Test Bank For Financial Accounting 3rd Edition By Christopher Burnley.

Test Bank For Financial Accounting 3rd Edition By Christopher Burnley. ACCOUNT CLASSIFICATION AND PRESENTATION Normal Account Title Classifi cation Financial Statement Balance A Accounts Payable Current Liability Statement of Financial Position Credit Accounts Receivable Current Asset Statement of Financial Position Debit Accumulated Depreciation— Plant Asset—Contra Statement of Financial Position Credit Buildings Accumulated Depreciation— Plant Asset—Contra Statement of Financial Position Credit Equipment Administrative Expenses Operating Expense Income Statement Debit Advertising Expense Operating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Statement of Financial Position Credit Amortization Expense Operating Expense Income Statement Debit B Bad Debt Expense Operating Expense Income Statement Debit Bonds Payable Non-Current Liability Statement of Financial Position Credit Buildings Plant Asset Statement of Financial Position Debit C Cash Current Asset Statement of Financial Position Debit Copyrights Intangible Asset Statement of Financial Position Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit D Debt Investments Current Asset/Long-Term Statement of Financial Position Debit Investment Depreciation Expense Operating Expense Income Statement Debit Dividend Revenue Other Income and Expense Income Statement Credit Dividends Temporary account closed Retained Earnings Debit to Retained Earnings Statement Dividends Payable Current Liability Statement of Financial Position Credit E Equipment Plant Asset Statement of Financial Position Debit F Freight-Out Operating Expense Income Statement Debit G Gain on Disposal of Plant Assets Other Income and Expense Income Statement Credit Goodwill Intangible Asset Statement of Financial Position Debit I Income Summary Temporary account closed Not Applicable (1) to Retained Earnings Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Statement of Financial Position Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Income and Expense Income Statement Debit Interest Payable Current Liability Statement of Financial Position Credit Interest Receivable Current Asset Statement of Financial Position Debit Interest Revenue Other Income and Expense Income Statement Credit Inventory Current Asset Statement of Financial Position (2) Debit Normal Account Title Classifi cation Financial Statement Balance L Land Plant Asset Statement of Financial Position Debit Loss on Disposal of Plant Assets Other Income and Expense Income Statement Debit M Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Non-Current Liability Statement of Financial Position Credit N Notes Payable Current Liability/ Statement of Financial Position Credit Non-Current Liability P Patents Intangible Asset Statement of Financial Position Debit Prepaid Insurance Current Asset Statement of Financial Position Debit R Rent Expense Operating Expense Income Statement Debit Research and Development Expense Operating Expense Income Statement Debit Retained Earnings Equity Statement of Financial Position Credit and Retained Earnings Statement S Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Statement of Financial Position Credit Sales Discounts Revenue—Contra Income Statement Debit Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Share Capital—Ordinary Equity Statement of Financial Position Credit Share Capital—Preference Equity Statement of Financial Position Credit Share Investments Current Asset/Long-Term Statement of Financial Position Debit Investment Share Premium—Ordinary Equity Statement of Financial Position Credit Share Premium—Preference Equity Statement of Financial Position Credit Supplies Current Asset Statement of Financial Position Debit Supplies Expense Operating Expense Income Statement Debit T Treasury Shares Equity—Contra Statement of Financial Position Debit U Unearned Service Revenue Current Liability Statement of Financial Position Credit Utilities Expense Operating Expense Income Statement Debit (1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss. The Income Summary account does not appear on any fi nancial statement. (2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold. The following is a sample chart of accounts. It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used. This sample chart of accounts is for a company that generates both service revenue as well as sales revenue. It uses the perpetual approach to inventory. If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases, Freight-In, Purchase Returns and Allowances, and Purchase Discounts. Administrative Expenses Amortization Expense Bad Debt Expense Cost of Goods Sold Depreciation Expense Freight-Out Income Tax Expense Insurance Expense Interest Expense Loss on Disposal of Plant Assets Maintenance and Repairs Expense Rent Expense Salaries and Wages Expense Selling Expenses Supplies Expense Utilities Expense Service Revenue Sales Revenue Sales Discounts Sales Returns and Allowances Interest Revenue Gain on Disposal of Plant Assets Share Capital— Preference Share Capital— Ordinary Share Premium— Preference Share Premium— Ordinary Retained Earnings Treasury Shares Dividends Income Summary Notes Payable Accounts Payable Unearned Service Revenue Salaries and Wages Payable Interest Payable Dividends Payable Income Taxes Payable Bonds Payable Mortgage Payable CHART OF ACCOUNTS Assets Liabilities Equity Revenues Expenses Cash Accounts Receivable Allowance for Doubtful Accounts Interest Receivable Inventory Supplies Prepaid Insurance Land Equipment Accumulated Depreciation— Equipment Buildings Accumulated Depreciation— Buildings Copyrights Goodwill Patents Many students who take this course do not plan to be accountants. If you are in that group, you might be thinking, “If I’m not going to be an accountant, why do I need to know accounting?” In response, consider the quote from Harold Geneen, the former chairman of a major international company: “To be good at your business, you have to know the numbers—cold.” Success in