CHAPTER 1
ACCOUNTING IN ACTION
LEARNING OBJECTIVES
1. EXPLAIN WHAT ACCOUNTING IS.
2. IDENTIFY THE USERS AND USES OF ACCOUNTING.
3. UNDERSTAND WHY ETHICS IS A FUNDAMENTAL BUSI-
NESS CONCEPT.
4. EXPLAIN GENERALLY ACCEPTED ACCOUNTING PRIN–
CIPLES.
5. EXPLAIN THE MONETARY UNIT ASSUMPTION AND THE
ECONOMIC ENTITY ASSUMPTION.
6. STATE THE ACCOUNTING EQUATION, AND DEFINE
ITS COMPONENTS.
7. ANALYZE THE EFFECTS OF BUSINESS TRANSACTIONS
ON THE ACCOUNTING EQUATION.
8. UNDERSTAND THE FOUR FINANCIAL STATEMENTS
AND HOW THEY ARE PREPARED.
*9. EXPLAIN THE CAREER OPPORTUNITIES IN ACCOUNTING.
CHAPTER REVIEW
Accounting Defined
1. (L.O. 1) Accounting is an information system that identifies, records, and communicates the
b. Recording is the keeping of a chronological diary of events, measured in dollars and cents.
2. The accounting process consists of:
Identification Recording Communication.
3. (L.O. 2) Internal users of accounting information are managers who plan, organize, and run a
company officers.
4. External users include investors, creditors, taxing authorities, regulatory agencies, labor unions,
and customers.
Ethics
5. (L.O. 3) The standards of conduct by which one’s actions are judged as right or wrong, honest
weigh the impact of each alternative on various stakeholders, then select the most ethical
alternative.
GAAP and Measurement Principles
6. (L.O. 4) Generally accepted accounting principles (GAAP) are a common set of guidelines
(standards) used by accountants.
7. The Securities and Exchange Commission (SEC) is the agency of the United States
8. The Financial Accounting Standards Board (FASB) is the primary accounting standard-setting
9. The historical cost principle requires that companies record assets at their cost. The fair value
principle states that assets and liabilities should be reported at fair value (the price received to sell
an asset or settle a liability).
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 1-3
The Monetary Unit and Economic Entity Assumptions
10. (L.O. 5) The accounting profession has developed certain assumptions that serve as guidelines
for the accounting process.
Business Enterprises
11. Three types of business enterprises are proprietorships, partnerships, and corporations.
with ownership divided into transferable shares of stock.
The Accounting Equation
12. (L.O. 6) The basic accounting equation is:
Assets = Liabilities + Owner’s Equity.
form of business organization.
13. The key components of the basic accounting equation are:
a. Assets are resources owned.
b. Liabilities are claims against assets.
14. In proprietorships, there are four subdivisions of owner’s equity:
into for the purpose of earning income.
c. Drawings are withdrawals of cash or other assets by the owner for personal use.
revenue.
15. Revenues and expenses determine if a net income or net loss occurs as follows:
a. Revenues > Expenses = Net Income.
b. Revenues < Expenses = Net Loss.
Transactions
16. (L.O. 7) Transactions are the economic events of the business recorded by accountants.
17. Each transaction must be analyzed in terms of its effect on the components of the basic
the change in each item.
18. Each transaction has a dual effect on the equation. For example, if an individual asset is
increased, there must be a corresponding:
a. decrease in another asset, or
b. increase in a specific liability, or
c. increase in owner’s equity.
19. A tabular summary may be prepared to show the cumulative effect of transactions on the basic
accounting equation. The summary demonstrates that:
equity column.
The Financial Statements
period of time.
c. A balance sheet reports the assets, liabilities, and owner’s equity at a specific date.
21. The financial statements are interrelated because:
reported in the balance sheet.
22. In the income statement, revenues are listed first, followed by expenses. Then below expenses is
23. The owner’s equity statement shows the owner’s capital at the beginning of the period, additional
the end of the period.
25. The statement of cash flows reports the sources, uses, and net increase or decrease in cash.
Chapter 17 will examine in detail how the statement is prepared.
*Careers in Accounting
*26. (L.O. 9) Public accounting provides the services of auditing, taxation, and management
consulting.
a. Auditing involves examining financial statements of companies and expressing an opinion
as to the fairness of their presentation.
b. Taxation includes providing tax advice and planning, preparing tax returns, and representing
clients before governmental agencies.
c. Management consulting involves providing advice for managers on such matters as
financial planning and control and the development of computer systems.
*27. Private accounting involves the employment of accountants within individual companies. The
private accountant performs a wide variety of duties such as general accounting, cost accounting,
budgeting, accounting information systems, tax accounting, and internal auditing.
*28. Opportunities in government are other options available such as employment with the Internal
Revenue Service (IRS), Federal Bureau of Investigation (FBI) and the Securities and Exchange
Commission (SEC).
*29. Forensic accounting uses accounting, auditing, and investigative skills to conduct investigations
into theft and fraud.
LECTURE OUTLINE
A. What Accounting Is.
1. Accounting consists of three basic activities—it identifies, records, and
users.
2. Once a company identifies economic events, it records those events in
order to provide a history of its financial activities. Recording consists of
keeping a systematic, chronological diary of events, measured in dollars
and cents.
therefore just one part of the accounting process. Accounting involves the
entire process of identifying, recording, and communicating economic events.
B. Users and Uses of Accounting.
1. Internal users of accounting information are managers who plan,
2. External users are individuals and organizations outside of a company
who are either:
money.
b. Other external users: This includes taxing authorities (Internal Revenue
Service), regulatory agencies (Securities and Exchange Commission),
customers, and labor unions.
ACCOUNTING ACROSS THE ORGANIZATION
happening in the company.”
What are the benefits to the company and to the employees of making the
financial statements available to all employees?
much inventory to produce. The human resources department will be
better able to determine whether employees can be given raises.
Finally, all employees will be better informed about the basis on which
they are evaluated, which will increase employee morale.
C. Ethics in Financial Reporting.
reporting depends on sound ethical behavior.
2. In the process of analyzing ethics cases and situations, the following
steps should be applied:
on various stakeholders.
D. Generally Accepted Accounting Principles.
1. Generally accepted accounting principles are a common set of
standards used by accountants.
2. Two organizations are primarily responsible for establishing generally
accepted accounting principles.
bodies.
c. Many countries outside of the U.S. have adopted the accounting
standards issued by the International Accounting Standards Board
(IASB).
3. The historical cost principle (or cost principle) dictates that companies
asset is held.
4. The fair value principle states that assets and liabilities should be
reported at fair value (the price received to sell an asset or settle a
liability).
E. Assumptions.
1. Monetary unit assumption.
a. Requires that companies include in the accounting records only trans-
action data that can be expressed in money terms. This assumption
enables accounting to quantify (measure) economic events.
principle.
2. Economic entity assumption requires that the activities of the entity be kept
separate and distinct from the activities of its owner and all other economic
entities.
a. A business owned by one person is generally a proprietorship.
is a partnership.
c. A business organized as a separate legal entity under state corpo–
ration law and having ownership divided into transferable shares of
stock is a corporation.
ACCOUNTING ACROSS THE ORGANIZATION
How might accounting help a student?