Chapter 01 – A Framework for Financial Accounting
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Chapter 1
A Framework for Financial Accounting
INSTRUCTOR’S MANUAL
Authors’ Perspectives
PART A: Accounting as a Measurement/Communication Process
LO1-1 Describe the two primary functions of financial accounting.
Eliminate the Misconception – It’s important on Day 1 to change any misconception students
have about financial accounting. Most students think this is going to be another math class.
Chapter 1 begins by explaining that this is not the case. Financial accounting is described as “the
language companies use to tell their financial story.” The concept of storytelling has broad
Start Simple – The financial accounting course can be intimidating to many students, most of
whom have never had an accounting course. We can simplify the measurement-communication-
decision making nature of financial accounting with the following illustrations:
• Illustration 1-4 provides a complete list of the measurement categories students will need
to know. Students will see many account titles throughout the semester, and this may
Chapter 01 – A Framework for Financial Accounting
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manageable.
• Illustration 1-10 was created by the Pathways Commission of the American Accounting
PART B: Financial Accounting Information
LO1-5 Explain the term generally accepted accounting principles (GAAP) and describe the
role of GAAP in financial accounting.
Accounting is a Dynamic Social Science – Many students are surprised to learn that the formal
rules of financial accounting are established by a private-sector body, the Financial Accounting
Standards Board. Some are also surprised to find out that separate rules have been established
Intriguing Role of the Auditor – The description of financial accounting as “the language
companies use to tell their financial story” was introduced in Part A. In Part B, students are
introduced briefly to the role of an independent auditor in providing verification that companies
are telling their story accurately. Students are highly interested in cases of financial statement
fraud, and instructors can explain that topics covered throughout the book will demonstrate how
fraud occurs. There are two types of auto-gradable assignments at the end of each chapter that
can be assigned related to financial statement fraud:
1. Ethics Cases. In Part B of the text, students will see a simple four-step framework for
thinking about ethical decisions related to financial reporting. In Ethics cases at the end of
Chapter 01 – A Framework for Financial Accounting
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PART C: Careers in Accounting
LO1-6 Identify career opportunities in accounting.
Can I get a job? – This is a question on all students’ minds. Accounting tends to be one of the
first business courses that students take. Many of them don’t yet know what their major will be,
what they’ll like, and if they can get a job. We can capture the best students in accounting by
APPENDIX
LO1-7 Explain the nature of the conceptual framework used to develop generally accepted
accounting principles.
The conceptual framework is discussed in the appendix. Instructors can cover the conceptual
Self-Study Materials
■ Let’s Review—Measuring business activities (p. 8).
■ Let’s Review—Communicating through financial statements (p. 17).
Chapter 01 – A Framework for Financial Accounting
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Key Points by Learning Objective
Throughout the chapter, Key Points provide quick synopses of the critical pieces of information
LO1-1 Describe the two primary functions of financial accounting.
The functions of financial accounting are to measure business activities of a company and to
LO1-2 Understand the business activities that financial accounting measures.
The measurement role of accounting is to create a record of the activities of a company. To make
LO1-3 Determine how financial accounting information is communicated through financial
statements.
The income statement compares revenues and expenses for the current period to assess the
company’s ability to earn a profit from running its operations.
The statement of stockholders’ equity reports information related to changes in common stock
LO1-4 Describe the role that financial accounting plays in the decision-making process.
Financial accounting serves an important role by providing information useful in investment and
lending decisions.
Chapter 01 – A Framework for Financial Accounting
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LO1-5 Explain the term generally accepted accounting principles (GAAP) and describe the
role of GAAP in financial accounting.
The rules of financial accounting are called generally accepted accounting principles (GAAP).
LO1-6 Identify career opportunities in accounting.
Because of the high demand for accounting graduates, the wide range of job opportunities, and
increasing salaries, this is a great time to obtain a degree in accounting.
Appendix
LO1-7 Explain the nature of the conceptual framework used to develop generally accepted
accounting principles.
