard=setting %ody outside
the United $tates is the 'nternational Accounting
$tandards 8oard 'A$82.
(. The cost principle dictates that companies record
assets at their cost. 'n later periods, however, the fair
value of the asset must %e used if fair value is higher
than its cost.
'ndicate whether each of the following statements presented %elowis trueor alse.
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:uestionCom%ining the activities of ?ellogg and 5eneral @ills would
violate the
a. cost principle.
%. economic entity assumption.
c. monetary unit assumption.
d. ethics principle.
LO & Explain the $onetar! unit assu$ptionand the econo$ic entit! assu$ption.
0he 7uilding 7locs o Accounting
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A %usiness organized as a separate legal entity under law
having ownership divided into ordinary shares is a
a. proprietorship.
%. partnership.
c. corporation.
d. sole proprietorship.
LO & Explain the $onetar! unit assu$ptionand the econo$ic entit! assu$ption.
:uestion
5or$s o 7usiness Ownership
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AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities E)uit!E)uit!E)uit!E)uit!= >
3rovides the underl!ing ra$eworfor recording andsummarizing economic events.
Applies to all economic entities regardless of size.
0he 7asic Accounting E)uation
LO ' (tate the accounting e)uation* and deine its co$ponents.
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AssetsAssetsAssetsAssets
3rovides the underl!ing ra$eworfor recording andsummarizing economic events.
esources a %usiness owns. 3rovide future services or %enefits.
Cash, 'nventory, 0;uipment, etc.
Assets
LiabilitiesLiabilitiesLiabilitiesLiabilities E)uit!E)uit!E)uit!E)uit!= >
LO ' (tate the accounting e)uation* and deine its co$ponents.
0he 7asic Accounting E)uation
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3rovides the underl!ing ra$eworfor recording andsummarizing economic events.
Liabilities
AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities= >
E)uit!E)uit!E)uit!E)uit!
LO ' (tate the accounting e)uation* and deine its co$ponents.
0he 7asic Accounting E)uation
Claims against assets de%ts and o%ligations2. Creditors = party to whom money is owed.
Accounts paya%le, 4otes paya%le, etc.
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3rovides the underl!ing ra$eworfor recording andsummarizing economic events.
LO ' (tate the accounting e)uation* and deine its co$ponents.
0he 7asic Accounting E)uation
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4evenuesresult from %usiness activities entered into for the purpose
of earning income.
5enerally results from selling merchandise, performing services,
renting property, and lending money.
Illustration 1-+
LO ' (tate the accounting e)uation* and deine its co$ponents.
0he 7asic Accounting E)uation
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Expensesare the cost of assets consumed or services used in the
process of earning revenue.
Common e*penses are salaries e*pense, rent e*pense, interest
e*pense, property ta* e*pense, etc.
Illustration 1-+
LO ' (tate the accounting e)uation* and deine its co$ponents.
0he 7asic Accounting E)uation
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6ividends are the distri%ution of cash or other assets to shareholders.
educe retained earnings
4ot an e*pense
Illustration 1-+
LO ' (tate the accounting e)uation* and deine its co$ponents.
0he 7asic Accounting E)uation
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Classification
Classify the following items as issuance of shares, dividends,revenues, or e*penses. Then indicate whether each item
increases or decreases e;uity.
1. ent e*pense
!. $ervice revenue
#. "ividends
&. $alaries e*pense
LO ' (tate the accounting e)uation* and deine its co$ponents.
0ffect on 0;uity0*pense "ecrease
evenue 'ncrease
0;uity "ecrease
0*pense "ecrease
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0ransactionsare a %usinesss economic events recorded%y accountants.
@ay %e externalor internal.
4ot all activities represent transactions.
0ach transaction has a dual effect on the accounting
e;uation.
LO + Anal!,e the eects o business transactions on the accounting e)uation.
#sing the Accounting E)uation
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Illustration?Are the following events recorded in the accountingrecords
Event;urchase
co$puter.
Criterion 's the financial position assets, lia%ilities, or e;uity2of the company changed
6iscuss
product
design with
custo$er.
