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CHAPTER 1
ACCOUNTING IN BUSINESS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives
C1. Explain the purpose and
importance of accounting.
1, 5
1-1
1-1, 1-4, 1-6
1-6
C2. Identify users and uses of, and
opportunities in accounting.
2, 3, 4, 6, 7,
8, 9, 10, 11,
12, 23
1-2
1-2, 1-3, 1-4
1-4, 1-8
C3. Explain why ethics are crucial to
accounting.
11
1-3
1-4, 1-5
1-3
C4. Explain generally accepted
accounting principles and define
and apply several accounting
principles.
13, 14, 15,
16, 19, 32
1-4, 1-5,
1-6, 1-16,
1-17
1-6, 1-7
1-7, 1-8, 1-9
1-3
C5. B Identify and describe the three
major activities in organizations.
(Appendix 1B)
16, 30,
31
1-21
1-13, 1-14
Analytical objectives:
A1. Define and interpret the
accounting equation and each of
its components.
17, 33, 34
1-7, 1-8,
1-9
1-8, 1-9
1-1, 1-2,
1-8, 1-10
1-1, 1-2,
1-4, 1-7,
1-9
A2. Compute and interpret return on
assets.
28
1-15
1-18
1-10, 1-11
1-1, 1-2,
1-5, 1-9
A3. A Explain the relation between
return and risk. (Appendix 1A)
29
1-12
1-1, 1-2,
1-9
Procedural objectives:
P1. Analyze business transactions
using the accounting equation.
18
1-10, 1-11
1-10, 1-11,
1-12, 1-13
1-1, 1-2, 1-7,
1-8, 1-9
1-7
P2. Identify and prepare basic
financial statements and explain
how they interrelate.
20, 21, 22,
23, 24, 25,
26, 27, 33,
34, 35
1-12, 1-13,
1-14
1-14, 1-15,
1-16, 1-17,
1-18, 1-19,
1-20
1-3, 1-4, 1-5,
1-6, 1-7, 1-8,
1-9
*See additional information on next page that pertains to these quick studies, exercises and problems.
Additional Information on Related Assignment Material
Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all
Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or
Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used
in practice, homework, or exam mode.
Synopsis of Chapter Revisions
Apple: NEW opener with new entrepreneurial assignment
Added titles to revenue and expense entries in columnar layout of transaction
analysis
Streamlined section on Dodd-Frank act
Bulleted presentation for accounting principles and fraud triangle
Deleted world map of IFRS coverage
Bulleted layout for 'fraud triangle'
Updated salary information
New discussion on FASB and IASB convergence
Updated return on assets for Dell
Chapter Outline
Notes
I. Importance of Accounting—we live in the information age, where
information, and its reliability, impacts the financial well-being of us
all.
A. Accounting Activities
Accounting is an information and measurement system that
identifies, records and communicates relevant, reliable, and
comparable information about an organizations business activities.
B. Users of Accounting Information
1. External Information Users—those not directly involved with
running the company. Examples: shareholders (investors),
lenders, directors, external auditors, non-executive employees,
labor unions, regulators, voters, legislators, government
officials, customers, suppliers, lawyers, brokers, etc.
a. Financial Accounting—area of accounting aimed at
serving external users by providing them with general-
purpose financial statements.
b. General-Purpose Financial Statements—statements that
have broad range of purposes which external users rely on.
2. Internal Information Users—those directly involved in
managing and operating an organization.
a. Managerial Accounting—area of accounting that serves
the decision-making needs of internal users.
b. Internal Reports—not subject to same rules as external
reports. They are designed with special needs of external
users in mind.
C. Opportunities in Accounting
Four broad areas of opportunities are financial, managerial,
taxation, and accounting related.
1. Private accounting offers the most opportunities.
2. Public accounting offers the next largest number of
opportunities
3. Government (and not-for-profit) agencies, including business
regulation and investigation of law violations also offer
opportunities.
II. Fundamentals of Accounting—accounting is guided by principles,
standards, concepts, and assumptions.
A. Ethics—a key concept. Ethics are beliefs that distinguish right
from wrong.
B. Fraud Triangle—model that asserts three factors must exist for
person to commit fraud: opportunity, pressure, and rationalization.
Chapter Outline
Notes
C. Internal Controls—procedures set up to protect company property
and equipment and insure reliable accounting reports, promotes
efficiency, and encourage adherence to company policies.
D. Generally Accepted Accounting Principles (GAAP)—concepts
and rules that govern financial accounting. Purpose of GAAP is to
make information in accounting statements relevant, reliable and
comparable.
