1-1

Financial Accounting
Information for Decisions

John J. Wild
4th Edition
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2008
 Chapter 1

Introducing Accounting
in Business

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc., 2008

 1-3

Conceptual Chapter Objectives

C1: Explain the purpose and importance of

accounting in the information age
C2: Identify users and uses of accounting
C3: Identify opportunities in accounting and
related fields
C4: Explain why ethics are crucial in
accounting
C5: Explain the meaning of GAAP, and define
and apply several key accounting
principles
C6: Appendix 1B: Identify and describe the
three major activities in organizations
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 1-4

Analytical Chapter Objectives

A1: Define and interpret the accounting

equation and each of its components
A2: Analyze business transactions using the
accounting equation
A3: Compute and interpret return on assets
A4: Appendix 1A: Explain the relationship
between return and risk

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Procedural Chapter Objectives

P1: Identify and prepare basic financial

statements and explain how they
interrelate

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C1

Importance of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
to
tohelp
helpusers
usersmake
make
Comparable better
betterdecisions.
decisions.
Comparable
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C1

Accounting Activities

Identifying Recording
Business Business
Activities Activities

Communicating
Business
Activities

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C2 Users of Accounting
Information
External Users Internal Users

Lenders Consumer Groups Managers Sales Staff

Shareholders External Auditors Officers/Directors Budget Officers

Governments Customers Internal Auditors Controllers

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C2 Users of Accounting
Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.

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C3

Opportunities in Accounting
Financial Managerial
Managerial Taxation
Financial Taxation
Preparation General
Generalaccounting
accounting Preparation
Preparation Preparation
Analysis Cost accounting
Cost accounting Planning
Analysis Planning
Auditing Budgeting
Budgeting Regulatory
Auditing Regulatory
Regulatory Internal
Internalauditing
auditing Investigations
Regulatory Investigations
Consulting Consulting
Consulting Consulting
Consulting Consulting
Planning Controller
Controller Enforcement
Planning Enforcement
Treasurer Legal
Criminal
Criminal Treasurer Legalservices
services
Strategy Estate
investigation
investigation Strategy Estateplans
plans
Lenders
Lenders FBI
FBIinvestigators
investigators
Consultants
Consultants Market
Marketresearchers
researchers
Analysts
Analysts Systems
Systemsdesigners
designers
Accounting-
Accounting- Traders
Traders Merger
Mergerservices
services
Directors Business
Businessvaluation
related
related Directors
Underwriters Human
valuation
services
Underwriters Human services
Planners
Planners Litigation
Litigationsupport
support
Appraisers
Appraisers Entrepreneurs
Entrepreneurs
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C3

Accounting Jobs by Area

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C4

EthicsA Key Concept

Ethics

Beliefs that
Accepted
distinguish
standards of
right from
good and bad
wrong
behavior

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C4 Guidelines for Ethical
Decisions
Identify Analyze Make ethical
ethical concerns options decision

Use personal Consider all Choose best

ethics to good and bad option after
recognize ethical consequences. weighing all
concern. consequences.
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C5
Generally Accepted Accounting
Principles
Financial
Financial accounting
accountingpractice
practice is
isgoverned
governedbyby
concepts
conceptsandandrules
rules known
knownas as generally
generallyaccepted
accepted
accounting
accountingprinciples
principles (GAAP).
(GAAP).

Relevant
Relevant Affects
Affectsthethedecision
decisionof
of
Information
Information its
itsusers.
users.

Reliable
Reliable Information
Information Is
Istrusted
trustedby
by
users.
users.

Comparable
Comparable Used
Usedin
incomparisons
comparisons
Information across
acrossyears
years&&companies.
companies.
Information
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C5

Setting Accounting Principles

Financial
Financial Accounting
Accounting Standards
Standards
Board
Board is
is the
the private
private group
group that
that
sets
sets both
both broad
broad and
and specific
specific
principles.
principles.
The
TheSecurities
Securitiesand
andExchange
ExchangeCommission
Commissionis isthe
the
government
governmentgroup
groupthat
thatestablishes
establishesreporting
reporting
requirements
requirementsfor
forcompanies
companiesthat
thatissue
issuestock
stockto to
the
thepublic.
public.
The International Accounting Standards Board (IASB) issues inter-
national standards that identify preferred accounting practices
in other countries. The IASB does not have authority to impose
its standards on companies.
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C5

Principles of Accounting

Objectivity Principle Cost Principle

Accounting information is Accounting information is
supported by independent, based on actual cost.
unbiased evidence.

