, CHAPTER 1
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the activities and users associated with accounting. Accounting is an information
system that identifies, records, and communicates the economic events of an organization to
interested users. The major users and uses of accounting are as follows: (a) Management
uses accounting information to plan, organize, and run the business. (b) Investors (owners)
decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c)
Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on
the basis of accounting information. Other groups that use accounting information are taxing
authorities, regulatory agencies, customers, and labor unions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics
are the standards of conduct by which actions are judged as right or wrong. Effective financial
reporting depends on sound ethical behavior.
Generally accepted accounting principles are a common set of standards used by
accountants. The primary accounting standard-setting body in the United States is the
Financial Accounting Standards Board.
3. State the accounting equation, and define its components. The basic accounting
equation is:
Assets = Liabilities + Owner's Equity
Assets are resources a business owns. Liabilities are creditorship claims on total assets.
Owner's equity is the ownership claim on total assets.
The expanded accounting equation is:
Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues −
Expenses
Investments by owners (assets the owner puts into the business) are recorded in a category
called owner’s capital. Owner’s drawings are the withdrawal of assets by the owner for
personal use. Revenues are the gross increase in owner’s equity from business activities for
the purpose of earning income. Expenses are the costs of assets consumed or services used
in the process of earning revenue. Owner’s equity is increased by an owner’s investments
and by revenues from business operations. Owner’s equity is decreased by an owner’s
withdrawals of assets and by expenses.
4. Analyze the effects of business transactions on the accounting equation. Each business
transaction must have a dual effect on the accounting equation. For example, if an individual
asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase
in a specific liability, or (3) increase in owner's equity.
5. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses, and resulting net income or net loss for a specific
period of time. An owner's equity statement summarizes the changes in owner's equity for a
specific period of time. A balance sheet reports the assets, liabilities, and owner's equity at a
specific date. A statement of cash flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
,1-2 Test Bank for Accounting Principles, Fourteenth Edition
a
6. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental, and forensic accounting.
Accounting is a popular major because there are many different types of jobs, with unlimited
potential for career advancement.
FOR INSTRUCTOR USE ONLY
, Accounting in Action 1-3
TRUE-FALSE STATEMENTS
1. Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
2. Transactions that can be measured in dollars and cents are recorded in the financial
information system.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
3. The hiring of a new company president is an economic event recorded by the financial
information system.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
4. Management of a business enterprise is the major external user of information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
5. Accounting communicates financial information about a business enterprise to both
internal and external users.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
6. Accounting information is used only by external users with a financial interest in a
business enterprise.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
7. Financial statements are the major means of communicating accounting information to
interested parties.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
8. Bookkeeping and accounting are one and the same because the bookkeeping function
includes the accounting process.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
9. The origins of accounting are attributed to Luca Pacioli, a famous mathematician.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
ACCOUNTING IN ACTION
CHAPTER LEARNING OBJECTIVES
1. Identify the activities and users associated with accounting. Accounting is an information
system that identifies, records, and communicates the economic events of an organization to
interested users. The major users and uses of accounting are as follows: (a) Management
uses accounting information to plan, organize, and run the business. (b) Investors (owners)
decide whether to buy, hold, or sell their financial interests on the basis of accounting data. (c)
Creditors (suppliers and bankers) evaluate the risks of granting credit or lending money on
the basis of accounting information. Other groups that use accounting information are taxing
authorities, regulatory agencies, customers, and labor unions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethics
are the standards of conduct by which actions are judged as right or wrong. Effective financial
reporting depends on sound ethical behavior.
Generally accepted accounting principles are a common set of standards used by
accountants. The primary accounting standard-setting body in the United States is the
Financial Accounting Standards Board.
3. State the accounting equation, and define its components. The basic accounting
equation is:
Assets = Liabilities + Owner's Equity
Assets are resources a business owns. Liabilities are creditorship claims on total assets.
Owner's equity is the ownership claim on total assets.
The expanded accounting equation is:
Assets = Liabilities + Owner's Capital − Owner's Drawings + Revenues −
Expenses
Investments by owners (assets the owner puts into the business) are recorded in a category
called owner’s capital. Owner’s drawings are the withdrawal of assets by the owner for
personal use. Revenues are the gross increase in owner’s equity from business activities for
the purpose of earning income. Expenses are the costs of assets consumed or services used
in the process of earning revenue. Owner’s equity is increased by an owner’s investments
and by revenues from business operations. Owner’s equity is decreased by an owner’s
withdrawals of assets and by expenses.
4. Analyze the effects of business transactions on the accounting equation. Each business
transaction must have a dual effect on the accounting equation. For example, if an individual
asset increases, there must be a corresponding (1) decrease in another asset, or (2) increase
in a specific liability, or (3) increase in owner's equity.
5. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses, and resulting net income or net loss for a specific
period of time. An owner's equity statement summarizes the changes in owner's equity for a
specific period of time. A balance sheet reports the assets, liabilities, and owner's equity at a
specific date. A statement of cash flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
,1-2 Test Bank for Accounting Principles, Fourteenth Edition
a
6. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental, and forensic accounting.
Accounting is a popular major because there are many different types of jobs, with unlimited
potential for career advancement.
FOR INSTRUCTOR USE ONLY
, Accounting in Action 1-3
TRUE-FALSE STATEMENTS
1. Owners of business firms are the only people who need accounting information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Reporting, AICPA PC: None, IMA:
Reporting
2. Transactions that can be measured in dollars and cents are recorded in the financial
information system.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
3. The hiring of a new company president is an economic event recorded by the financial
information system.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
4. Management of a business enterprise is the major external user of information.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
5. Accounting communicates financial information about a business enterprise to both
internal and external users.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
6. Accounting information is used only by external users with a financial interest in a
business enterprise.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
7. Financial statements are the major means of communicating accounting information to
interested parties.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
8. Bookkeeping and accounting are one and the same because the bookkeeping function
includes the accounting process.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
9. The origins of accounting are attributed to Luca Pacioli, a famous mathematician.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Governance Perspective, AICPA FC: Measurement Analysis and
Interpretation, AICPA PC: None, IMA: Reporting
