1 Accounting in Action

Learning
Objectives
1 Identify the activities and users associated with
accounting.
Explain the building blocks of accounting: ethics,
2 principles, and
assumptions.
3 State the accounting equation, and define its
components.

4 Analyze the effects of business transactions on the accounting

equation.
Describe the four financial statements and how
5 they are prepared.
1-1
LEARNING Identify the activities and
1
OBJECTIVE users associated with
accounting.
Accounting consists of three basic activities—it
 identifies,

 records, and

 communicates

the economic events of an organization to

interested users.

1-2 LO
 Three
Activities
Illustration 1-1
The activities of the accounting
process

The accounting process

includes the
bookkeeping function.

1-3 LO
 Who Uses Accounting
Data
INTERNAL
USERS

Illustration 1-2
Questions that
internal users ask

1-4 LO
1-5 LO 1
 Who Uses Accounting
Data
EXTERNAL
USERS

Illustration 1-3
Questions that
external users ask
1-6 LO 1
 DO 1 Basic Concepts
IT!
Indicate whether the following statements are true or false.

1. The three steps in the accounting process are

identification, recording, and communication.

2. Bookkeeping encompasses all steps in the

accounting process.

3. Accountants prepare, but do not interpret, financial

reports.

4. The two most common types of external users are

investors and
company officers.

5. Managerial accounting activities focus on reports for

internal users.
1-7 LO
LEARNING Explain the building blocks of accounting:
2
OBJECTIVE ethics, principles, and assumptions.

Ethics in Financial Reporting

 Recent financial scandals include: Enron,
WorldCom, HealthSouth, AIG, and other
companies.

 Regulators and lawmakers concerned that economy

would suffer if investors lost confidence in corporate
accounting. In response,
► Congress passed Sarbanes-Oxley Act (SOX).

 Effective financial reporting depends on sound

ethical behavior.

1-8 LO 2
 Ethics in Financial
Reporting

Illustration 1-4
Steps in analyzing ethics
cases and situations
1-9 LO 2
 Ethics in Financial
Reporting
Question
Ethics are the standards of conduct by which one's
actions are judged as:

a. right or wrong.

b. honest or dishonest.

c. fair or not fair.

d. all of these options.

1-10 LO 2
1-11 LO 2
 Generally Accepted Accounting
Principles
Financial Statements
Various  Balance Sheet
users need 

Income Statement
Statement of Owner's Equity
financial  Statement of Cash Flows
information  Note Disclosure

The accounting
profession has Generally Accepted
developed standards
Accounting
Principles (GAAP)
that are generally
accepted and
universally practiced.
1-12 LO 2
 Generally Accepted Accounting
Principles
Generally Accepted Accounting Principles (GAAP) –
Standards that are generally accepted and universally
practiced. These standards indicate how to report
economic events.

Standard-setting bodies:
► Financial Accounting
Standards Board (FASB)
► Securities and Exchange
Commission (SEC)
► International Accounting
Standards Board (IASB)
1-13 LO 2
 Measurement
Principles
HISTORICAL COST PRINCIPLE (or cost principle)
dictates that companies record assets at their cost.

FAIR VALUE PRINCIPLE states that assets and liabilities

should be reported at fair value (the price received to sell
an asset or settle a liability).

Selection of which principle to

follow generally relates to
trade-offs between relevance
and faithful representation.

1-14 LO 2
 Assumptio
ns
MONETARY UNIT ASSUMPTION requires that companies
include in the accounting records only transaction data
that can be expressed in terms of money.

ECONOMIC ENTITY ASSUMPTION requires that

activities of the entity be kept separate and distinct from
the activities of its owner and all other economic entities.
 Proprietorsh
ip Forms of Business
 Ownership
Partnership
 Corporation

1-15 LO 2
 Forms of Business
Ownership
Proprietorship Partnership Corporation

 Owned by  Owned by two  Ownership

one person or divided into
 more persons shares of
Owner is often
manager/opera  Often retail stock
tor and service-  Separate legal
 type entity
Owner receives
businesses organized
any profits,
suffers any  Generally under state
losses, and is unlimited corporation
personally liable personal law
for all debts liability  Limited
 liability
Partnershi
1-16 LO 2
p
 Assumptio
ns
Question
Combining the activities of Kellogg and
General Mills would violate the

a. cost principle.

b. economic entity assumption.

c. monetary unit assumption.

d. ethics principle.