any business comes back to the numbers. You will rely on them to make decisions, and managers will use them to evaluate your performance. That is true whether your job involves marketing, production, management, or information systems. In business, accounting is the means for communicating the numbers. If you don’t know how to read fi nancial statements, you cannot really know your business. Many companies spend signifi cant resources teaching their employees basic accounting so that they can read fi nancial statements and understand how their actions affect the company’s fi nancial results. Employers need managers in all areas of the company to be “fi nancially literate.” Taking this course will go a long way to making you fi nancially literate. In this book, you will learn how to read and prepare fi nancial statements, and how to use basic tools to evaluate fi nancial results. Appendices A, B, and C of this textbook provide real fi nancial statements of three companies from different countries that report using International Financial Reporting Standards (IFRS): Taiwan Semiconductor Manufacturing Company (TSMC) Ltd. (TWN), Nestlé SA (CHE), and Petra Foods Ltd. (SGP). Throughout this textbook, we increase your familiarity with fi nancial reporting by providing numerous references, questions, and exercises that encourage you to explore these fi nancial statements. In addition, we encourage you to visit each company’s website where you can view its complete annual report. In examining the fi nancial reports of these three companies, you will see that the accounting practices of companies in specifi c countries that follow IFRS sometimes differ with regard to particular details. However, more importantly, you will fi nd that the basic accounting principles are the same. As a result, by learning these basic principles as presented in this textbook, you will be well equipped to begin understanding the fi nancial results of companies around the world. ■ 1 Accounting in Action FEATURE STORY Knowing the Numbers CHAPTER LEARNING OBJECTIVES After studying this chapter, you should be able to: 1 Explain what accounting is. 2 Identify the users and uses of accounting. 3 Understand why ethics is a fundamental business concept. 4 Explain accounting standards and the measurement principles. 5 Explain the monetary unit assumption and the economic entity assumption. 6 State the accounting equation, and defi ne its components. 7 Analyze the effects of business transactions on the accounting equation. 8 Understand the fi ve fi nancial statements and how they are prepared. The Navigator is a learning system designed to prompt you to use the learning aids in the chapter and set priorities as you study. Learning Objectives give you a framework for learning the specifi c concepts covered in the chapter. basic tools to evaluate fi nancial results. Th Nh i i ll i dd i dd Scan Learning Objectives Read Feature Story Review and Practice pp. 28–34 • Reviews of Learning Objectives and Glossary • Answer Practice Multiple-Choice Questions, Exercises, and Problem Complete Assignments Watch WileyPLUS Chapter Reviews Read A Look at U.S. GAAP The Navigator The Navigator The Feature Story helps you picture how the chapter topic relates to the real world of accounting and business. You will fi nd references to the story throughout the chapter. 3 PREVIEW OF CHAPTER 1 The Feature Story highlights the importance of having good fi nancial information and knowing how to use it to make effective business decisions. Whatever your pursuits or occupation, the need for fi nancial information is inescapable. You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing fi nancial information. Good decision-making depends on good information. The purpose of this chapter is to show you that accounting is the system used to provide useful fi nancial information. The content and organization of Chapter 1 are as follows. • Three activities • Who uses accounting data? What Is Accounting? ACCOUNTING IN ACTION • Ethics in fi nancial reporting • Accounting standards • Measurement principles • Assumptions The Building Blocks of Accounting • Assets • Liabilities • Equity The Basic Accounting Equation • Transaction analysis • Summary of transactions • Income statement • Retained earnings statement • Statement of fi nancial position • Statement of cash fl ows • Comprehensive income statement Using the Accounting EquationFinancial Statements Tetra Images/SUPERSTOCK The Preview describes and outlines the major topics and subtopics you will see in the chapter. The Navigator 4 1 Accounting in Action What consistently ranks as one of the top career opportunities in business? What frequently rates among the most popular majors on campus? Accounting. 1 Why do people choose accounting? They want to acquire the skills needed to understand what is happening fi nancially inside a company. Accounting is the fi nancial information system that provides these insights. In short, to understand an organization of any type, you have to know the numbers. Accounting consists of three basic activities—it identifi es, records, and communicates the economic events of an organization to interested users. Let’s take a closer look at these three activities. Three Activities As a starting point to the accounting process, a company identifi es the economic events relevant to its business. Examples of economic events are the sale of food and snacks by Unilever (GBR and NLD), the providing of telephone services by Chunghwa Telecom (TWN), and the manufacture of motor vehicles by Tata Motors (IND). Once a company like Unilever identifi es economic events, it records those events in order to provide a history of its fi nancial activities. Recording consists of keeping a systematic, chronological diary of events, measured in monetary units. In recording, Unilever also classifi es and summarizes economic events. Finally, Unilever communicates the collected information to interested users by means of accounting reports. The most common of these reports are called fi nancial statements. To