CHAPTER 1
ACCOUNTING IN ACTION
LEARNING OBJECTIVES
1. IDENTIFY THE ACTIVITIES AND USERS ASSOCIATED
WITH ACCOUNTING.
2. EXPLAIN THE BUILDING BLOCKS OF ACCOUNTING:
ETHICS, PRINCIPLES, AND ASSUMPTIONS.
3. STATE THE ACCOUNTING EQUATION, AND DEFINE ITS
COMPONENTS.
4. ANALYZE THE EFFECTS OF BUSINESS
TRANSACTIONS ON THE ACCOUNTING EQUATION.
5. DESCRIBE THE FOUR FINANCIAL STATEMENTS AND
HOW THEY ARE PREPARED.
*6. EXPLAIN THE CAREER OPPORTUNITIES IN
ACCOUNTING.
*7. DESCRIBE THE IMPACT OF INTERNATIONAL
ACCOUNTING STANDARDS ON U. S. FINANCIAL
REPORTING.
CHAPTER REVIEW
Accounting Defined
1. (L.O. 1) Accounting is an information system that identifies, records, and communicates the
economic events of an organization to interested users.
a. The first part of the process, identifying, involves selecting those events that are considered
evidence of economic activity relevant to a particular business organization.
Ethics
5. (L.O. 2) The standards of conduct by which one’s actions are judged as right or wrong, honest
or dishonest, fair or not fair, are ethics. The process of analyzing ethics cases and situations is
to:
GAAP and Measurement Principles
6. Generally accepted accounting principles (GAAP) are a common set of guidelines (standards)
used by accountants.
7. The historical cost principle requires that companies record assets at their cost. The fair value
The Monetary Unit and Economic Entity Assumptions
8. The accounting profession has developed certain assumptions that serve as guidelines for the
accounting process.
Business Enterprises
9. Three types of business enterprises are proprietorships, partnerships, and corporations.
a. A proprietorship is a business owned by one person.
The Accounting Equation
10. (L.O.3) The basic accounting equation is:
11. The key components of the basic accounting equation are:
a. Assets are resources owned.
12. In corporations, stockholders’ equity consists of:
a. Common stock is the total amount paid in by stockholders for the shares they purchase.
Effects of Business Transactions on the Accounting Equation
13. (L.O. 4) Transactions are the economic events of the business recorded by accountants.
Transactions may be identified as either external or internal transactions.
16. A tabular summary may be prepared to show the cumulative effect of transactions on the basic
accounting equation. The summary demonstrates that:
a. Each transaction must be analyzed in terms of its effect on
The Financial Statements
17. (L.O. 5) Four financial statements are prepared from the summarized accounting data:
a. An income statement presents the revenues and expenses and resulting net income or net
loss of a company for a specific period of time. Revenues and expenses determine if a net
18. The financial statements are interrelated because:
a. Net income (or net loss) shown on the income statement is added (subtracted) to (from) the
19. In the income statement, revenues are listed first, followed by expenses. Then below expenses is
the resulting amount of net income (or net loss).
20. The retained earnings statement starts with the retained earnings at the beginning of the period.
Net income for the period is added, and dividends are deducted (if there is a net loss, it is
*Careers in Accounting
*23. (L.O. 6) Public accounting provides the services of auditing, taxation, and management
consulting.
a. Auditing involves examining financial statements of companies and expressing an opinion
*24. 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.
*Describe the Impact of International Accounting Standards on U. S. Financial Reporting
*27. (L. O. 7) Most agree that there is a need for one set of international accounting standards.
a. Multinational corporations
*28. The similarities and differences between GAAP and IFRS are:
a. Similarities:
(1) The recording process is essentially the same for U. S. and international companies.
(2) Both sets of standards emphasize meeting the information needs of investors and
*29. Both FASB and IASB are working on standards that will eliminate major differences in how certain
transactions are accounted for and reported.
LECTURE OUTLINE
A. What Accounting Is.
1. Accounting consists of three basic activities—it identifies, records, and
communicates the economic events of an organization to interested
users.
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:
a. Investors or creditors: Investors (owners) use accounting information
ACCOUNTING ACROSS THE ORGANIZATION
Accounting can serve as a useful recruiting tool even for the human resources
department. One company’s website includes the following: “operating results
are posted and monthly group meetings inform all employees about what’s
happening in the company.”
What are the benefits to the company and to the employees of making the
financial statements available to all employees?
C. Ethics in Financial Reporting.
1. Ethics are the standards of conduct by which one’s actions are judged
2. In the process of analyzing ethics cases and situations, the following
steps should be applied:
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
3. The historical cost principle (or cost principle) dictates that companies
should record assets at their cost. This is also true over the time the
asset is held.
E. Assumptions.
1. Monetary unit assumption.
a. Requires that companies include in the accounting records only trans-
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.
ACCOUNTING ACROSS THE ORGANIZATION
The study of accounting should help students a great deal, because a working
knowledge of accounting is desirable for virtually every field of business.
How might accounting help a student?
F. The Basic Accounting Equation.
1. Assets = Liabilities + Stockholders’ Equity.
G. Assets, Liabilities, and Stockholders’ Equity.
1. Assets are resources a business owns. The business uses its assets in
carrying out such activities as production and sales.
2. Liabilities are claims against assets. They are existing debts and obligations.
H. Using the Accounting Equation.
1. External transactions are economic events between the company and
some outside enterprise.
I. Financial Statements.
1. An income statement presents the revenues and expenses and resulting
net income or net loss 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
2. Private accountants are employees of a for-profit company and are involved
3. Governmental accounting opportunities include employment with the
IFRS
A Look at IFRS
Most agree that there is a need for one set of international accounting standards. Here is why:
Multinational corporations. Today’s companies view the entire world as their market. For
KEY POINTS
Similarities
• International standards are referred to as International Financial Reporting
Standards (IFRS), developed by the International Accounting Standards Board (IASB).
Differences
• International standards are referred to as International Financial Reporting Standards
(IFRS), developed by the International Accounting Standards Board. Accounting
standards in the United States are referred to as generally accepted accounting
standards (GAAP) and are developed by the Financial Accounting Standards Board.
LOOKING TO THE FUTURE
Both the IASB and the FASB are hard at work developing standards that will lead to the
elimination of major differences in the way certain transactions are accounted for and reported.
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
2. Bookkeeping deals with the record-keeping process and is only one aspect of accounting.
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
5. Net income is the excess of revenues over expenses for the accounting period.
True False
6. The economic entity assumption requires that the activities of the entity be kept sepa–
rate and distinct from the activities of its owner and all other economic entities.
True False
7. Collection of an accounts receivable will increase both cash and accounts receivable.
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.
c. keeping a systematic, chronological diary of events, measured in dollars and cents.
d. identifying, measuring, receiving, and communicating economic events to interested
users.
3. The financial statement that summarizes information about the cash inflows and outflows
during a period is the
a. income statement.
b. retained earnings statement.
c. balance sheet.
d. statement of cash flows.
4. Which of the following is not an acceptable statement of the basic accounting equation?
a. Assets – Liabilities = Stockholders’ equity
b. Assets = Liabilities – Stockholders’ equity
c. Assets = Liabilities + Stockholders’ equity
d. Assets – Stockholders’ 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