;a! rent.
4ecord@
6ont 4ecord
LO + Anal!,e the eects o business transactions on the accounting e)uation.
#sing the Accounting E)uation
Illustration 1-
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1-"2 LO + Anal!,e the eects o business transactions on the accounting e)uation.
#sing the Accounting E)uation
Illustration 1-8
0*panded accounting e;uation
0ransaction Anal!sis
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1-""LO +
0ransaction Anal!sis
0ransaction B1. Invest$ent b! (hareholders. ay and 8ar%ara 4eal
decides to open a computer programming service which he names$oft%yte.
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0ransaction Anal!sis
Illustration 1-19
0ransaction B2. ;urchase o E)uip$ent or Cash. $oft%yte purchases
computer e;uipment for B, cash.
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1-"& LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B". ;urchase o (upplies on Credit. $oft%yte purchases for
B1,+ from Acme $upply Company computer paper and other suppliese*pected to last several months. The purchase is on account.
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1-"' LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B%. (ervices ;rovided or Cash. $oft%yte receives B1,!
cash from customers for programming services it has provided.
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1-"+ LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B&. ;urchase o Advertising on Credit. $oft%yte receives a
%ill for B!( from the "aily 4ews for advertising %ut postpones paymentuntil a later date.
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1-" LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B'. (ervices ;rovided or Cash and Credit.$oft%yte
provides B#,( of programming services for customers. The companyreceives cash of B1,( from customers, and it %ills the %alance of B!,
on account.
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1-"8 LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B+. ;a!$ent o Expenses. $oft%yte pays the following
e*penses in cash for $eptem%er/ store rent B+, salaries and wages ofemployees BD, and utilities B!.
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1-%9 LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B. ;a!$ent o Accounts ;a!able.$oft%yte pays its B!(
"aily 4ews %ill in cash.
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1-%1 LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B8. 4eceipt o Cash on Account.$oft%yte receives B+ in
cash from customers who had %een %illed for services Ein Transaction +2F.
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1-%2 LO +
0ransaction Anal!sis
Illustration 1-19
0ransaction B19. 6ividends.The corporation pays a dividend of B1,# in
cash.
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Companies prepare ourfinancial statements /
$tatement
of 7inancial
3osition
'ncome
$tatement
$tatement
of Cash
7lows
etained
0arnings
$tatement
LO #nderstand the our inancial state$ents and how the! are prepared.
5inancial (tate$ents
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4et income will result during a time period when/
a. assets e*ceed lia%ilities.
%. assets e*ceed revenues.
c. e*penses e*ceed revenues.
d. revenues e*ceed e*penses.
LO #nderstand the our inancial state$ents and how the! are prepared.
5inancial (tate$ents
:uestion
4et income is needed to determine the
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4et income is needed to determine the
ending %alance in retained earnings.5inancial (tate$ents
LO
Illustration 1-11
7inancial statements and
their interrelationships
The ending %alance in retained earnings is
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The ending %alance in retained earnings is
needed in preparing the %alance sheet5inancial (tate$ents
Illustration 1-11
LO
The %alance sheet and income statement are
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The %alance sheet and income statement are
needed to prepare statement of cash flows.5inancial (tate$ents
Illustration 1-11
LO
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)hich of the following financial statements is prepared as
of a specific date
a. $tatement of financial position.
%. 'ncome statement.
c. etained earnings statement.
d. $tatement of cash flows.
LO #nderstand the our inancial state$ents and how the! are prepared.
5inancial (tate$ents
:uestion
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1-%8
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5orensic Accounting
Uses accounting, auditing, and
investigative skills to conductinvestigations into theft and
fraud.
Dovern$ent
Careers with the ta*
authorities, law enforcementagencies, and corporate
regulators.
;rivate AccountingCareers in industry working in
cost accounting, %udgeting,
accounting information
systems, and ta*ation.
LO 8 Explain the career opportunities in accounting.
;ublic AccountingCareers in auditing, ta*ation,
and management consulting
serving the general pu%lic.
