Chapter 01 – Introducing Financial Accounting
Chapter 1
Introducing Financial Accounting
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable
2. Technology reduces the time, effort, and cost of recordkeeping. There is still a
demand for people who can design accounting systems, supervise their operation,
3. External users and their uses of accounting information include: (a) lenders, to
measure the risk and return of loans; (b) shareholders, to assess whether to buy,
4. Business owners and managers use accounting information to help answer
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch,
6. The internal role of accounting is to serve the organization’s internal operating
7. Accounting professionals offer many services including auditing, management
8. Marketing managers are likely interested in information such as sales volume,
9. Accounting is described as a service activity because it serves decision makers by
10. Some accounting-related professions include consultant, financial analyst,
11. Ethics rules require that auditors avoid auditing clients in which they have a direct
12. In addition to preparing tax returns, tax accountants help companies and individuals
plan future transactions to minimize the amount of tax to be paid. They are also
13. The objectivity concept means that financial statement information is supported by
15. The revenue recognition principle provides guidance for managers and auditors so
they know when to recognize revenue. If revenue is recognized too early, the
16. Business organizations can be organized in one of three basic forms: sole
proprietorship, partnership, or corporation. These forms have implications for legal
liability, taxation, continuity, number of owners, and legal status as follows:
17. (a) Assets are resources owned or controlled by a company that are expected to
yield future benefits. (b) Liabilities are creditors’ claims on assets that reflect
18. Equity is increased by investments from the stockholder(s) and by net income
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Financial Accounting, 7th Edition
4
32. The dollar amounts in Apple’s financial statements are rounded to the nearest million
34. Confirmation of Samsung’s accounting equation follows (numbers in KRW millions):
Assets
=
Liabilities
+
Equity
181,071,570
=
59,591,364
+
121,480,206
35. The independent auditor for Apple, is Ernst & Young, LLP. The auditor expressly
Chapter 01 – Introducing Financial Accounting
QUICK STUDIES
Quick Study 1-1
1. f. Technology
Quick Study 1-2
a.
E
g.
E
b.
E
h.
E
c.
E
i.
I
d.
E
j.
E
e.
I
k.
E
f.
E
l.
I
Quick Study 1-3
a. The choice of an accounting method when more than one alternative
method is acceptable often has ethical implications. This is because
accounting information can have major impacts on individuals’ (and
firms’) well-being.
Quick Study 1-4
1. c. constraint
Quick Study 1-5
Attribute Present
Proprietorship
Partnership
Corporation
1.
Business taxed
no
no
yes
2.
Business entity
yes
yes
yes
3.
Legal entity
no
no
yes
Quick Study 1-6
Quick Study 1-7
Assets = Liabilities + Equity
Quick Study 1-8
1.
Assets = Liabilities + Equity
2.
Assets =
Liabilities
+ Common Stock
– Dividends
+ Revenues
– Expenses
$40,000
$16,000
$20,000
$ 0
(a) $12,000
$ 8,000
$80,000
$32,000
$44,000
(b) $2,000
$24,000
$18,000
Quick Study 1-11
Assets
=
Liabilities
+
Equity
Cash
+
Supplies
+
Equip.
+
Land
=
Accts.
Pay.
+
Notes
Pay.
+
Common
Stock
–
Div.
+
Rev.
–
Exp.
(a)
$15,000
=
$15,000
(b)
–500
+
$500
=
Bal.
14,500
+
500
=
+
15,000
(c)
+
$10,000
=
+
$10,000
Bal.
14,500
+
500
+
10,000
=
+
10,000
+
15,000
(d)
+
200
=
+$200
Bal.
14,500
+
700
+
10,000
=
200
+
10,000
+
15,000
(e)
–9,000
+
9,000
=
Bal.
5,500
+
700
+
10,000
+
9,000
=
200
+
10,000
+
15,000
Quick Study 1-12
[Code: Income statement (I), Balance sheet (B), Statement of retained earnings (E), or
Statement of cash flows (CF).]
a. B d. B g. CF
*An advanced student might know that this item would also appear on CF, which is an acceptable answer.
EXERCISES
Exercise 1-1 (10 minutes)
1.
A
5.
C
2.
B
6.
C
3.
A
7.
B
4.
A
8.
B
Exercise 1-2 (10 minutes)
C 1. Analyzing and interpreting reports
Exercise 1-3 (20 minutes)
Part A.
1.
I
5.
I
2.
I
6.
E
3.
E
7.
I
4.
E
8.
I
1.
I
5.
I
2.
E
6.
E
3.
I
7.
I
4.
E