1-17 LO 2
 Assumptio
ns
Question
A business organized as a separate legal entity
under state law having ownership divided into
shares of stock is a

a. proprietorship.

b. partnership.

c. corporation.

d. sole proprietorship.

1-18 LO 2
 DO 2 Building Blocks of
Accounting
IT!
Indicate whether each of the following statements
presented below is true or false.

1. Congress passed the Sarbanes-Oxley Act to

reduce unethical behavior and decrease the True
likelihood of future corporate scandals.

2. The primary accounting standard-setting body

in the United States is the Financial
True
Accounting Standards Board (FASB).

3. The historical cost principle dictates that

companies record assets at their cost. In later False
periods, however, the fair value of the asset
must be used if fair value is higher than its
1-19
cost. LO 2
 DO 2 Building Blocks of
Accounting
IT!
Indicate whether each of the following statements
presented below is true or false.

4. Relevance means that financial information

matches what really happened; the
False
information is factual.
5. A business owner’s personal expenses must
be separated from expenses of the business True
to comply with accounting’s economic entity
assumption.

1-20 LO 2
LEARNING State the accounting equation, and
3
OBJECTIVE define its components.

Assets = Liabilities + Owner's

Equity

Basic Accounting Equation

 Provides the underlying framework for
recording and summarizing economic events.
 Assets are claimed by either creditors or
owners.
 If a business is liquidated, claims of creditors must
be paid before ownership claims.

1-21 LO 2
 Basic Accounting
Equation

Assets = Liabilities + Owner's

Equity

Assets
 Resources a business owns.
 Provide future services or
benefits.
 Cash, Supplies, Equipment,
etc.

1-22 LO 2
 Basic Accounting
Equation

Assets = Liabilities + Owner's

Equity

Liabilities
 Claims against assets (debts and obligations).
 Creditors (party to whom money is owed).
 Accounts Payable, Notes Payable, Salaries and
Wages Payable, etc.

1-23 LO 2
 Basic Accounting
Equation

Assets = Liabilities + Owner's

Equity

Owner's Equity
 Ownership claim on total assets.
 Referred to as residual equity.
 Investment by owners and
revenues (+)
 Drawings and expenses (-).

1-24 LO 2
 Owner’s Illustration 1-6

Equity Expanded
accounting
equation

Increases in Owner’s Equity

 Investments by owner are the assets the owner puts
into the
business.
 Revenues result from business activities entered into
for the purpose of earning income.
► Common sources of revenue are: sales, fees,
services, commissions, interest, dividends,
royalties, and rent.
1-25 LO 2
 Owner’s Illustration 1-6

Equity Expanded
accounting
equation

Decreases in Owner’s Equity

 Drawings An owner may withdraw cash or other
assets for personal use.
 Expenses are the cost of assets consumed or services
used in the process of earning revenue.
► Common expenses are: salaries expense, rent
expense, utilities expense, tax expense, etc.

1-26 LO 2
 DO 3 Owner's Equity
Effects
IT!
Classify the following items as investment by owner,
owner’s drawings, revenue, or expenses. Then
indicate whether each item increases or decreases
owner’s equity.

Classification
Expens Decreas
e e
Effect on Equity
Revenu Increas
e e
1. Rent Expense Drawing Decreas
s e
2. Service Revenue
Expens Decreas
3. Drawings e e
1-27 LO 2
4. Salaries and
LEARNING Analyze the effects of business
4
OBJECTIVE transactions on the accounting equation.

Transactions are a business’s economic events

recorded
by accountants.
 May be external or internal.
 Not all activities represent transactions.
 Each transaction has a dual effect on the
accounting equation.

1-28 LO 2
 Transaction
Analysis
Illustration: Are the following events recorded in the
accounting records?
Illustration 1-7
Discuss product
Purchas
Even design with Pay
e
t potential rent
compute
customer
r
Criterio Is the financial position (assets,
n liabilities, or owner’s equity) of the
company changed?