A;;E6IF 1A ACCO#0ID CA4EE4 O;;O40#I0IE(
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1-&1 LO 8 Explain the career opportunities in accounting.
A;;E6IF 1A ACCO#0ID CA4EE4 O;;O40#I0IE(
G(how e the one!H$alary estimates for -o%s in pu%lic and corporate accounting Illustration 1A-1
Upper=level management salaries in corporate accounting Illustration 1A-2
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1-&2
e! ;oints @ost agree that there is a need for one set of international accounting
standards. Gere is why/
H @ultinational corporations. Todays companies view the entire world
as their market.H @ergers and ac;uisitions. The mergers %etween 7iat9Chrysler and
Iodafone9@annesmann suggest that we will see even more such
%usiness com%inations in the future.
H 'nformation technology. As communication %arriers continue to
topple through advances in technology, companies and individualsin different countries and markets are %ecoming more comforta%le
%uying and selling goods and services from one another.
H 7inancial markets. 7inancial markets are of international
significance today.
Another ;erspective
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e! ;oints 'n !!, the U.$. Congress issued the $ar%anes=
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e! ;oints '7$ tends to %e less detailed in its accounting and disclosure
re;uirements than 5AA3. This difference in approach has resulted in a
de%ate a%out the merits of principles=%ased'7$2 versus rules=
%ased5AA32 standards.
U.$. regulators have recently eliminated the need for foreign companies
that trade shares in U.$. markets to reconcile their accounting with
5AA3.
5AA3 is %ased on a conceptual framework that is similar to that used to
develop '7$.
Another ;erspective
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e! ;oints The three common forms of %usiness organization that are presented in
the chapter, proprietorships, partnerships, and corporations, are also
found in the United $tates. 8ecause the choice of %usiness organization
is influenced %y factors such as legal environment, ta* rates and
regulations, and degree of entrepreneurism, the relative use of each
form will vary across countries.
Transaction analysis is %asically the same under '7$ and 5AA3 %ut, as
you will see in later chapters, the different standards may impact how
transactions are recorded.
Another ;erspective
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e! ;oints The %asic definitions provided in this te*t%ook for the key elements of
financial statements are simplified versions of the official definitions
provided %y the 'A$8.
H
Assets 3ro%a%le future economic %enefits o%tained or controlled %ya particular entity as a result of past transactions or events.
H >ia%ilities 3ro%a%le future sacrifices of economic %enefits arising
from present o%ligations of a particular entity to transfer assets or
provide services to other entities in the future as a result of past
transactions or events.
Another ;erspective
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e! ;oints The %asic definitions provided in this te*t%ook for the key elements of
financial statements are simplified versions of the official definitions
provided %y the 'A$8.
H
0;uity The residual interest in the assets of an entity that remainsafter deducting its lia%ilities.
H evenues 'nflows or other enhancements of assets of an entity or
settlements of its lia%ilities or a com%ination of %oth2 from
delivering or producing goods, rendering services, or other
activities that constitute the entitys ongoing ma-or or centraloperations.
H 0*penses
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Looing to the 5uture8oth the 'A$8 and the 7A$8 are hard at work developing standards that will
lead to the elimination of ma-or differences in the way certain transactions
are accounted for and reported. Consider, for e*ample, that as a result of a
-oint pro-ect on the conceptual framework, the definitions of the most
fundamental elements assets, lia%ilities, e;uity, revenues, and e*penses2
may actually change. Gowever, whether the 'A$8 adopts internal control
provisions similar to those in $
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)hich of the following is not a reason why a single set of high=;uality
international accounting standards would %e %eneficial
a2 @ergers and ac;uisition activity.
%2 7inancial markets.
c2 @ultinational corporations.
d2 5AA3 is widely considered to %e a superior reporting system.
DAA; (el-0est :uestions
Another ;erspective
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The $ar%anes=
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'7$ is considered to %e more/
a2 principles=%ased and less rules=%ased than 5AA3.
%2 rules=%ased and less principles=%ased than 5AA3.
c2 detailed than 5AA3.
d2 4one of the a%ove.
DAA; (el-0est :uestions
Another ;erspective
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