CHAPTER 1: Accounting In Action
BY THE END OF THIS CHAPTER STUDENTS SHOULD BE ABLE TO:
1. EXPLAIN THE MEANING OF ACCOUNTING.
2. IDENTIFY THE USERS AND USES OF ACCOUNTING.
3. UNDERSTAND WHY ETHICS IS A FUNDAMENTAL BUSINESS CONCEPT.
4. EXPLAIN THE MEANING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND THE COST PRINCIPLE.
5. EXPLAIN THE MEANING OF THE MONETARY UNIT ASSUMPTION AND THE ECONOMIC ENTITY ASSUMPTION.
6. STATE THE BASIC ACCOUNTING EQUATION AND EXPLAIN THE MEANING OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY.
7. ANALYZE THE EFFECT OF BUSINESS TRANSACTIONS ON THE BASIC ACCOUNTING EQUATION.
8. PREPARE AN INCOME STATEMENT, RETAINED ...view middle of the document...
Bookkeeping is therefore only a part of accounting.
6. (S.O. 3) 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 ethical issues is to recognize that an ethical issue is involved, identify and analyze the principle elements in the situation (especially those harmed or benefited), identify the alternatives and weigh the impact of each alternative on the various stakeholders, then select the most ethical alternative.
GAAP and the Cost Principle
7. (S.O. 4) Generally accepted accounting principles (GAAP) are a common set of guidelines (standards) used by accountants in reporting economic events.
8. The Securities and Exchange Commission (SEC) is an independent regulatory agency of the United States government. The SEC has the legal power to enforce the form and content of financial statements of corporations that wish to sell securities to the public.
9. The Financial Accounting Standards Board (FASB) has been granted the power from the SEC to establish GAAP.
10. Under the cost principle assets should be recorded at their cost. Cost is the value exchanged at the time something is acquired.
The Monetary Unit and Economic Entity Assumptions
11. (S.O. 5) The accounting profession has developed certain assumptions that serve as guidelines for the accounting process.
a. The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records of the economic entity.
b. The economic entity assumption requires that the activities of the entity be kept separate and distinct from (1) the activities of its owner and (2) all other economic entities.
12. Three types of business enterprises are proprietorships, partnerships, and corporations.
a. A proprietorship is a business owned by one person.
b. A partnership is a business owned by two or more persons associated as partners.
c. A corporation is a business organized as a separate legal entity under state corporation law with ownership divided into transferable shares of stock.
The Accounting Equation
13. (S.O. 6) The basic accounting equation is:
Assets = Liabilities + Stockholders' Equity.
The accounting equation applies to all economic entities regardless of size, nature of business, or form of business organization.
14. The key components of the basic accounting equation are:
a. Assets are resources owned by a business
b. Liabilities are claims against assets.
c. Stockholders' equity are the claims of stockholders.
15. In corporations, there are five subdivisions of stockholders' equity:
a. Paid-in capital is the stockholders' investment in the business.
b. Revenues are the gross increases in...