BCIT FMGT 2152 Chapter 3 PP

Survey of Accounting
Second Edition
Kimmel ● Weygandt
Chapter 3
The Accounting Information System
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.
Chapter Outline
Learning Objectives
LO 1 Discuss financial reporting concepts.
LO 2 Analyze the effect of business transactions on the basic
accounting equation.
Copyright ©2020 John Wiley & Sons, Inc. 2

Learning Objective 1
Discuss Financial Reporting Concepts
LO 1 Copyright ©2020 John Wiley & Sons, Inc. 3

Financial Reporting Concepts
The Standard-Setting Environment

Generally Accepted Accounting Principles (GAAP)
A set of rules and practices, having substantial authoritative
support that companies use to determine:
• What type of financial information to disclose.
• What format to use.
• How it should measure assets, liabilities, revenues, and
expenses?

Standard-setting bodies determine these accounting

standards:
• Securities and Exchange Commission (SEC)
• Financial Accounting Standards Board (FASB)
• International Accounting Standards Board (IASB)
• Public Company Accounting Oversight Board (PCAOB)
International Note Over 115 countries use international
standards (called IFRS).

GAAP Review Question
Generally accepted accounting principles are:

a. a set of standards and rules that are recognized as a general
guide for financial reporting.
b. usually established by the Internal Revenue Service.
c. the guidelines used to resolve ethical dilemmas.
d. fundamental truths that can be derived from the laws of
nature.

GAAP Review Question Answer
Generally accepted accounting principles are:
a. a set of standards and rules that are recognized as a general
guide for financial reporting.
b. usually established by the Internal Revenue Service.
c. the guidelines used to resolve ethical dilemmas.
d. fundamental truths that can be derived from the laws of
nature.

Qualities of Useful Information
Relevance
According to the FASB, useful information should possess
two fundamental qualities, relevance and faithful
representation.
Relevance
• Makes a difference in a business decision.
• Provides information that has predictive value.
• Has confirmatory value, confirms or corrects prior
expectations.
• Materiality is a company-specific aspect. An item is material
when its size makes it likely to influence the decision of an
investor or creditor.
Faithful Representation
According to the FASB, useful information should possess

two fundamental qualities, relevance and faithful
representation.
Faithful Representation
• Means that information accurately depicts what really
happened.
• Information must be:
o Complete (nothing important has been omitted).
o Neutral (not biased toward one position or another).
o Free from error.
Enhancing Qualities
Comparability Information is Information has the

results when different verifiable if quality of
companies use the independent understandability if
same accounting observers, using the it is presented in a
principles. same methods, obtain clear and concise
similar results. fashion.
Consistency means that a For accounting information to
company uses the same have relevance, it must be
accounting principles and timely.
methods from year to year.

Assumptions in Financial Reporting
Monetary Unit Assumption

Requires that only those things that can be expressed in money
are included in the accounting records.
Economic Entity Assumption
States that every economic entity can be separately identified
and accounted for.

Assumptions in Financial Reporting
(continued)
Periodicity Assumption
States that the life of a business can be divided into artificial
time periods.
Going Concern Assumption
The business will remain in operation for the foreseeable
future.

Principles in Financial Reporting
Measurement Principles
Historical Cost
Cost principle, dictates companies record assets at cost.
Fair Value
Indicates that assets and liabilities should be reported at fair
value.

Principles in Financial Reporting (continued)
Full Disclosure Principle

Disclose all circumstances and events that would make a
difference to financial statement users.
Cost Constraint
Accounting standard-setters weigh the cost that companies
will incur to provide the information against the benefit that
financial statement users will gain from having the information
available.

DO IT! 3: Financial Accounting Concepts and Principles
Terms
The following items guide the FASB when it creates accounting

standards.
Relevance Periodicity assumption
Faithful representation Going concern assumption
Comparability Historical cost principle
Consistency Full disclosure principle
Monetary unit assumption Materiality
Economic entity assumption

Solution
Match each item with the appropriate concept or principle.
1. Ability to easily evaluate one company’s

Comparability
results relative to another’s.
2. Belief that a company will continue to Going concern
operate for the foreseeable future.
3. The judgment concerning whether an item is Materiality

large enough to matter to decision-makers.
4. The reporting of all information that would

make a difference to financial statement users. Full disclosure

Solution (continued)
5. The practice of preparing financial

Periodicity
statements at regular intervals.
6. The quality of information that indicates the Relevance
information makes a difference in a decision.
7. A belief that items should be reported on the
balance sheet at the price that was paid to acquire Historical
the item. cost
8. A company’s use of the same accounting
principles and methods from year to year. Consistency

Solution (concluded)
9. The requirement that a company must keep

Economic
separate accounting records from personal
entity
accounting records.
10. The desire to minimize errors and bias in Faithful
financial statements. representation
11. Reporting only those things that can be measured Monetary

in dollars. unit

Primary Criterion Review Question
What is the primary criterion by which accounting information

can be judged?
a. Consistency.
b. Predictive value.
c. Usefulness for decision making.
d. Comparability.

Primary Criterion Review Question Answer
What is the primary criterion by which accounting information
can be judged?
a. Consistency.
b. Predictive value.
c. Usefulness for decision making.
d. Comparability.

Learning Objective 2
Analyze the Effect of Business Transactions
on the Basic Accounting Equation

Using the Accounting Equation to Analyze
Transactions
Accounting Information System

System of:
• Collecting transaction data.
• Processing transaction data.
• Communicating financial information to decision-makers.

Accounting Transactions
Transactions are economic events that require recording in

the financial statements.
• Not all activities represent transactions.
• Economic events that require recording in the financial
statements are accounting transactions.
• Accounting transactions occur when assets, liabilities, or
stockholders’ equity items change as a result of some
economic event.