Record/
Don’t
Record

1-29 LO 2
 Transaction
Analysis
TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to
start a smartphone app development company which he names
Softbyte. On September 1, 2017, he invests $15,000 cash in the
business. This transaction results in an equal increase in assets
and owner’s equity.
Asset = Liabilities Owner's
s + Equity
Trans Accounts Account
Cash + + Equipment + Owner's + Rev. -
- s
Supplies = Exp.
actio + Receivabl Payable Owner's
n e
+
Capital Drawings
1.
Illustration 1-8 +15,000
Tabular
+1 summary
of Softbyte
5,0
transactions
00

1-30 LO 2
 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8

Assets = Liabilities + Owner's Equity

Trans Accounts
Cash + Supplies + Accounts + Owner's + Rev. -
-
Equipment = Exp.
actio + Receivabl Owner's + Payable
n e +15,00
Capital
0
1. - +7,00 Drawings
3. 7,000 +1,600 0 +1,600
+1
4.
5,0 +1,200 +1,200
00
5. +250 -250
2.
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -
1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 -
$1,300
1-31 LO 2
 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte
Inc. purchases for $1,600 headsets and other accessories
expected to last several months. The supplier allows Softbyte to
pay this bill in October.
Illustration Assets = Liabilities + Owner's
1-8
Equity
Trans Accounts
Cash + Supplies + Accounts + Owner's + -
-
Equipment = Rev. Exp.
actio + Receivabl Owner's + Payable
n e +15,00
Capital
0
1. - +7,00 Drawings
7,000 +1,60 0 +1,60
+1 0 0
4. +1,200 +1,200
5,0
00
5. +250 -250
2.
6. +1,500 +2,000 +3,500
3.
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -
1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 -
$1,300
1-32 LO 2
 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development
services
performeit has Illustration
d. 1-8
Asset = Liabilities Owner's
s + Equity
Trans Accounts Account Owner's Owner's
Cash + + Equipment + Rev. -
- s Capita Drawing
Supplies = + Exp.
actio + Receivabl Payable l s+
n e +15,00
0
1. - +7,00
7,000 +1,60 0 +1,60
+1 0 0
+1,20 +1,20
5,0
0 0
00
5. +250 -250
2.
6. +1,500 +2,000 +3,500
3.
7. -1,700 -600
4. -900
-200
8. -250 -250
9. +600 -600
10. -1,300 -
1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 -
$1,300
1-33 LO 2
 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte
Inc. receives a bill for $250 from the Daily News for advertising on
its onlinebut postpones payment until a
website Illustration
later date. 1-8
Owner's
Assets Equity
Trans Accounts Accounts Owner's Owner's
Cash + Supplies + + Rev. -
- Drawing
Equipment = + Exp.
actio + = Liabilities +
Receivabl s+
n e Payable +15,00
Capital
0
1. - +7,00
7,000 +1,60 0 +1,60
+1 0 0
+1,20 +1,20
5,0
0 0
00 +25 -
2.
6. +1,500 +2,000 0 +3,500 250

