Chapter 1

2. Accounting in Action Chapter1 Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

3. Accounting in Action What is Accounting? The Building Blocks of Accounting The Basic Accounting Equation Using the Accounting Equation Financial Statements Three activities Who uses accounting data? Ethics in financial reporting Accounting standards Assumptions Assets Liabilities Equity Transaction analysis Summary of transactions Income statement Retained earnings statement Statement of financial position Statement of cash flows

4. What is Accounting? • The purpose of accounting: • to identify, record, and communicate the economic events of an • organization to • interested users. SO 1 Explain what accounting is.

5. What is Accounting? Illustration 1-1 The activities of the accounting process Three Activities The accounting process includes the bookkeeping function. SO 1 Explain what accounting is.

6. What is Accounting? Who Uses Accounting Data External Users Internal Users Human Resources Taxing Authorities Labor Unions Finance Management Customers Creditors Marketing Regulatory Agencies Investors SO 2 Identify the users and uses of accounting.

7. What is Accounting? 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 • Should any product lines be eliminated? Management 4. Is cash sufficient to pay dividends to shareholders? Finance 5. What price for our product will maximize net income? Marketing 6. Will the company be able to pay its debts? Creditors SO 2 Identify the users and uses of accounting.

8. The Basic Accounting Equation Assets Liabilities Equity + = Provides the underlying frameworkfor recording and summarizing economic events. Applies to all economic entities regardless of size. SO 6 State the accounting equation, and define its components.

9. The Basic Accounting Equation Assets Liabilities Equity + = Provides the underlying frameworkfor recording and summarizing economic events. Assets • Resources a business owns. • Provide future services or benefits. • Cash, Inventory, Equipment, etc. SO 6 State the accounting equation, and define its components.

10. The Basic Accounting Equation Assets Liabilities Equity + = Provides the underlying frameworkfor recording and summarizing economic events. Liabilities • Claims against assets (debts and obligations). • Creditors - party to whom money is owed. • Accounts payable, Notes payable, etc. SO 6 State the accounting equation, and define its components.

11. The Basic Accounting Equation Assets Liabilities Equity + = Provides the underlying frameworkfor recording and summarizing economic events. Equity • Ownership claim on total assets. • Referred to as residual equity. • Share capital and retained earnings. SO 6 State the accounting equation, and define its components.

12. The Basic Accounting Equation Illustration 1-7 Revenuesresult from business activities entered into for the purpose of earning income. Generally results from selling merchandise, performing services, renting property, and lending money. SO 6 State the accounting equation, and define its components.

13. The Basic Accounting Equation Illustration 1-7 Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are salaries expense, rent expense, utilities expense, tax expense, etc. SO 6 State the accounting equation, and define its components.

14. The Basic Accounting Equation Illustration 1-7 Dividends are the distribution of cash or other assets to shareholders. • Reduce retained earnings • Not an expense SO 6 State the accounting equation, and define its components.

15. The Basic Accounting Equation Classify the following items as issuance of shares, dividends, revenues, or expenses. Then indicate whether each item increases or decreases equity. Classification Effect on Equity Expense Decrease • Rent expense • Service revenue • Dividends • Salaries expense Revenue Increase Dividends Decrease Expense Decrease Solution on notes page SO 6 State the accounting equation, and define its components.

16. Using The Accounting Equation Transactionsare a business’s economic events recorded by accountants. • May be external or internal. • Not all activities represent transactions. • Each transaction has a dual effect on the accounting equation. SO 7 Analyze the effects of business transactions on the accounting equation.

17. Using The Accounting Equation Illustration: Are the following events recorded in the accounting records? Discuss product design with customer. Illustration 1-8 Purchase computer. Pay rent. Event Is the financial position (assets, liabilities, or equity) of the company changed? Criterion Record/ Don’t Record SO 7 Analyze the effects of business transactions on the accounting equation.

18. Using The Accounting Equation Transaction Analysis SO 7 Analyze the effects of business transactions on the accounting equation.