make the reported fi nancial information meaningful, Unilever reports the recorded data in a standardized way. It accumulates information resulting from similar transactions. For example, Unilever accumulates all sales transactions over a certain period of time and reports the data as one amount in the company’s fi nancial statements. Such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifi es a multitude of transactions and makes a series of activities understandable and meaningful. A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analysis involves use of ratios, percentages, graphs, and charts to highlight signifi cant fi nancial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data. Appendix A of this textbook shows the fi nancial statements of Taiwan Semiconductor Manufacturing Company (TSMC) Ltd. (TWN). Appendix B illustrates the fi nancial statements of Nestlé SA (CHE), and Appendix C includes the fi nancial statements of Petra Foods Ltd. (SGP). We refer to these statements at various places throughout the textbook. (In addition, in the A Look at U.S. GAAP section at the end of each chapter, the U.S. company Apple Inc. is analyzed.) At this point, these fi nancial statements probably strike you as complex and confusing. By the end of this course, you’ll be surprised at your ability to understand, analyze, and interpret them. Illustration 1-1 summarizes the activities of the accounting process. You should understand that the accounting process includes the bookkeeping function. Bookkeeping usually involves only the recording of economic events. It is therefore just one part of the accounting process. In total, accounting Learning Objective 1 Explain what accounting is. What Is Accounting? Essential terms are printed in blue when they fi rst appear, and are defi ned in the end-of-chapter Glossary Review . 1The appendix to this chapter describes job opportunities for accounting majors and explains why accounting is such a popular major. What Is Accounting? 5 involves the entire process of identifying, recording, and communicating economic events. 2 Who Uses Accounting Data? The specifi c fi nancial information that a user needs depends upon the kinds of decisions the user makes. There are two broad groups of users of fi nancial information: internal users and external users. INTERNAL USERS Internal users of accounting information are managers who plan, organize, and run the business. These include marketing managers, production supervisors, fi nance directors, and company offi cers. In running a business, internal users must answer many important questions, as shown in Illustration 1-2. Learning Objective 2 Identify the users and uses of accounting. Identification Recording Communication Select economic events (transactions) Record, classify, and summarize Prepare accounting reports Analyze and interpret for users CHIP CITY DELL . . . . . . . . . . . . . Illustration 1-1 The activities of the accounting process 2The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian Renaissance mathematician. Pacioli was a close friend and tutor to Leonardo da Vinci and a contemporary of Christopher Columbus. In his 1494 text Summa de Arithmetica, Geometria, Proportione et Proportionalite, Pacioli described a system to ensure that fi nancial information was recorded effi ciently and accurately. Questions Asked by Internal Users Is cash sufficient to pay dividends to SAP shareholders? Finance Can we afford to give Toyota employees pay raises this year? Human Resources Which PepsiCo product line is the most profitable? Should any product lines be eliminated? Management What price for a Nokia cell phone will maximize the company's net income? Marketing SHARES ON ONSTRIKE STRIKE ON STRIKE odu h fi bl ? Sh ment Which PepsiCo pro h fi bl Managem Snack chips Beverages COLA Illustration 1-2 Questions that internal users ask To answer these and other questions, internal users need detailed information on a timely basis. Managerial accounting provides internal reports to help users make decisions about their companies. Examples are fi nancial comparisons of 6 1 Accounting in Action operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. EXTERNAL USERS External users are individuals and organizations outside a company who want fi nancial information about the company. The two most common types of external users are investors and creditors. Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company. Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. Illustration 1-3 shows some questions that investors and creditors may ask. Financial accounting answers these questions. It provides economic and fi nancial information for investors, creditors, and other external users. The information needs of external users vary considerably. Taxing authorities, such as the State Administration of Taxation in the People’s Republic of China (CHN), want to know whether the company complies with tax laws. Regulatory agencies, such as the Autorité des Marchés Financiers (FRA) or the Federal Trade Commission (USA), want to know whether the company is operating within prescribed rules. Customers are interested in whether a company like Tesla Motors, Inc. (USA) will continue to honor product warranties and support its product lines. Labor unions, such as the German Confederation of Trade Unions (DEU), want to know whether the companies have the ability to pay increased wages and benefi ts to union members. Illustration 1-3 Questions that external users ask What do we do if they catch us? BILL COLLECTOR Yeah! Questions Asked by External Users Is Royal Dutch Shell earning satisfactory income? Investors How does Disney compare in size and profitability with Time Warner? Investors Will Singapore Airlines be able to pay its debts as they come due? Creditors 1. True. 2. False. Bookkeeping involves only the recording step. 3. False. Accountants analyze and interpret information in reports as part of the communication step. 4. False. The two most common types of external users are investors and creditors. 5. True.