3. 7. -1,700 -
4. 600
-900
5. -200
8. -250 -250
9. +600 -600
10. -1,300
$8,050
-1,300 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 $1,950
$1,300
1-34 LO 2
+ + + = + +
 TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.
Softbyte performs $3,500 of services. The company receives
cash
$1,500 of from customers, and it bills the balance of $2,000 on
account.
Illustration Assets = Liabilities + Owner's
1-8
Equity
Trans Accounts Account Owner' Owner'
Cash + Supplies + Equipmen = + + + Rev. - Exp.
- s s s
t
actio + Receivabl Payable Capital Drawing
n e s
1. +15,000 +15,00
0
2. -7,000 +7,000
3. +1,60 +1,60
0 0
4. +1,20
+1,200 0
7. -1,700 -600
5. +25 -250
-900
0
-200
6. +2,00 +3,50
+1,500 -250
8. 0 -250 0
9. +600 -600
10. -1,300
-1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 -
$1,300
1-35 LO 2
 TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the
following expenses in cash for September: office rent $600,
salariesofand
wages employees $900, and utilities Illustration
$200. 1-8
Owner's
Assets Equity
Trans Accounts Account Owner's Owner's
Cash + Supplies + + Rev. -
- s Capita Drawing
Equipment = + Exp.
actio + = Liabilities +
Receivabl Payable l s+
n e +15,00
0
1. - +7,00
7,000 +1,60 0 +1,60
+1 0 0
+1,20 +1,20
5,0
0 0
00 +25 -
2. 0 250
+1,50 +2,00 +3,50
3. 0 0 0
- -
4. 1,700 600
-
5. 900
8. -250 -250
6. -
9. +600 -600 200
7.
10. -1,300 -
1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 -
$1,300
1-36 LO 2
 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company
previously (in Transaction 5) recorded the bill as an
increase in Accounts
Illustration Assets
Payable. = Liabilities + Owner's
1-8
Equity
Trans Accounts Accounts Owner's Owner's
Cash + Supplies + + Rev. -
- Drawing
Equipment = + Exp.
actio + Receivabl s+
n e Payable +15,00
Capital
0
1. - +7,00
7,000 +1,60 0 +1,60
+1 0 0
+1,200 +1,200
5,0
00 +250 -250
2. +1,500 +2,000 +3,500
3. -1,700 -600
4. -900
-200
5.
8 - -
6.
. 250 250
9. +600 -600
7.
10. -1,300 -
1,300

1-37 $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 -

LO 2
$1,950 - $1,300
 TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.
receives $600 in cash from customers who had been billed for
services
(in Transaction Illustration
6). 1-8
Asset = Liabilities Owner's
s + Equity
Trans Accounts Account Owner's Owner's
Cash + + Equipment + Rev. -
- s Capita Drawing
Supplies = + Exp.
actio + Receivabl Payable l s+
n e +15,00
0
1. - +7,00
7,000 +1,60 0 +1,60
+1 0 0
+1,200 +1,200
5,0
00 +250 -250
2. +1,500 +2,000 +3,500
3. -1,700 -600
4. -900
-200
5.
8 - -
6.
. 250 250
+60 -
7.
9 0 600
10. -1,300 -
.
1,300
$8,050 $1,400 $1,600 $7,000 $1,600 $15,000 $4,700 - $1,950 -
$1,300 + + + = + +
1-38 LO 2
 TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his
personal use.
Illustration
Assets = Liabilities + Owner's
1-8
Equity
Trans Accounts Accounts Owner's Owner's
Cash + Supplies + + Rev. -
- Drawing
Equipment = + Exp.
actio + Receivabl s+
n e Payable +15,00
Capital
0
1. - +7,00
7,000 +1,60 0 +1,60
+1 0 0
+1,20 +1,20
5,0
0 0
00 +25 -
0 250
2. +1,50 +2,00 +3,50
3. 0 0 0
- -
4. 1,700 600
-
5. 900
8.
6. - - -
250 250 200
9.
7. +60 -
0 600
10 - -
. 1,300 1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $1,300 - $4,700 -
$1,950

1-39 $18,05 $18,05 LO 4

0 0
 Summary of
Transactions
1. Each transaction is analyzed in terms of its
effect on:
a. The three components of the basic
accounting
equation.

b. Specific of items within each component.

2. The two sides of the equation must always be

equal.

1-40 LO 4
 DO 4 Tabular Analysis
IT!
Transactions made by Virmari & Co., a public accounting
firm, for the month of August are shown below. Prepare a
tabular analysis which shows the effects of these
transactions on the expanded accounting equation, similar
to that shown in Illustration 1-8.
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office equipment on
credit.
3. The company received $8,000 cash in exchange for
services performed.
4. The company paid $850 for this month’s rent.
5. The owner withdrew $1,000 cash for personal use.
1-41 LO 4
 DO 4 Tabular Analysis
IT!
1. The owner invested $25,000 cash in the
business.
Assets = Liabilities Owner's
Trans + Accounts Owner's Equity
Owner's
Cash + Equipment Rev. -
- Payabl Capit Drawing
= + + Exp.
actio e al s+
+25,00
n
+25,000 0
2.
1. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -
1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 -

