Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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
opportunities in accounting.
8, 9, 10, 11,
12, 23
C2. Identify users and uses of, and
2, 3, 4, 6, 7,
1-2
1-2, 1-3, 1-4
1-4, 1-8
C3. Explain why ethics are crucial to
accounting.
11, 14
1-3
1-4, 1-5
1-3
principles.
19
1-6, 1-16
SP 1
C4. Explain generally accepted
13, 14, 15,
1-4, 1-5,
1-6, 1-7
1-7, 1-8, 1-9,
1-3
(Appendix 1B)
Analytical objectives:
C5. B Identify and describe the three
14, 16, 30,
1-21
1-13, 1-14
A1. Define and interpret the
accounting equation and each of
its components.
17, 20, 24
1-7, 1-8,
1-9, 1-17
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
1-14, 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
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how they interrelate.
25, 26, 27,
28, 32, 33
1-14
1-17, 1-18,
1-19, 1-20,
1-6, 1-7, 1-8,
1-9
P2. Identify and prepare basic
21, 22, 23,
1-12, 1-13,
1-15, 1-16,
1-22
1-3, 1-4, 1-5,
C1. Explain the purpose and
importance of accounting
1, 5,
1-1
1-1, 1-4, 1-6
1-6
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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 also provides algorithmic versions for Quick Study, Exercises and
Problems. It allows instructors to monitor, promote, and assess student learning. It can be used in
practice, homework, or exam mode.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto-graded and provide
instant feedback to the student.
Excel Simulations
Assignable within Connect, Excel Simulations allow students to practice their Excel skills—such as basic formulas
and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me
tutorials (when enabled). Excel Simulations are auto-graded and provide instant feedback to the student.
Synopsis of Chapter Revisions
Updated opener—Apple and entrepreneurial assignment.
Updated salary info for accountants and for those with college degrees.
Streamlined “Fraud Triangle” section.
Updated “Cooking the Books” Fraud box.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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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
B. Users of Accounting Information
officials, customers, suppliers, lawyers, brokers, etc.
1. External Information Users—those not directly involved with
running the company. Examples: shareholders (investors),
lenders, directors, external auditors, non-executive employees,
2. Internal Information Users—those directly involved in
managing and operating an organization.
a. Managerial Accounting—area of accounting that serves
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.
B. Fraud Triangle—model that asserts three factors must exist for
person to commit fraud: opportunity, pressure, and rationalization.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
C. Internal Controls—procedures set up to protect company property
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
2. Conceptual Framework consists of:
a. Objectives—to provide information useful to investors,
creditors, and others.
3. Principles and Assumptions of Accounting—two types are
general principles (assumptions, concepts and guidelines for
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
a. Measurement principle also called the cost principle—
financial statements are based on actual costs (with
some companies express reports in more than one
the customer.
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
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.
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
Chapter Outline
Notes
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
independent unbiased evidence: more than someone’s
opinion.
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are responsible for personal income tax on their individual
share of the net income of entity.
c. Three special partnership forms that limit liability
i. Limited partnership (LP)—has a general partner(s) with
d. 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
referred to as constraints as well.
6. Sarbanes-Oxley (SOX)—Law passed by congress that
7. Dodd-Frank (Wall Street Reform and Consumer Protection
Act)—Law recently passed as a response to financial systems
III. Business Transactions and Accounting
A. Accounting equation (Assets = Liabilities + Equity)—elements of
the equation include:
1. Assets—resources a company owns or controls that are
Chapter Outline
Notes
expected to carry future benefits. (i.e. cash, supplies,
equipment and land)
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others.
3. Equity—owner’s claim on assets; assets minus liabilities. Also
called net assets or residual equity. Changes in Equity—result
from investments, revenues, withdrawals, expenses.
a. Owner investments—assets an owner puts into the
company results in an increase in equity. Recorded under
the title Owner, Capital.
