978-1118334324 Chapter 1 Lecture Note Part 2

F. The Basic Accounting Equation.

1. Assets = Liabilities + Owner’s Equity.

2. Equality of the equation must be preserved.

3. The expanded accounting equation is:

Assets = Liabilities + Owner’s Capital – Owner’s Drawings + Revenues –

Expenses.

G. Assets, Liabilities, and Owner’s Equity.

2. Liabilities are claims against assets. They are existing debts and obligations.

3. Owner’s equity is equal to total assets minus total liabilities; owner’s

b. Drawings are the withdrawal of cash or other assets from a proprie–

5. Expenses are the cost of assets consumed or services used in the process

of earning revenue.

H. Using the Accounting Equation.

1. External transactions are economic events between the company and

some outside enterprise.

2. Internal transactions are economic events that occur entirely within one

company.

I. Financial Statements.

for a specific period of time.

specific date.

4. A statement of cash flows summarizes information about the cash inflows

(receipts) and outflows (payments) for a specific period of time.

*J. Accounting Career Opportunities.

1. Individuals in public accounting offer expert service to the general public

through the services they perform.

a. Auditing—A certified public accountant (CPA) examines company

financial statements and provides an opinion as to how accurately

the financial statements present the company’s results and financial

position.

b. Taxation—Tax specialists provide tax advice and planning, prepare

tax returns, and represent clients before governmental agencies.

c. Management Consulting—Management consultants assist in the

installation of basic accounting software and perform support services

for major marketing projects and merger and acquisition activities.

2. Private accountants are employees of a for-profit company and are involved

in a number of activities including cost accounting, tax planning and prepa-

ration, accounting information system design and support, and internal

auditing.

3. Governmental accounting opportunities include employment with the

Internal Revenue Service, Federal Bureau of Investigation, and the

Securities and Exchange Commission.

IFRS

A Look at IFRS

Multinational corporations. Today’s companies view the entire world as their market. For

example, Coca-Cola, Intel, and McDonald’s generate more than 50% of their sales outside the

United States, and many foreign companies, such as Toyota, Nestlé, and Sony, find their

largest market to be the United States.

Information technology. As communication barriers continue to topple through advances in

technology, companies and individuals in different countries and markets are becoming more

comfortable buying and selling goods and services from one another.

KEY POINTS

 International standards are referred to as International Financial Reporting

Standards (IFRS), developed by the International Accounting Standards Board (IASB).

developed by the Financial Accounting Standards Board (FASB). The fact that there are

differences between what is in this textbook (which is based on U.S. standards) and

IFRS should not be surprising because the FASB and IASB have responded to different

user needs. In some countries, the primary users of financial statements are private

 The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large

public companies listed on U.S. exchanges. There is a continuing debate as to whether

non-U.S. companies should have to comply with this extra layer of regulation. Debate

 IFRS tends to be simpler in its accounting and disclosure requirements; some people

say it is more “principles–based.” GAAP is more detailed; some people say it is more

“rules–based.” This difference in approach has resulted in a debate about the merits of

“principles–based” versus “rules–based” standards.

across countries.

 The conceptual framework that underlies IFRS is very similar to that used to develop

GAAP. The basic definitions provided in this textbook for the key elements of financial

statements, that is, assets, liabilities, equity, revenues (referred to as income), and

resources embodying economic benefits. Liabilities may be legally enforceable

via a contract or law, but need not be, i.e., they can arise due to normal business

practice or customs.

Equity. A residual interest in the assets of the entity after deducting all its liabilities.

LOOKING TO THE FUTURE

the most fundamental elements (assets, liabilities, equity, revenues, and expenses) may

actually change. However, whether the IASB adopts internal control provisions similar to those

in SOX remains to be seen.

20 MINUTE QUIZ

Circle the correct answer.

True/False

1. Accounting is the information system that identifies, records, and communicates the

economic events of an organization to interested users.

True False

3. Internal users are those who manage the business.

True False

4. The Financial Accounting Standards Board is the primary accounting standard-setting

body in the United States.

True False

6. The economic entity assumption requires that the activities of the entity be kept sepa–

True False

8. An expense paid with cash would result in an equal decrease in liabilities and owner’s

equity.

True False

9. Liabilities represent the ownership claim on total assets.

True False

*10. Certified Public Accountants are only permitted to prepare audit reports and tax returns.

True False

Multiple Choice

1. All of the following are external users of accounting information except

a. labor unions.

b. taxing authorities.

c. regulatory agencies.

d. company officers.

2. Recording consists of

a. identifying and measuring economic events.

b. preparing and distributing accounting reports.

users.

3. The financial statement that summarizes information about the cash inflows and outflows

during a period is the

a. income statement.

b. owner’s equity statement.

c. balance sheet.

d. statement of cash flows.

a. Assets – Liabilities = Owner’s equity

b. Assets = Liabilities – Owner’s equity

c. Assets = Liabilities + Owner’s equity

d. Assets – Owner’s equity = Liabilities

*5. Accountants involved with cost accounting, budgeting, and internal auditing are part of

which broad category within the accounting profession?

a. Governmental accounting

b. Management consulting

c. Public accounting

d. Private accounting

ANSWERS TO QUIZ

True/False

Multiple Choice

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