$1,000
$18,050
1-42 LO 4
$18,050
 DO 4 Tabular Analysis
IT!
2. The company purchased $7,000 of office equipment
on credit.
Assets = Liabilities Owner's
Trans + Accounts Owner's Equity
Owner's
Cash + Equipment Rev. -
- Payabl Capit Drawing
= + + Exp.
actio e al s+
+25,00
n
+25,000 0
2
1. +7,00 +7,00
. 0 0
3. +8,000 +8,000

4. -850 -850

5. -1,000 -
1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 -

$1,000
$18,050
1-43 LO 4
$18,050
 DO 4 Tabular Analysis
IT!
3. The company received $8,000 cash in exchange for
services performed.
Assets = Liabilities +
Trans Owner's Equity
Cash + Equipment Accounts + Owner's + Rev. -
-
= Exp.
actio Owner's +
n
+25,000 Payable
2
1. +7,00 +7,00 Drawings
Capital
. 0 0
3 +8,00 +25,000 +8,00
. 0 0
4. -850 -850

5. -1,000 -
1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000

$18,050
1-44 LO 4
$18,050
 DO 4 Tabular Analysis
IT!
4. The company paid $850 for this
month’s rent.
Assets = Liabilities Owner's
Trans + Accounts Owner's Equity
Owner's
Cash + Equipment Rev. -
- Payabl Capit Drawing
= + + Exp.
actio e al s+
+25,00
n
+25,000 0
2
1. +7,00 +7,00
. 0 0
3 +8,00 +8,00
. 0 0
4 - -
. 850 850
5. -1,000 -
1,000

$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 -

$1,000
$18,050
1-45 LO 4
$18,050
 DO 4 Tabular
Analysis
IT!
5. The owner withdrew $1,000 cash for
personal use.
Assets = Liabilities Owner's
Trans + Accounts Owner's Equity
Owner's
Cash + Equipment Rev. -
- Payabl Capit Drawing
= + + Exp.
actio e al s+
+25,00
n
+25,000 0
2
1. +7,00 +7,00
. 0 0
3 +8,00 +8,00
. 0 0
4 - -
. 850 850
5 - -
. 1,000 1,000
$31,150 $7,00 = $7,000 + $25,000 $1,00 + $8,000 $85
+ 0 + 0 - 0

$38,15 $38,15
1-46 LO 4
0 0
LEARNING Describe the four financial
5
OBJECTIVE statements and how they are
prepared.
Companies prepare four financial
statements :

Owner’s Statemen
Income Balanc
Equity t of Cash
e
Stateme Flows
Stateme Sheet
nt
nt

1-47 LO 5
 Financial
Statements
Question
Net income will result during a time period
when:

a. assets exceed liabilities.

b. assets exceed revenues.

c. expenses exceed revenues.

d. revenues exceed expenses.

1-48 LO 5
 Net income is needed to
Financial determine the ending balance
in owner’s equity.
Statements
SOFTBYTE
Income Statement
For the Month Ended September 30, 2017

Illustration 1-9
Financial statements
and their
interrelationships

SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

1-49 LO 5
 SOFTBYTE
Owner’s Equity Statement
For the Month Ended September 30, 2017

Illustration
The ending 1-9
balance in SOFTBYTE
owner’s Balance Sheet
equity is September 30,
needed in 2017
preparing
the balance
sheet.

Illustration 1-9
Financial
statements and
their
interrelationships

1-50
 SOFTBYTE
Financial Balance Sheet
September 30, 2017

Statemen
ts
Balance sheet and
income statement
are needed to
prepare statement
of cash flows.
SOFTBYTE
Statement of Cash Flows
For the Month Ended September 30, 2017

Illustration 1-9
Financial
statements and
their
interrelationships

1-51
 Income
Statement
 Reports the revenues and expenses for a specific
period of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).
 Does not include
investment and
withdrawal
transactions
between the owner
and the business in
measuring net
1-52
income. LO 5
 Owner’s Equity
Statement
 Reports the changes in owner’s equity for a
specific period of time.
 The time period is the same as that covered
by the income statement.

1-53 LO 5
 Balance
Sheet
 Reports the assets, liabilities, and owner's
equity at a specific date.
 Lists assets at the top, followed by liabilities and
owner’s equity.
 Total assets must equal total liabilities and
owner's equity.
 Is a snapshot of the company’s financial
condition at a specific moment in time (usually
the month-end or year- end).