Chapter 01 – A Framework for Financial Accounting
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A
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Questions
Learning
Objective(s)
Topic
Time
(Min.)
1
LO1-1
Define accounting
5
2
LO1-1
Identify decision makers
5
3
LO1-1
Define financial accounting
5
4
LO1-1
Determine the functions of accounting
5
5
LO1-2
Classify business activities
5
6
LO1-2
Determine financing activities
5
7
LO1-2
Determine investing activities
5
8
LO1-2
Determine operating activities
5
9
LO1-2
Distinguish legal forms of business
5
10
LO1-2
Define account types
5
11
LO1-2
Name advantages and disadvantages of the legal
5
forms of business
12
LO1-3
Describe basic financial statements
5
13
LO1-3
Understand financial reporting periods
5
14
LO1-3
Identify revenues and expenses
5
15
LO1-3
Understand the accounting equation
5
16
LO1-3
Identify assets and liabilities
5
17
LO1-3
and balance sheet
LO1-3
Explain other forms of financial accounting
information
5
20
LO1-4
Explain the role of accounting in society
5
21
LO1-5
Define GAAP
5
22
LO1-5
Describe the role of the FASB
5
LO1-5
Compare U.S. GAAP and IFRS
5
24
LO1-5
Understand the historical role of the securities acts
5
LO1-5
Describe the role of the auditor
5
26
LO1-5
List the three objectives of financial reporting
5
27
LO1-6
Understand the benefits of an accounting degree
5
LO1-7
Discuss relevance and faithful representation
5
representation
LO1-7
Describe cost effectiveness
5
31
LO1-7
Define the four basic assumption underlying GAAP
5
Understand the link between the income statement
5
Chapter 01 – A Framework for Financial Accounting
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Brief
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
BE1-1
LO1-1
Define accounting
5
BE1-2
LO1-2
Identify the different types of business activities
5
BE1-3
LO1-2
Identify the different forms of business
organizations
5
BE1-4
LO1-2
Recognize the different account classifications
5
BE1-5
LO1-2
Assign account classifications
5
BE1-6
LO1-2
Assign account classifications
5
BE1-7
LO1-3
Describe each financial statement
5
statements
BE1-9
LO1-5
Identify different groups engaged in providing high-
quality financial reporting
5
LO1-5
Identify the objectives of financial accounting
5
LO1-6
Identify careers for accounting majors
5
LO1-7
Identify the components/aspects of relevance
5
LO1-7
Identify the components/aspects of faithful
representation
5
Exercises
Learning
Objective(s)
Topic
Time
(Min.)
E1-1
LO1-2
Identify the different types of business activities
5
E1-2
LO1-2
Identify account classifications and business
activities
5
E1-3
LO1-2
Identify account classifications and business
activities
5
E1-4
LO1-2
E1-5
LO1-2
Calculate net loss and stockholders’ equity
E1-6
LO1-3
Prepare an income statement
5
E1-7
LO1-3
E1-8
LO1-3
Prepare a balance sheet
5
E1-9
LO1-3
Prepare a statement of cash flows
LO1-3
balance sheet
LO1-3
Link the balance sheet to the statement of cash
flows
LO1-3
Compute missing amounts from financial statements
LO1-3
Calculate the balance of retained earnings
5
earnings
Chapter 01 – A Framework for Financial Accounting
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related to the balance sheet
LO1-3
Calculate missing amounts related to the statement
of cash flows
10
LO1-5
Understand the role of the auditor
LO1-7
Identify the purpose of qualitative characteristics
10
LO1-7
Identify business assumptions underlying GAAP
Problems
Learning
Objective(s)
Topic
Time
(Min.)