B. Expanded Accounting Equation:
Assets = Liabilities + Owner’s Capital – Owner’s Withdrawal +
Revenues – Expenses. Net income occurs when revenues exceed
revenues. Net income increases equity. Net loss occurs when
expenses exceed revenues which decreases equity.
C. Transaction Analysis—each transaction and event always leaves
the equation in balance. (Assets = Liabilities + Equity)
equation in balance.
1. Investment by owner:
ASSET = LIABILITIES + OWNERS’ EQUITY
2. Purchase supplies for cash:
ASSET = LIABILITIES + OWNERS’ EQUITY
3. Purchase equipment for cash:
ASSET = LIABILITIES + OWNERS’ EQUITY
Chapter Outline
Notes
4. Purchase supplies on credit:
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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5. Provide services for cash:
6,7. Payment of expenses in cash (salaries, rent etc.):
8. Provided services and facilities for credit:
9. Receipt of cash from account receivable (customers paying on
their accounts):
10. Payment of accounts payable:
11. Withdrawal of cash by owner:
ASSET = LIABILITIES + OWNERS’ EQUITY
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Chapter Outline
Notes
IV. Financial Statements
A. The four financial statements and their purposes are:
withdrawals over a period of time.
1. Income Statement—describes a company’s revenues and
2. Statement of Owner’s Equity—explains changes in equity
3. Balance Sheet—describes a company’s financial position
4. Statement of Cash Flows—identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.
B. Statement Preparation from Transaction Analysis—prepared in the
following order using the procedure indicated below.
1. Income Statement⎯information about revenues and expenses
is conveniently taken from the owner’s equity column. Total
2. Statement of Changes in Owner’s Equity⎯the beginning
owner’ equity is taken from the owner’s equity column and
liabilities. The ending capital (note that this is taken from the
3. Balance Sheet⎯the ending balance of each asset is listed and
the total of this listing equals total assets. The ending balance
of each liability is listed and the total of this listing equals total
4. Statement of Cash Flows⎯the cash column must be carefully
analyzed to organize and report cash flows in categories of
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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Chapter Outline
Notes
V. Sustainability and Accounting —(SASB) nonprofit entity engaged in
creating and disseminating sustainability accounting standards for
companies.
A. Sustainability—refers to environmental, social and governance
aspects. Includes social aspects such as donations and
VI. Decision Analysis—Return on Assets (ROA)—a profitability measure.
Also called Return on Investment (ROI)
A. Useful in evaluating management, analyzing and forecasting profits,
and planning activities.
VII. Risk and Return Analysis—Appendix 1A
A. Risk—the uncertainty about the return we will earn on an
investment.
B. The lower the risk, the lower the return.
C. Higher risk implies higher, but riskier implied returns.
VIII. Business Activities and the Accounting Equation—Appendix 1B
A. The accounting equation is derived from business activities.
B. Three major business activities are:
1. Financing activities—activities that provide the means
organizations use to pay for resources such as land, buildings, and
equipment to carry out plans. Two types of financing are:
develop, purchase, produce, distribute, and market products and
services.
2. Investing activities—are the acquiring and disposing of resources
3. Operating activities—involve using resources to research,
C Investing (assets) is balanced by Financing (liabilities and equity).
Operating activities is the result of investing and financing.
companies.
Wild, Shaw & Chiappetta: Fundamental Accounting Principles, 23rd Edition
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VISUAL #1-1
WARNING: NO MATTER WHAT HAPPENS
ALWAYS KEEP THIS SCALE
IN BALANCE
ASSETS L + OE
Basic Accounting Equation
ASSETS = LIABILITIES + OWNER’S EQUITY
TRANSACTION ANALYSIS RULES
1) Every transaction affects at least two items.
2) Every transaction must result in a balanced equation.
TRANSACTION ANALYSIS POSSIBILITIES:
A
=
L
+
OE
OR(2)
–
and
–
OR(3)
and
OR(4)
and
and