1-54 LO 5
 Statement of Cash
Flows
 Information on the cash receipts and
payments for a specific period of time.
 Answers the following:
► Where did cash come from?
► What was cash used for?
► What was the change in
the cash balance?

1-55 LO 5
 Financial
Statements
Question
Which of the following financial statements is
prepared as of a specific date?

a. Balance sheet.

b. Income statement.

c. Owner's equity statement.

d. Statement of cash flows.

1-56 LO 5
1-57 LO 5
 DO 5 Financial Statement Items
IT!
Presented below is selected information related to Flanagan
Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages 7,000
Expense
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(a) Determine the total assets of at December 31,
2017. (b) Determine the net income reported for
December 2017. (c) Determine the owner’s equity
at December 31, 2017.

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 DO 5 Financial Statement Items
IT!
Presented below is selected information related to Flanagan
Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages 7,000
Expense
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(a)Determine the total assets of at December 31,
2017.

The total assets are $27,000, comprised of

• Cash $8,000,
• Accounts Receivable $9,000, and
• Equipment $10,000.
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 DO 5 Financial Statement Items
IT!
Presented below is selected information related to Flanagan
Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages 7,000
Expense
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(b) Determine the net income reported for
December 2017.

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 DO 5 Financial Statement Items
IT!
Presented below is selected information related to Flanagan
Company at December 31, 2017. Flanagan reports financial
information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages 7,000
Expense
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(c) Determine the owner’s equity at December
31, 2017.

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LEARNING APPENDIX 1A: Explain the career
6
OBJECTIVE opportunities in accounting.

Public Accounting Private Accounting

Careers in auditing, Careers in industry working
taxation, and in cost accounting,
management consulting budgeting, accounting
serving the general information systems, and
public. taxation.

Governmental Accounting Forensic Accounting

Careers with the IRS, the Uses accounting, auditing,
FBI, the SEC, public and investigative skills to
colleges and universities, conduct investigations into
and in state and local theft and fraud.
governments.
1-62 LO
 “Show Me the
Money”
Salary estimates for jobs in public and corporate
accounting Illustration
1A-1

Upper-level management salaries in corporate

accounting Illustration
1A-2

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LEARNING Describe the impact of international
OBJECTIVE
7 accounting standards on U.S. financial
reporting.
Key Points
Following are the key similarities and differences between
GAAP and
IFRS as related to accounting fundamentals.

Similarities
 The basic techniques for recording business transactions
are the same for U.S. and international companies.
 Both international and U.S. accounting standards
emphasize transparency in financial reporting. Both
sets of standards are primarily driven by meeting the
1-64 LO 7
needs of investors and creditors.
 Key
Points
Similarities
 The three most common forms of business organizations,
proprietorships, partnerships, and corporations, are also
found in countries that use international accounting
standards.

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 principles (GAAP) and are
developed by the Financial Accounting Standards Board.
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 Key
Points
Differences
 IFRS tends to be simpler in its accounting and disclosure
requirements; some people say it is more “principles-
based.” GAAP is more detailed; some people say it is
more “rules-based.”
 The internal control standards applicable to Sarbanes-
Oxley (SOX) apply only to large public companies listed
on U.S. exchanges. There is continuing debate as to
whether non-U.S. companies should have to comply
with this extra layer of regulation.

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 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.

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 IFRS Self-Test
Questions
Which of the following is not a reason why a single set of
high-quality international accounting standards would be
beneficial?

a) Mergers and acquisition activity.

b) Financial markets.

c) Multinational corporations.

d) GAAP is widely considered to be a superior reporting

system.

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 IFRS Self-Test
Questions
The Sarbanes-Oxley Act determines:

a) international tax regulations.

b) internal control standards as enforced by the IASB.

c) internal control standards of U.S. publicly traded

companies.

d) U.S. tax regulations.

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 IFRS Self-Test
Questions
IFRS is considered to be more:

a) principles-based and less rules-based than

GAAP.

b) rules-based and less principles-based than

GAAP.

c) detailed than GAAP.

d) None of the above.

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