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Chapter 1
Introduction to Accounting and Business
After studying Chapter 1, the student should be able to –
(1) Describe the nature of a business, the role of accounting, and ethics in business;
(2) Summarize the development of accounting principles and relate them to practice;
(3) State the accounting equation and define each element of the equation;
(4) Describe and illustrate how business transactions can be recorded in terms of the
resulting change in the elements of the accounting equation; and
(5) Describe the financial statements of a corporation and explain how they interrelate.
Nature of Business and Accounting
What is a business - ________________________________________________________
What is the objective of most businesses - _______________________________________
What is a profit - ____________________________________________________________
1. Profit is the difference between:
a. Assets and liabilities
b. Assets and equities
c. The assets purchased with cash contributed by the stockholders and the cash
spent to operate the business
d. The assets received for goods and services and the amounts used to provide the
goods and services
Types of Businesses
What are the three types of businesses operated for profit and give examples of each.
(1) _______________ ___________________________________________________
(2) _______________ ___________________________________________________
Exercise 1 – 1
P 32
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1
(3) _______________ ___________________________________________________
What is the Role of Accounting in Business - _____________________________________
What is Accounting - ________________________________________________________
2. Which of the following best describes accounting:
a. Records economic data but does not communicate the data to users according to any
specific rules
b. Can be thought of as the “language of business”
c. Is of no use by individuals outside of the business
d. Is used only for filling out tax returns and for financial statements for various type of
governmental reporting requirements
See Exh 1 P3
What is managerial accounting - _______________________________________________
What is financial accounting - __________________________________________________
What are General purpose financial statements - ___________________________________
_________ _____________ refers to the wide range of decision-making needs that these
reports are designed to serve.
What is the role of Ethics in Accounting and Business - ______________________________
_________________________________.
What are ethics - ____________________________________________________________
See Exh 2
P4
See Exh 3
P6
What are the opportunities for Accountants - ______________________________________
What is a private accountant - __________________________________________________
What is a public accountant - __________________________________________________
LO2
Generally Accepted Accounting Principles
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2
What are Generally Accepted Accounting Principles - _______________________________
__________________________________________________________________________
3.
a.
b.
c.
d.
The initials GAAP stand for:
General Accounting Auditing Procedures
Generally Accepted Auditing Principles
Generally Accepted Accounting Principles
Generally Accepted Audit Practices
How do these accounting principles develop - _____________________________________
__________________________________________________________________________
Business Entity Concept
What is the business entity concept - ____________________________________________
__________________________________________________________________________
4.
a.
b.
c.
d.
The business entity concept means that:
The owner is part of the business entity
An entity is organized according to state or federal statutes
An entity is organized according to the rules set by the FASB
The entity is an individual economic unit for which data are recorded, analyzed, and
reported
What are the four (4) principle forms of business entities –
(1) ___________________________________________
(2) ___________________________________________
(3) ___________________________________________
(4) ___________________________________________
5. Which of the following is not a business organization form?
a. Governmental unit
b. Proprietorship
c. Partnership
d. Corporation
Exh 4 P8
Exercise 1 – 3
Page 33
The Cost Concept
Page
3
What is the cost concept - _____________________________________________________
6. Equipment with an estimated market value of $ 45,000 is offered for sale at $ 65,000.
The equipment is acquired for $ 10,000 in cash and a note payable of $ 40,000 due in
30 days. The amount used in the buyer’s accounting records to record this acquisition
is:
a. $ 50,000
b. $ 65,000
c. $ 10,000
d. $ 45,000
What is the objectivity concept - ________________________________________________
What is the unit of measure concept - ____________________________________________
See Example Exercise 1-1 P9
LO3
The Accounting Equation
What is the accounting equation _______________________________________________
7.
a.
b.
c.
d.
The accounting equation may be expressed as:
Assets = Equities – Liabilities
Assets + liabilities = Owners’ Equity
Assets = Revenues less Liabilities
Assets = Liabilities + Owner’s Equity
Assets are:
always greater than liabilities
Either cash or accounts receivables
The same as expenses because they are acquired with cash
Financed by the owners and/or creditors
9.
a.
b.
c.
d.
Resources owned by a business are referred to as
Assets
Liabilities
Equities
Revenues
What are liabilities - __________________________________________________________
10. Debts owed by a business are referred to as:
a. Accounts receivables
b. Equities
c. Owner’s equity
d. Liabilities
Page
8.
a.
b.
c.
d.
