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Chapter 1 Accounting in Business QUICK STUDIES Q uick Study 1 1 a E g E b E h E c I i E d E j E e E k I f I l E Q uick Study 1 2 a and b GAAP Generally Accepted Accounting Principles Importance GAAP are the rules that specify acceptable accounting practices SEC Securities and Exchange Commission Importance The SEC is charged by Congress to set reporting rules for organizations that sell ownership shares to the public The SEC delegates part of this responsibility to the FASB FASB Financial Accounting Standards Board Importance FASB is an independent group of full time members who are responsible for setting accounting rules IASB International Accounting Standards Board Importance Its purpose is to issue standards that identify preferred practices in the desire of harmonizing accounting practices across different countries The vast majority of countries and financial exchanges support its activities and objectives McGraw Hill Companies 2009 Solutions Manual Chapter 1 1 Q uick Study 1 3 Accounting professionals practice in at least four main areas These four areas along with a listing of some work opportunities in each are 1 Financial accounting Preparation Analysis Auditing external Consulting Investigation 2 Managerial accounting Cost accounting Budgeting Auditing internal Consulting 3 Tax accounting Preparation Planning Regulatory Consulting Investigation 4 Accounting related Lending Consulting Analyst Investigator Appraiser Q uick Study 1 4 Internal controls serve several purposes They involve monitoring an organization s activities to promote efficiency and to prevent wrongful use of its resources They help ensure the validity and credibility of accounting reports They are often crucial to effective operations and reliable reporting More generally the absence of internal controls can adversely affect the ffectiveness of domestic and global financial markets e Examples of internal controls include cash registers with internal tapes or drives scanners at doorways to identify tagged products overhead video cameras security guards and many others McGraw Hill Companies 2009 Fundamental Accounting Principles 19th Edition 2 uick Study 1 5 Q a Revenue recognition principle b Cost principle also called historical cost c Business entity assumption Q uick Study 1 6 The choice of an accounting method when more than one alternative method is acceptable often has ethical implications This is because accounting information can have major impacts on individuals and firms ell being w To illustrate many companies base compensation of managers on the amount of reported income When the choice of an accounting method affects the amount of reported income the amount of compensation is also affected Similarly if workers in a division receive bonuses based on the division s income its computation has direct financial implications for hese individuals t Q uick Study 1 7 Assets Liabilities Equity 375 000 a 125 000 250 000 250 000 b 90 000 160 000 185 000 60 000 c 125 000 Q uick Study 1 8 Assets Liabilities Equity 500 000 a 180 000 320 000 450 000 900 000 b b 450 000 Q uick Study 1 9 a For September 30 2006 the account and its dollar amount in millions for Apple are 1 Assets 17 205 2 Liabilities 7 221 3 Equity 9 984 McGraw Hill Companies 2009 Solutions Manual Chapter 1 3 Quick Study 1 9 continued b Using Apple s amounts from a we verify that in millions Assets Liabilities Equity 17 205 7 221 9 984 Quick Study 1 10 Code Income statement I Balance sheet B Statement of owner s equity OE or Statement of cash flows CF a B d CF g B b I e I h CF c B f B i OE and CF The more advanced student might know that this item would also appear in CF EXERCISES Exercise 1 1 20 minutes External users and some questions they seek to answer with accounting nformation include i 1 Shareholders investors who seek answers to questions such as a Are resources owned by a business adequate to carry out plans b Are the debts owed excessive in amount c What is the current level of income and its components 2 Creditors who seek answers for questions such as a Does the business have the ability to repay its debts b Can the business take on additional debt c Are resources sufficient to cover current amounts owed 3 Employees who seek answers to questions such as a Is the business financially stable b Can the business afford to pay higher salaries c What are growth prospects for the organization Internal users and some ways they use accounting information on their obs include j McGraw Hill Companies 2009 Fundamental Accounting Principles 19th Edition 4 1 Research and development managers who need information on projected costs and revenues of any proposed changes in products or services 2 Purchasing managers who need to know what when and how much to purchase 3 Human resource managers who need information about employees payroll benefits performance and compensation 4 Production managers who depend on information to monitor costs and ensure quality 5 Distribution managers who need reports for timely accurate and efficient delivery of products and services Exercise 1 2 10 minutes 1 C 5 B 2 C 6 A 3 A 7 B 4 A 8 B Exercise 1 3 20 minutes a Auditing professionals with competing audit clients are likely to learn valuable information about each client that the other clients would benefit from knowing In this situation the auditor must take care to maintain the confidential nature of information about each client b Accounting professionals who prepare tax returns can face situations where clients wish to claim deductions they cannot substantiate Also clients sometimes exert pressure to use methods not allowed or questionable under the law Issues of confidentiality also arise when these professionals have access to clients personal records c Managers face several situations demanding ethical decision making in their dealings with employees Examples include fairness in performance evaluations salary adjustments and promotion recommendations They can also include avoiding any perceived or real harassment of employees by the manager