CHA
PTER 1 H 4
ACCOUNTING IN ACTION H4 H4
CHAPTER LEARNING OBJECTIVES H4 H4
1. Identify the activities and users associated with accounting. Accounting is an inform
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ation system that identifies, records, and communicates the economic events of an orga
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
nization to interested users. The major users and uses of accounting are as follows: (a)
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Management uses accounting information to plan, organize, and run the business. (b) In
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
vestors (owners) decide whether to buy, hold, or sell their financial interests on the basis
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
H4of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H
4credit or lending money on the basis of accounting information. Other groups that use
H4 H4 H4 H 4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
accounting information are taxing authorities, regulatory agencies, customers, and labor u
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
nions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethi
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
cs are the standards of conduct by which actions are judged as right or wrong. Effective
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
financial reporting depends on sound ethical behavior.
H4 H4 H4 H4 H4 H4 H4
Generally accepted accounting principles are a common set of standards used by accou
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ntants. The primary accounting standard-
H4 H4 H4 H4
setting body in the United States is the Financial Accounting Standards Board.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
,3. State the accounting equation, and define its components. The basic accounting eq
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H 4
uation is: H4
Assets = Liabilities + Owner's Equity
H4 H4 H4 H4 H4
Assets are resources a business owns. Liabilities are creditorship claims on total ass
H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4
ets. Owner's equity is the ownership claim on total assets.
H4 H4 H4 H4 H4 H4 H4 H4 H4
The expanded accounting equation is:
H4 H4 H4 H4
Assets Liabilities + Owner's Capital Owner's Drawings + Revenues
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Expenses
Investments by owners (assets the owner puts into the business) are recorded in a cate
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
gory called owner‘s capital. Owner‘s drawings are the withdrawal of assets by the owner
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
for personal use. Revenues are the gross increase in owner‘s equity from business acti
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
vities for the purpose of earning income. Expenses are the costs of assets consumed or
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
services used in the process of earning revenue. Owner‘s equity is increased by an o
H4 H4 H4 H4 H4 H4 H 4 H4 H4 H4 H4 H4 H4 H4 H4
wner‘s investments and by revenues from business operations. Owner‘s equity is decrea
H4 H 4 H4 H4 H4 H4 H4 H4 H4 H4 H4
sed by an owner‘s withdrawals of assets and by expenses.
H4 H4 H4 H4 H4 H4 H4 H4 H4
4. Analyze the effects of business transactions on the accounting equation. Each busi
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ness transaction must have a dual effect on the accounting equation. For example, if an
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
individual asset increases, there must be a corresponding (1) decrease in another asset
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
, or (2) increase in a specific liability, or (3) increase in owner's equity.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
5. Describe the four financial statements and how they are prepared. An income state
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ment presents the revenues and expenses, and resulting net income or net loss for a s
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
pecific period of time. An owner's equity statement summarizes the changes in owner's
H 4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
equity for a specific period of time. A balance sheet reports the assets, liabilities, and o
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
wner's equity at a specific date. A statement of cash flows summarizes information abou
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
t the cash inflows (receipts) and outflows (payments) for a specific period of time.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
,
, 21A - H4
2 Test Bank for Accounting Principles, Fourteenth Edition
a
6. Explain the career opportunities in accounting. Accounting offers many different jobs
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
in fields such as public and private accounting, governmental, and forensic accounting.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Accounting is a popular major because there are many different types of jobs, with unli
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
mited potential for career advancement.
H4 H4 H4 H4
TRUE-FALSE STATEMENTS H4
1. Owners of business firms are the only people who need accounting information.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Ans:H 4 F,H 4 LO:H 4 1,H 4 Bloom:H 4 K,H 4 Difficulty:H 4 Easy,H 4 Min:H 4 1,H 4 AACSB:H 4 None,H 4 AICPAH 4 BB:H 4 GovernanceH 4 Perspective,H 4 AICPAH 4 FC:H 4 Reporting,H
4 AICPAH 4 PC: H 4 None,H 4 IMA:H 4 Reporting
2. Transactions that can be measured in dollars and cents are recorded in the
H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4
financial information system.
H 4 H4 H4
Ans:H4T,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
3. The hiring of a new company president is an economic event recorded by the
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
financial information system.
H4 H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4C,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
4. Management of a business enterprise is the major external user of information.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
5. Accounting communicates financial information about a business enterprise to
H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H
4both internal and external users.
H 4 H4 H4 H4
Ans:H4T,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
6. Accounting H 4 information is used only H 4 H 4 H 4 H 4 by external
H 4 H 4 users H 4 with H 4 a H 4 financial H 4 i
nterest in H 4 H 4 a business enterprise.
H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4C,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
7. Financial statements are the major means of communicating accounting inform
H 4 H4 H 4 H 4 H 4 H4 H 4 H 4 H 4
ation to interested parties.
H 4 H4 H4
Ans:H4T,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
8. Bookkeeping and accounting are one and the same because the bookkeeping
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
function includes the accounting process.