Now Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
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C5
Principles of Accounting
Monetary Unit Principle
Express transactions and events in
monetary, or money, units.
Business Entity Principle
A business is accounted for
separately from other business
entities, including its owner.
McGraw-Hill/Irwin
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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.
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C5

Business Entity Forms

Sole
Sole Partnership
Partnership Corporation
Corporation
Proprietorship
Proprietorship

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C5

Characteristics of Businesses

* *

**Proprietorships
Proprietorshipsandandpartnerships
partnershipsthat
thatare
areset
set up
up as
asLLCs
LLCs
provide
providelimited
limitedliability.
liability.

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Corporation
C5

Owners of a corporation are called

shareholders (or stockholders).

When a corporation issues only one

class of stock, we call it common stock
(or capital stock).
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A1

Accounting Equation

Assets
Assets = Liabilities
Liabilities + Equity
Equity

Liabilities
Assets & Equity

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A1
Assets

Cash
Cash
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles controlled
controlled
Vehicles Land
by
by aa Land
company
company
Store
Store Buildings
Buildings
Supplies
Supplies Equipment
Equipment
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A1

Liabilities

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Creditors
Creditors
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable

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A1

Equity

Contributed
Contributed Retained
Retained
Capital
Capital Earnings
Earnings

Owners
Owners
claim
claim on
on
assets
assets

Dividends
Dividends
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 Expanded Accounting 1-25
A1

Equation

Assets
Assets = Liabilities
Liabilities + Equity
Equity

Common
Common _ Dividends _
Stock
Stock
Dividends
+ Revenues
Revenues Expenses
Expenses

Retained Earnings

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A2

Transaction Analysis Equation

The accounting equation MUST remain in
balance after each transaction.

Assets
Assets = Liabilities
Liabilities + Equity
Equity

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A2

Transaction Analysis
J. Scott invests $20,000 cash to start
the business in exchange for stock.
The accounts involved are:
(1) Cash (asset)
(2) Common Stock (equity)

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A2

Transaction Analysis
J. Scott invests $20,000 cash to start the
business in return for stock.

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A2

Transaction Analysis

Purchased supplies paying $1,000 cash.

The accounts involved are:

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

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A2

Transaction Analysis

Purchased supplies paying $1,000 cash.

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A2

Transaction Analysis

Purchased equipment for $15,000 cash.

The accounts involved are:

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

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A2

Transaction Analysis

Purchased equipment for $15,000 cash.

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A2

Transaction Analysis

Purchased Supplies of $200 and

Equipment of $1,000 on account.

The accounts involved are:

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

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Transaction Analysis
A2

Purchased Supplies of $200 and

Equipment of $1,000 on account.

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A2

Transaction Analysis

Borrowed $4,000 from 1st American Bank.

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A2

Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.

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A2

Transaction Analysis

Now, lets look at transactions

involving revenue, expenses and
dividends.

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A2

Transaction Analysis

Provided consulting services receiving

$3,000 cash.

The accounts involved are:

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

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A2

Transaction Analysis
Provided consulting services receiving
$3,000 cash.

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A2

Transaction Analysis

Paid salaries of $800 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity decreases because expenses
reduce equity.
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A2

Transaction Analysis

Paid salaries of $800 to employees.

Remember that expenses decrease equity.

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A2

Transaction Analysis

Dividends of $500 are paid to shareholders.

The accounts involved are:
(1) Cash (asset)
(2) Dividends (equity)
Remember that the Dividend account actually
increases.
But, equity decreases because dividends
reduce equity.
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A2

Transaction Analysis
Dividends of $500 are paid to shareholders.

Remember that dividends decrease equity.

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P1

Financial Statements
Lets prepare the Financial Statements reflecting
the transactions we have recorded.

1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows

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P1

Income Statement

Net income is the

difference
between
Revenues and
Expenses.

The 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.
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P1
Statement of Retained Earnings
The net income of $2,200
increases Retained
Earnings by $2,200.

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P1

Balance Sheet

The
TheBalance
BalanceSheet
Sheetdescribes
describes
aacompanys
companysfinancial
financialposition
position
at
ataapoint
pointin
intime.
time.

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P1
Statement of Cash Flows

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P1

Return on Assets (ROA)

Return on Net income

=
assets Average total assets

ROA
ROA is
is viewed
viewed as
as an
an
indicator
indicator of
of operating
operating
efficiency.
efficiency.

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End of Chapter 1

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