Week 1 - PowersNeedles
Week 1 - PowersNeedles
Uses of Accounting
Information and the
Financial Statements
SOLUTION
1. c; 2. b; 3. a; 4. b; 5. c; 6. c
Accounting Measurement
Four questions must be answered to
make an accounting measurement.
What is measured?
When should the measurement be made?
What value should be placed on what is
measured?
How should what is measured be classified?
Business Transactions
A business transaction is an economic
event that affects a business’s financial
position.
A transaction can be an exchange of value (a
purchase, sale, payment, collection, or loan)
between two or more parties.
A transaction that does not involve an
exchange is a “nonexchange transaction.” For
example, losses from fire, flood, explosion, and
theft; physical wear and tear on machinery and
equipment; and the day-by-day accumulation
of interest.
Money Measure
The money measure concept states
that a business transaction should be
recorded in terms of money.
Transactions between countries must
involve the translation of amounts of
money using the appropriate exchange
rate.
Examples of Foreign
Exchange Rates
Separate Entity
In accounting, a business is a separate
entity, distinct not only from its
creditors and customers but also from its
owners.
Match each description with one of the terms that follow:
Forms of Business
Sole proprietorship—one owner
Theowner takes all of the profits or losses of
the business
The owner has unlimited liability
Partnership—two or more owners
In a partnership two or more owners share
profits or losses based on a predetermined
arrangement
Owners have unlimited liability which can be
avoided by forming a limited liability
partnership
Forms of Business
(slide 1 of 2)
____ 1.
Issues stock a. Sole proprietorship
____ 2.
Owned by only one person b. Partnership
____ 3.
Multiple co-owners c. Corporation
____ 4.
Management appointed by
board of directors
____ 5. Most numerous but usually
small in size
____ 6. Biggest segment of the economy
SOLUTION
1. c; 2. a; 3. b; 4. c; 5. a; 6. c.
The Financial Statements
and their Elements
Income statement (also referred to as the
statement of operations) the most
important financial report because it shows
whether a business achieved its profitability
goal through its operating activities
Revenues are the increases in stockholders’
equity that result from operating a business.
Expenses are the decreases in stockholders’
equity that result from operating a business.
Net Income When revenues exceed expenses,
the difference is called net income. When
expenses exceed revenues, the difference is
called net loss.
Income Statement for Inglot
Consultancy, Inc.
Statement of Retained
Earnings
Retained earnings represent the
accumulated earnings generated by a
business’s income-producing activities
less amounts that have been paid out to
the stockholders.
The statement of retained earnings shows
the changes in retained earnings over an
accounting period.
Dividends are distributions of resources,
generally in the form of cash, to
stockholders, and only the board of
directors has the authority to declare
them.
Statement of Retained
Earnings for Inglot
Consultancy, Inc.
The Accounting Equation
Balance Sheet
Balance sheet (also called the statement
of financial position) shows the financial
position of a business on a certain date,
usually the end of the month or year
The assets equal the sum of the liabilities and
stockholders’ equities, under the accounting
equation
Assets are the economic resources of a
company that are expected to benefit the
company’s future operations.
Liabilities are a business’s present obligations
to pay cash, transfer assets, or provide
services to other entities in the future.
Balance Sheet for Inglot
Consultancy
Balance Sheet
Income Statement
Revenues $2,775
Expenses (a)
Net income $
(b)
Statement of Retained Earnings
Beginning balance $7,250
Net income (c)
Less dividends 500
Ending balance
$7,500
Balance Sheet
Total assets $ (d)
Liabilities $4,000
Stockholders’ equity
Common stock
5,000
Retained earnings (e)
Total liabilities and stockholders’ equity $ (f)
SOLUTION
Thus, start with (c), which must equal $750 ($7,250 + $750
- $500 + $7,500). Then, (b) equals (c), or $750. Thus, (a)
must equal $2,025 ($2,775 - $2,025 + $750). Because (e)
equals $7,500 (ending balance from the statement of
retained earnings), (f) must equal $16,500 ($4,000 +
$5,000 + $7,500 + $16,500). Now, (d) equals (f ), or
$16,500.
Generally Accepting
Accounting Principles
GAAP are the conventions, rules, and
procedures that define acceptable
accounting practice at a particular time.
GAAP and the Independent CPA’s Report
Certified public accountant (CPA) performs
independent audits of businesses’ financial
statements.
An audit is an examination of the financial
statements and the accounting systems,
controls, and records to ascertain that financial
statements are in accordance with GAAP.
Large International Certified
Public Accounting Firms
Organizations That Issue
Accounting Standards
The Financial Accounting Standards
Board (FASB) is responsible for
developing GAAP.
The International Accounting
Standards Board (IASB) sets
international accounting standards.
Issues international financial reporting
standards (IFRS)
IFRS is becoming increasingly important
because of the acceptance of its standards
in many financial markets throughout the
world.
Other Organizations That
Influence GAAP
The Public Company Accounting Oversight Board (PCAOB) is a
governmental body created by the Sarbanes-Oxley Act to regulate
the accounting profession.
The American Institute of Certified Public Accountants (AICPA)
influences GAAP through advisory committees.
The Securities and Exchange Commission (SEC) sets its own
standards for companies whose securities are listed on the stock
exchanges.
The Governmental Accounting Standards Board (GASB) was
established to issue accounting standards for state and local
governments.
Internal Revenue Service (IRS) guidelines are established to
collect taxes but play an influential role in the establishment of
accounting practices.
Professional Conduct
(slide 1 of 2)
Institute of Management
Accountants (IMA)
the primary professional association of
management accountants,
Code of professional conduct emphasizes
that management accountants
have a responsibility to be competent in their
jobs,
must keep information confidential except when
authorized or legally required to disclose it,
must maintain integrity and avoid conflicts of
interest,
and communicate information objectively and
without bias.
Match the following acronyms with the descriptions that follow:
____ 1. GAAP a. Sets U.S. accounting standards
____ 2. IFRS b. Audits financial statements
____ 3. CPA c. Established by the Sarbanes-Oxley
Act
____ 4. FASB d. Sets international accounting
standards
____ 5. IASB e. Established by the FASB
____ 6. PCAOB f. Established by the IASB
____ 7. AICPA g. Influences accounting standards
through
SOLUTION member CPAs
1. e;8.2. f;SEC
____ 3. b; 4. a; 5. d; 6. c; 7. g; 8.
h.h.Receives audited financial
statements of public companies