4
What are assets - ___________________________________________________________
What is stockholders’ equity ______________________________________________________
11. On November 1 of the current year, the assets and liabilities of TSU are as follows:
Cash, $ 10,000; Accounts Receivable, $ 8,200; Supplies, $ 1,050; Land, $ 25,000;
Accounts Payable, $ 6,530. What is the amount of stockholder’s equity as of
November 1 of the current year?
a. $ 37,720
b. $ 44,430
c. $ 21,500
d. $ 48,780
12. A business paid $ 9,000 to a creditor in payment of an amount owed. The effect of the
transaction on the accounting equation was to:
a. Increase one asset, decrease another asset
b. Increase an asset, increase another asset
c. Decrease an asset, decrease a liability
d. Increase an asset, increase owner’s equity
13. If total assets decreased by $ 47,000 during a period and owner’s equity increased by
$ 24,000 during the same period, then the amount and direction (increase or
decrease) of the period’s change in total liabilities is:
a. $ 23,000 increase
b. $ 47,000 decrease
c. $ 71,000 decrease
d. $ 71,000 increase
See Example Exercise 1-2 P10
Exercise 1 – 4
Page 33
LO4
Business Transactions and the Accounting Equation
What is a business transaction - ________________________________________________
Review transactions A – H Pp 10 – 13
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5
14. Which of the following is not a business transaction?
a. Make a sales offer
b. Sell goods for cash
c. Receive cash for services to be rendered later
d. Pay for supplies
15. If total liabilities increased by $ 30,000 during a period and owner’s equity increased
by $ 5,000 during the same period, the amount and direction (increase or decrease) of
the period’s change in total assets is:
a. $ 35,000 increase
b. $ 20,000 decrease
c. $ 25,000 increase
d. $ 25,000 decrease
16. If total liabilities decreased by $ 22,000 during a period and owner’s equity increased
by $ 29,000 during the same period, the amount and direction (increase or decrease)
of the period’s change in total assets is:
a. $ 7,000 increase
b. $ 3,000 decrease
c. $ 12,000 increase
d. $ 21,000 decrease
17. If total liabilities decreased by $ 22,000 during a period and owner’s equity increased
by $ 6,000 during the same period, then the amount and direction (increase or
decrease) of the period’s change in total assets is:
a. $ 16,000 increase
b. $ 16,000 decrease
c. $ 6,000 decrease
d. $ 6,000 increase
Exercise 1 – 9
Page 34
See Summary on P13
See Exh 5 – Summary of Transactions for NetSolutions P14
Classifications of Stockholders’
How is stockholders’ equity classified
________________________________________________________________________
________________________________________________________________________
What is common stock ______________________________________________________
What are retained earnings __________________________________________________
Page
See Example Exercise 1-3 P15
6
See Exh 6 – Effects of Transactions on Stockholders’ Equity P15
LO5
Financial Statements
What are financial statements - _________________________________________________
See Exh 7 P15
What are the four (4) types of financial statements –
(1) _______________________________
(2) _______________________________
(3) _______________________________
(4) _______________________________
Income Statement
What does the income statement report - _________________________________________
18. The financial statement that presents a summary of the revenues and expenses of a
business for a specific period, such as a month or year, is called a(n):
a. Prior period statement
b. Retained earnings statement
c. Income statement
d. Balance sheet
What is net income - _________________________________________________________
What is a net loss - __________________________________________________________
See Example Exercise 1-4 P16
What is the Retained Earnings Statement -________________________________________
When is it prepared - _________________________________________________________
See Example Exercise 1-5 P17
Page
19. The financial statement that presents a summary of the assets, liabilities, and owner’s
equity as of a specific date is call a(n)
a. Balance sheet
b. Retained earnings statement
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Balance Sheet
What is the balance sheet - ____________________________________________________
c. Statement of cash flows
d. Income statement
What is meant by reporting in “account form?” _____________________________________
__________________________________________________________________________
See Exh 8 P18
See Example Exercise 1-6 P19
Statement of Cash Flows
What is the statement of cash flows - ____________________________________________
20. Four financial statements are usually prepared for a business. The statement of cash
flows is usually prepared last. The retained earnings statement (R), the balance sheet
(B), and the income statement (I) are prepared in a certain order to obtain information
needed for the next statement. In what order are these three statements prepared?
a. I,R,B
b. B,I,R
c. R,I,B
d. B,R,I
See Example Exercise 1-7 P20-21
Exercise 1 – 20
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Study – Exhibit 9 - Interrelationship among financial statements – P21
Study – At a Glance Pp 23 – 25
Study - Illustrative Problem Pp 26 – 28
8
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Problem 1 – 6A