P1-1A
LO1-2
Classify business activities
10
P1-2A
LO1-2
Assign account classifications
10
P1-3A
LO1-3
Prepare financial statements
20
P1-4A
LO1-3
Understand the format of financial statements and
the links among them
25
P1-5A
LO1-3
Prepare financial statements
20
P1-6A
LO1-7
Identify underlying assumptions of GAAP
15
P1-7A
LO1-7
conceptual framework
10
LO1-2
Classify business activities
10
P1-2B
LO1-2
Assign account classifications
10
P1-3B
LO1-3
Prepare financial statements
20
P1-4B
LO1-3
Understand the format of financial statements and
the link among them
25
P1-5B
LO1-3
Prepare financial statements
20
P1-6B
LO1-7
Identify underlying assumptions of GAAP
15
P1-7B
LO1-7
conceptual framework
10
Additional
Perspectives
Topic
Time
(Min.)
AP1-1
Continuing Problem: Great Adventures
20
AP1-2
Financial Analysis: American Eagle Outfitters, Inc.
15
AP1-3
Financial Analysis: The Buckle, Inc.
15
AP1-5
Ethics
20
AP1-6
Internet Research
30
AP1-7
Written Communication
25
Chapter 01 – A Framework for Financial Accounting
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Alternate Let’s Review
On December 31, Wortham Services reports the following year-end amounts.
Assets:
Cash
$11,000
Revenues:
Service
$85,000
Accounts receivable
19,000
Buildings
32,000
Expenses:
Advertising
12,000
Liabilities:
Salaries payable
5,000
Insurance
18,000
Notes payable
20,000
Salaries
44,000
Additional information:
a. The balance of retained earnings at the beginning of the year is $6,000.
Required:
Prepare the (1) income statement, (2) statement of stockholders’ equity, and (3) balance sheet.
Solution:
1. Income statement:
2. Statement of stockholders’ equity:
Wortham Services
Wortham Services
3. Balance sheet:
Wortham Services
Balance Sheet
December 31
Assets
Liabilities
Cash
$11,000
Salaries payable
$ 5,000
Accounts receivable
Notes payable
Buildings
Total assets
$62,000
Total liabilities and equity
$62,000
Chapter 01 – A Framework for Financial Accounting
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Common Mistakes
Common Mistakes made by students are highlighted in each of the chapters. With greater
awareness of the potential pitfalls, students can avoid making the same mistakes and gain a
deeper understanding of the chapter material.
Common Mistake
Dividends represent the payment of cash but are not considered an expense in running the
Chapter 01 – A Framework for Financial Accounting
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Decision Points and Decision Maker’s Perspectives
Decision Points and Decision Maker’s Perspectives are provided throughout each chapter to give
insight into how measurement and communication of financial accounting information help
decision makers.
Decision Points
Question
Accounting Information
Analysis
How can I tell if a
company is
profitable?
Income statement
If revenues exceed expenses, a
company has net income and is
profitable.
stockholders’ equity
or internal sources?
equity
equity increases due to external
during the year in excess of dividends
paid, equity increases due to internal
Question
Accounting Information
Analysis
What are creditors’
claims and owners’
claims to the
company’s resources?
Balance sheet
The amount of total liabilities equals
creditors’ claims to the company’s
resources. The extent to which total
assets exceed total liabilities
represents owners’ claims.
Decision Maker’s Perspective
cash flows to assess a company’s ability to repay debt. Financing activities provide informa-
Chapter 01 – A Framework for Financial Accounting
Ethical Dilemma
You have been the manager of a local restaurant for the past five years. Because of increased
competition, you notice you’re getting fewer customers. Despite all your attempts to attract new
customers and cut costs, the restaurant’s profitability continues to decline. The restaurant owner
Key Issues
• Reporting higher profit makes the restaurant’s operations seem more profitable, signaling
better managerial performance.
• Self-preservation (keeping your job) vs. honesty (accurate reporting)
• Managing expectations—justifying why performance is truly declining
Option 1: Do not understate expenses
• The actions we take depict the type of person we are, not whom we hope to be. You may
believe other causes besides your performance drove the decline in performance, but that
Option 2: Understate expenses
• As the decline in performance is not your fault, you may decide that falsifying the
financial statements will allow you time to either explain to the owner why performance