1. Setting Accounting Principles
a. In U.S. major rule-setting bodies are the Securities and
Exchange Commission (SEC) and the Financial
Accounting Standards Board (FASB). SEC delegated
authority to set U.S. GAAP to the FASB.
b. The International Accounting Standards Board (IASB)
issues standards (International Financial Reporting
Standards or IFRS) that identify preferred accounting
practices in the global economy. IASB hopes to create
harmony among accounting practices in different
countries.
c. Differences between U.S. GAAP and IFRS are decreasing
as the FASB and IASB pursue convergence.
2. Conceptual Framework and Convergence—The FASB and
IASB are attempting to converge and enhance the conceptual
framework that guides standard setting. Framework consists
of:
a. Objectives—to provide information useful to investors,
creditors, and others.
b. Qualitative Characteristics—to require information that is
relevant, reliable and comparable.
c. Elements—to define items that financial statements can
contain.
d. Recognition and Measurement—to set criteria that an item
must meet for it to be recognized as an element; and how
to measure that element.
3. Principles and Assumptions of Accounting—two types are
general principles (basic assumptions, concepts and guidelines
for preparing financial statements; stem from long used
accounting practices) and specific principles (detailed rules
used in reporting transactions; from rulings of authoritative
bodies). The four principles discussed in this chapter are:
Chapter Outline
Notes
a. Measurement principle also called the cost principle—
financial statements are based on actual costs (with a
potential for subsequent adjustments to market) incurred
in business transactions. Cost is measured on a cash or
equal-to-cash basis. This principle emphasizes reliability
and verifiability; information based on cost is considered
objective. Objectivity means information is supported by
independent unbiased evidence: more than someone's
opinion.
b. Revenue recognition principle—revenue is recognized
(recorded) when earned. Proceeds need not be in cash.
Revenue is measured by cash received plus the cash value
of other items received.
c. Expense recognition principle, also called matching
principle—prescribes that a company records expenses
incurred to generate revenues it reported.
d. Full disclosure principle—prescribes reporting the details
behind the financial statements that would impacts users’
decisions; often in footnotes to the statements.
The four assumptions discussed in this chapter are:
a. Going-concern assumption—accounting information
reflects the assumption that the business will continue
operating instead of being closed or sold.
b. Monetary unit assumption—transactions and events are
expressed in monetary, or money, units. Generally this is
the currency of the country in which it operates but today
some companies express reports in more than one
monetary unit.
c. Time period assumption—the life of the company can be
divided into time periods, such as months and years, and
that useful reports can be prepared for those periods.
d. Business entity assumption—a business is accounted for
separate from other business entities and separate from its
owner. Necessary for good decisions
4. Business Entity Legal Forms
a. Sole proprietorship is a business owned by one person
that has unlimited liability. It is a separate entity for
accounting purposes. The business is not subject to an
income tax but the owner is responsible for personal
income tax on the net income of entity.
b. Partnership is a business owned by two or more people,
called partners, who are subject to unlimited liability. The
business is not subject to an income tax, but the owners
are responsible for personal income tax on their individual
share of the net income of entity.
Chapter Outline
Notes
c. Three special partnership forms that limit liability
i. Limited partnership (LP)—has a general partner(s) with
unlimited liability and a limited partner(s) with limited
liability restricted to the amount invested.
ii. Limited liability partnership (LLP)—restricts partner’s
liabilities to their own acts and the acts of individuals
under their control.
iii.Limited liability company (LLC)—offers the limited
liability of a corporation and the tax treatment of a
partnership.(Note: most proprietorships and
partnerships are now organized as LLC)
e. Corporation is a business that is a separate legal entity
whose owners are called shareholders or stockholders.
These owners have limited liability. The entity is
responsible for a business income tax and the owners are
responsible for personal income tax on profits that are
distributed to them in the form of dividends.
5. Accounting Constraints There are two basic constraints on
financial reporting.
a. The materiality constraint prescribes that only information
that would influence the decisions of a reasonable person
need be disclosed. It looks at both the importance and
relative size of an amount.
b. The cost-benefit constraint prescribes that only
information with benefits of disclosure greater than the
costs of providing it need be disclosed.
c. Conservatism and industry practices are sometimes
referred to as constraints as well.
6. Sarbanes-Oxley (SOX)—Law passed by congress that
requires public companies to apply both accounting oversight
and stringent internal controls to achieve more transparency,
accountability and truthfulness in reporting.
7. Dodd-Frank (Wall Street Reform and Consumer Protection
Act)—Law recently passed as a response to financial systems
near collapse. Details of the law are yet to be set forth by
regulators.
III. Transactions Analysis and the Accounting Equation
A. Accounting equation (Assets = Liabilities + Equity)—elements of
the equation include:
1. Assets—resources a company owns or controls that are
expected to carry future benefits. (i.e. cash, supplies,
equipment and land)
2. Liabilities—creditors’ claims on assets. These claims reflect
obligations to transfer assets or provide products or services to
others.