H4 H4 H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4C,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
PTER 1 H 4
ACCOUNTING IN ACTION H4 H4
CHAPTER LEARNING OBJECTIVES H4 H4
1. Identify the activities and users associated with accounting. Accounting is an inform
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ation system that identifies, records, and communicates the economic events of an orga
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
nization to interested users. The major users and uses of accounting are as follows: (a)
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Management uses accounting information to plan, organize, and run the business. (b) In
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
vestors (owners) decide whether to buy, hold, or sell their financial interests on the basis
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
H4of accounting data. (c) Creditors (suppliers and bankers) evaluate the risks of granting
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H
4credit or lending money on the basis of accounting information. Other groups that use
H4 H4 H4 H 4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
accounting information are taxing authorities, regulatory agencies, customers, and labor u
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
nions.
2. Explain the building blocks of accounting: ethics, principles, and assumptions. Ethi
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
cs are the standards of conduct by which actions are judged as right or wrong. Effective
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
financial reporting depends on sound ethical behavior.
H4 H4 H4 H4 H4 H4 H4
Generally accepted accounting principles are a common set of standards used by accou
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ntants. The primary accounting standard-
H4 H4 H4 H4
setting body in the United States is the Financial Accounting Standards Board.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
,3. State the accounting equation, and define its components. The basic accounting eq
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H 4
uation is: H4
Assets = Liabilities + Owner's Equity
H4 H4 H4 H4 H4
Assets are resources a business owns. Liabilities are creditorship claims on total ass
H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4
ets. Owner's equity is the ownership claim on total assets.
H4 H4 H4 H4 H4 H4 H4 H4 H4
The expanded accounting equation is:
H4 H4 H4 H4
Assets Liabilities + Owner's Capital Owner's Drawings + Revenues
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Expenses
Investments by owners (assets the owner puts into the business) are recorded in a cate
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
gory called owner‘s capital. Owner‘s drawings are the withdrawal of assets by the owner
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
for personal use. Revenues are the gross increase in owner‘s equity from business acti
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
vities for the purpose of earning income. Expenses are the costs of assets consumed or
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
services used in the process of earning revenue. Owner‘s equity is increased by an o
H4 H4 H4 H4 H4 H4 H 4 H4 H4 H4 H4 H4 H4 H4 H4
wner‘s investments and by revenues from business operations. Owner‘s equity is decrea
H4 H 4 H4 H4 H4 H4 H4 H4 H4 H4 H4
sed by an owner‘s withdrawals of assets and by expenses.
H4 H4 H4 H4 H4 H4 H4 H4 H4
4. Analyze the effects of business transactions on the accounting equation. Each busi
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ness transaction must have a dual effect on the accounting equation. For example, if an
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
individual asset increases, there must be a corresponding (1) decrease in another asset
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
, or (2) increase in a specific liability, or (3) increase in owner's equity.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
5. Describe the four financial statements and how they are prepared. An income state
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
ment presents the revenues and expenses, and resulting net income or net loss for a s
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
pecific period of time. An owner's equity statement summarizes the changes in owner's
H 4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
equity for a specific period of time. A balance sheet reports the assets, liabilities, and o
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
wner's equity at a specific date. A statement of cash flows summarizes information abou
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
t the cash inflows (receipts) and outflows (payments) for a specific period of time.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
,
, 21A - H4
2 Test Bank for Accounting Principles, Fourteenth Edition
a
6. Explain the career opportunities in accounting. Accounting offers many different jobs
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
in fields such as public and private accounting, governmental, and forensic accounting.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Accounting is a popular major because there are many different types of jobs, with unli
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
mited potential for career advancement.
H4 H4 H4 H4
TRUE-FALSE STATEMENTS H4
1. Owners of business firms are the only people who need accounting information.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Ans:H 4 F,H 4 LO:H 4 1,H 4 Bloom:H 4 K,H 4 Difficulty:H 4 Easy,H 4 Min:H 4 1,H 4 AACSB:H 4 None,H 4 AICPAH 4 BB:H 4 GovernanceH 4 Perspective,H 4 AICPAH 4 FC:H 4 Reporting,H
4 AICPAH 4 PC: H 4 None,H 4 IMA:H 4 Reporting
2. Transactions that can be measured in dollars and cents are recorded in the
H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4
financial information system.
H 4 H4 H4
Ans:H4T,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
3. The hiring of a new company president is an economic event recorded by the
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
financial information system.
H4 H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4C,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
4. Management of a business enterprise is the major external user of information.
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
5. Accounting communicates financial information about a business enterprise to
H 4 H 4 H 4 H 4 H 4 H 4 H 4 H 4 H
4both internal and external users.
H 4 H4 H4 H4
Ans:H4T,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
6. Accounting H 4 information is used only H 4 H 4 H 4 H 4 by external
H 4 H 4 users H 4 with H 4 a H 4 financial H 4 i
nterest in H 4 H 4 a business enterprise.
H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4C,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
7. Financial statements are the major means of communicating accounting inform
H 4 H4 H 4 H 4 H 4 H4 H 4 H 4 H 4
ation to interested parties.
H 4 H4 H4
Ans:H4T,H4LO:H41,H4Bloom:H4K,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
8. Bookkeeping and accounting are one and the same because the bookkeeping
H4 H4 H4 H4 H4 H4 H4 H4 H4 H4 H4
function includes the accounting process.
H4 H4 H4 H4
Ans:H4F,H4LO:H41,H4Bloom:H4C,H4Difficulty:H4Easy,H4Min:H41,H4AACSB:H4None,H4AICPAH4BB:H4GovernanceH4Perspective,H4AICPAH4FC:H4MeasurementH4Analy
sisH4andH 4 Interpretation,H4AICPAH4PC:H4None,H4IMA:H4Reporting