or any other employees It can also include issues of confidentiality regarding personal information known to managers McGraw Hill Companies 2009 Solutions Manual Chapter 1 5 d Situations involving ethical decision making in coursework include performing independent work on examinations and individually completing assignments projects It can also extend to promptly returning reference materials so others can enjoy them and to properly preparing for class to efficiently use the time and question period to not detract from others instructional benefits Exercise 1 4 10 minutes Code Description Principle or Assumption E 1 Usually created by a pronouncement from an authoritative body Specific accounting principle G 2 Financial statements reflect the assumption that the business continues operating Going concern assumption A 3 Derived from long used and generally accepted accounting practices General accounting principle C 4 Every business is accounted for separately from its owner or owners Business entity assumption D 5 Revenue is recorded only when the earnings process is complete Revenue recognition principle B 6 Information is based on actual costs incurred in transactions Cost principle F 7 A company reports details behind financial statements that would influence users decisions Full disclosure principle H 8 A company records the expenses incurred to generate the revenue reported Matching principle E xercise 1 5 10 minutes a Sole proprietorship e Corporation b Corporation f Partnership c Sole proprietorship g Sole proprietorship d Corporation E xercise 1 6 10 minutes Assets Liabilities Equity a 180 000 164 000 16 000 90 000 39 000 b 51 000 201 000 c 139 000 62 000 McGraw Hill Companies 2009 Fundamental Accounting Principles 19th Edition 6 E xercise 1 7 10 minutes 1 D 4 F 2 G 5 A 3 C Exercise 1 8 20 minutes a Using the accounting equation Assets Liabilities Equity 137 000 110 000 Thus equity 27 000 b Using the accounting equation at the beginning of the year Assets Liabilities Equity 259 000 194 250 Thus beginning liabilities 64 750 Using the accounting equation at the end of the year Assets Liabilities Equity 259 000 80 000 64 750 52 643 339 000 117 393 Thus ending equity 221 607 Alternative approach to solving part b Assets 80 000 Liabilities 52 643 Equity where refers to change in Thus Ending Equity 194 250 27 357 221 607 c Using the accounting equation at the end of the year Assets Liabilities Equity 190 000 57 000 16 000 190 000 41 000 149 000 Using the accounting equation at the beginning of the year Assets Liabilities Equity 190 000 60 000 57 000 130 000 57 000 Thus Beginning Equity 73 000 McGraw Hill Companies 2009 Solutions Manual Chapter 1 7 E xercise 1 9 15 minutes Examples of transactions that fit each case include a Business purchases equipment or some other asset on credit b Business signs a note payable to extend the due date on an account payable c Business pays an account payable or some other liability with cash or some other asset d Business purchases office supplies or some other asset for cash or some other asset e Business incurs an expense that is not yet paid for example when employees earn wages that are not yet paid f Owner s invest cash or some other asset in the business OR the business earns revenue and accepts cash or another asset g Cash withdrawals or some other asset paid to the owner s of the business OR the business incurs an expense paid in cash E xercise 1 10 15 minutes REAL ANSWERS Income Statement For Month Ended October 31 Revenues Consulting fees earned 14 000 Expenses Salaries expense 5 600 Rent expense 2 520 Telephone expense 760 Miscellaneous expenses 580 Total expenses 9 460 Net income 4 540 E xercise 1 11 15 minutes REAL ANSWERS Statement of Owner s Equity For Month Ended October 31 K King Capital October 1 0 Add Investments by owner 84 360 McGraw Hill Companies 2009 Fundamental Accounting Principles 19th Edition 8 Net income from Exercise 1 13 4 540 88 900 Less Withdrawals by owner 2 000 K King Capital October 31 86 900 E xercise 1 12 15 minutes REAL ANSWERS Balance Sheet October 31 Assets Liabilities Cash 11 500 Accounts payable 25 037 Accounts receivable 12 000 Office supplies 24 437 Equity Office equipment 18 000 Land 46 000 K King Capital 86 900 Total assets 111 937 Total liabilities and equity 111 937 For the computation of this amount see Exercise 1 14 Exercise 1 13 15 minutes REAL ANSWERS Statement of Cash Flows For Month Ended October 31 Cash flows from operating activities 1 Cash received from customers 2 000 Cash paid to employees2 5 000 Cash paid for rent 2 520 Cash paid for telephone expenses 760 Cash paid for miscellaneous expenses 580 Net cash used by operating activities 6 860 Cash flows from investing activities Purchase of office equipment 18 000 Net cash used by investing activities 18 000 Cash flows from financing activities McGraw Hill Companies 2009 Solutions Manual Chapter 1 9 Investments by owner 38 360 Withdrawals by owner 2 000 Net cash provided by financing activities 36 360 Net increase in cash 11 500 Cash balance October 1 0 Cash balance October 31 11 500 1 14 000 Consulting Fees Earned 12 000 Accounts Receivable 2 5 600 Salaries Expense 600 still owed 5 000 paid to employees Exercise 1 14 10 minutes O 1 Cash paid for rent O 5 Cash paid for advertising O 2 Cash paid on an account payable O 6 Cash paid for wages F 3 Cash investments by owner F 7 Cash withdrawal by owner O 4 Cash received from clients I 8 Cash purchase of equipment McGraw Hill Companies 2009 Fundamental Accounting Principles 19th Edition 10 McGraw Hill Companies 2009 Solutions Manual Chapter 1 11 PROBLEM SET A Problem 1 2A 25 minutes Balance Sheet Income Statement Statement of Cash Flows Transaction Total Assets Total Liab Total Equity Net Income Operating Activities Financing Activities Investing Activities 1 Owner invests cash in business 2 Receives cash for services provided 3 Pays cash for employee wages 4 Incurs legal costs on credit 5 Borrows cash by signing L T note payable 6 Buys land by signing note payable 7 P
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