Accounting Transactions
Decision Process
Decision process companies use to decide whether or not to record
economic events.

Analyzing Transactions
The process of identifying the specific effects of economic events

on the accounting equation.

Balanced Equation
The accounting equation must always balance.

• Each transaction has a dual effect on the equation
• If an asset is increased, there must be a corresponding:
o Decrease in another asset, or
o Increase in a specific liability, or
o Increase in stockholders’ equity.

Expanded Accounting Equation

Event (1)
On October 1, cash of $10,000 is invested in Sierra Corporation by
investors in exchange for $10,000 of common stock.

Event (1) Solution
On October 1, cash of $10,000 is invested in Sierra Corporation by

investors in exchange for $10,000 of common stock.

Event (2)
On October 1, Sierra borrowed $5,000 from Castle Bank by signing
a 3-month, 12%, $5,000 note payable.

Event (2) Solution
On October 1, Sierra borrowed $5,000 from Castle Bank by signing
a 3-month, 12%, $5,000 note payable.

Event (3)
On October 2, Sierra purchased equipment by paying $5,000 cash
to Superior Equipment Sales Co.

Event (3) Solution
On October 2, Sierra purchased equipment by paying $5,000 cash

to Superior Equipment Sales Co.

Event (4)
On October 2, Sierra received a $1,200 cash in advance from R.

Knox, a client.

Event (4) Solution
On October 2, Sierra received a $1,200 cash in advance from R.

Knox, a client.

Event (5)
On October 3, Sierra received $10,000 in cash from Copa Company

for guide services performed.

Event (5) Solution
On October 3, Sierra received $10,000 in cash from Copa Company

for guide services performed.

Event (6)
On October 3, Sierra Corporation paid its office rent for the month
of October in cash, $900.

Event (6) Solution
On October 3, Sierra Corporation paid its office rent for the month
of October in cash, $900.

Event (7)
On October 4, Sierra paid $600 for a one-year insurance policy that

will expire next year on September 30.

Event (7) Solution
On October 4, Sierra paid $600 for a one-year insurance policy that

will expire next year on September 30.

Event (8)
On October 5, Sierra purchased an estimated three months of

supplies on account from Aero Supply for $2,500.

Analyzing Trnsactions
Event (8) Solution
On October 5, Sierra purchased an estimated three months of

supplies on account from Aero Supply for $2,500.

Event (9)
On October 9, Sierra hired four new employees to begin work on
October 15.
An accounting transaction has not occurred.

Event (10)
On October 20, Sierra paid a $500 dividend.

Event (10) Solution
On October 20, Sierra paid a $500 dividend.

Event (11)
Employees have worked two weeks, earning $4,000 in salaries,

which were paid on October 26.

Event (11) Solution
Employees have worked two weeks, earning $4,000 in salaries,

which were paid on October 26.

Summary of Transactions

DO IT! 2a: Transaction Analysis
A tabular analysis of the transactions for the month of August is
shown below. Describe each transaction.
1. Company issued shares of stock for $25,000 cash.

2. Company purchased $7,000 of equipment on account.
3. Company received $8,000 cash in exchange for services performed.
4. Company paid $850 for accounts payable due.
DO IT! 2a: Transaction Analysis (continued)
A tabular analysis of the transactions for the month of August is
shown below. Describe each transaction.
1. The company performed services for $9,200 cash.

2. The company performed services worth $7,400 on account.
3. The company paid $900 in dividends to stockholders.
4. The company paid $1,250 to employees for salaries and wages.
Copyright ©2020 John Wiley & Sons, Inc. 52
Preparing Financial Statements
Financial Statements are prepared from the summarized

accounting data.
• Income statement reports the success or profitability of
the company’s operations over a specific period of time.
• Retained earnings statement reports the changes in
retained earnings for a specific period of time.
• Balance sheet reports the assets, liabilities, and
stockholders’ equity at a specific date.

Financial Statements

Financial Statements (continued)

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Survey of Accounting

Copyright ©2020 John Wiley & Sons, Inc. 2

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 3

The Standard-Setting Environment

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 4

Standard-setting bodies determine these accounting

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 5

Generally accepted accounting principles are:

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 6

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 7

According to the FASB, useful information should possess

Comparability Information is Information has the

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 10

Monetary Unit Assumption

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 11

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 12

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 13

Full Disclosure Principle

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 14

The following items guide the FASB when it creates accounting

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 15

Match each item with the appropriate concept or principle.

1. Ability to easily evaluate one company’s

3. The judgment concerning whether an item is Materiality

4. The reporting of all information that would

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 16

Match each item with the appropriate concept or principle.

5. The practice of preparing financial

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 17

Match each item with the appropriate concept or principle.

9. The requirement that a company must keep

11. Reporting only those things that can be measured Monetary

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 18

What is the primary criterion by which accounting information

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 19

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 20

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 21

Accounting Information System

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 22

Transactions are economic events that require recording in

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 23

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 24

The process of identifying the specific effects of economic events

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 25

The accounting equation must always balance.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 26

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 27

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 28

On October 1, cash of $10,000 is invested in Sierra Corporation by

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 29

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 30

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 31

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 32

On October 2, Sierra purchased equipment by paying $5,000 cash

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 33

On October 2, Sierra received a $1,200 cash in advance from R.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 34

On October 2, Sierra received a $1,200 cash in advance from R.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 35

On October 3, Sierra received $10,000 in cash from Copa Company

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 36

On October 3, Sierra received $10,000 in cash from Copa Company

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 37

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 38