Introduction to Financial Accounting

345 Pages·2017·10.12 MB·English

2017
Introduction to Financial
Accounting
(AC 101)

By Professor Khloud Kourani
Passaic County Community College
Textbook excerpts were modified by Professor Khloud Kourani for AC1 01 at
Passaic County Community College under copyright privilege extended by the
creators under Creative Commons licensing.
This excerpt is a modification of the following textbooks:
Introduction to Financial Accounting by Henry Dauderis and David Annand
edited by Athabasca University
CC BY-NC-SA 3.0
https://open.umn.edu/opentextbooks/BookDetail.aspx?bookId=215

Accounting Principles: A Business Perspective by James Don Edwards,
University of Georgia & Roger H. Hermanson, Georgia State University. Provided
by: Endeavour International Corporation. Project: The Global Text Project
http://solr.bccampus.ca:8001/bcc/file/fa667d22-26c7-487e-8d75-
0e57ef8eece7/1/Accounting%20Principles%20A%20Business%20Perspective.p
df
The following Creative Commons license is extended for original content authored by
Khloud Kourani

Attribution-NonCommercial-ShareAlike 4.0 International (CC BY-NC-SA 4.0)

Formatting and editing completed by Annemarie Roscello, Associate Professor, Bergen
Community College

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Table of Contents
1. Introduction to Financial Accounting 1
A. Accounting Defined 3
B. Business Organizations 3
C. Ethics in financial reporting 5
D. Generally Accepted Accounting Principles 5
E. Financial Statements 9
F. Transactions Analysis and Double-entry Accounting 13
Concept Self-check 20
Comprehension Problems 21
Problems 25
2. The Accounting Process 29
A. Accounts 30
B. Transactions Analysis Using Accounts 34
C. The Trial Balance 43
D. Using Formal Accounting Records 44
Concept Self-check 49
Comprehension Problems 50
Problems 61
3. Financial Accounting and the Use of Adjusting Entries 65
A. Revenue Recognition Principle 66
B. Adjusting Entries 71
C. The Adjusted Trial Balance 84
D. Using the Adjusted Trial Balance to Prepare Financial
Statements 85
Summary of Chapter 3 Learning Objectives 88
Concept Self-check 90
Comprehension Problems 91
Problems 98
4. The Classified Balance Sheet and Accounting Cycle 106
A. The Accounting Cycle 107
B. The Closing Process 109
C. Financial Statement Disclosure Decisions 114
D. Classified Balance Sheet 115
Summary of Chapter 4 Learning Objectives 121
Concept Self-check 124
Comprehension Problems 125
Problems 126
5. Accounting for the Sale of Goods 130
A. The Basics of Merchandizing 131
B. The Purchase and Payment of Merchandizing Using the
Perpetual Inventory Method 133
C. Merchandize Inventory: Sales and Collections Using the
Perpetual Inventory Method 137
D. Adjustments to Merchandize Inventory Using the Perpetual
Inventory Method 141
E. Merchandizing Income Statement 144
F. Closing Entries for a Merchandizer Using the Perpetual
Inventory Method 146
Appendix: The Periodic Inventory System 149
Concept Self-check 152
Comprehension Problems 153
Problems 159
6. Assigning Costs to Merchandise 163
A. Inventory Cost Flow Assumptions 164
B. Financial Statement Impact of Different Inventory Cost Flows 177
C. Lower of Cost and Net Realizable Value (LCNRV) 180
D. Estimating the Balance in Merchandize Inventory 181
Concept Self-check 188
Comprehension Problems 189
Problems 200
8. Internal Control and Cash 213
A. Internal Control 214
B. Petty Cash 216
C. Cash Collections and Payments 218
Concept Self-check 238
Comprehension Problems 239
Problems 242

9. Receivables 246
A. Types of Receivable 247
B. Notes Receivable 259
Concept Self-check 261
Comprehension Problems 262
Problems 265
10. Long-lived Assets 274
A. Establishing Cost of Property, Plant, and Equipment (PPE) 275
B. Depreciation 278
E. Impairment of Long-lived Assets 284
F. Derecognition of Property, Plant, and Equipment 285
G. Intangible Assets 289
H. Goodwill 291
I. Disclosure 292
Summary of Chapter 8 Learning Objectives 293
Concept Self-check 297
Comprehension Problems 299
Problems 307
11. Current and Non-Current Liabilities 312
A. Current versus Non-Current Liabilities 314
B. Known Current Liabilities 314
C. Estimated Current Liabilities 326
D. Non-current Liabilities 328
Concept Self-check 335
Comprehension Problems 335
Problems 340
CHAPTER 1

Introduction to Financial
Accounting I
CHAPTER ONE
Introduction to
Financial Accounting
Chapter 1 Learning Objectives
LO1 – Define accounting.
LO2 – Identify and describe the forms of business organizations.
LO3 – Identify and explain generally accepted accounting principles
(GAAP).
LO4 – Identify and explain the uses of the four financial statements.
LO5 – Analyse transactions using the accounting equation.

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A. Accounting Defined
Accounting is often called the language of business because it uses a
LO1 – Define
unique vocabulary to communicate information to decision makers.
accounting.
In this chapter, we will discuss what financial accounting is and
briefly introduce how financial information is communicated
through financial statements. Then we will study how financial
transactions are analyzed and reported on financial statements.
Accounting is the process of identifying, measuring, recording, and
communicating an organization’s economic activities to users. Users
need information for decision making. Internal users of accounting
information work for the organization and are responsible for
planning, organizing, and operating the entity. The area of
accounting known as managerial accounting serves the decision-
making needs of internal users. External users do not work for the
organization and include investors, creditors, labour unions, and
customers. Financial accounting is the area of accounting that
presents financial information of interest to external users. This
book deals with financial accounting.
B. Business Organizations
An organization is a group of individuals who come together to
LO2 – Identify and
pursue a common set of goals and objectives. There are typically two
describe the forms
types of organizations: business and non-business. A business
of business
organization sells products or services for profit. A non-business
organizations.
organization, such as a charity or hospital, exists to meet various
societal needs and does not have profit as a goal. All organizations
record, report, and, most importantly, use accounting information for
making decisions.
This book focuses on business organizations. There are three
common forms of business organizations—a proprietorship, a
partnership, and a corporation.
Proprietorship
A proprietorship is a business owned by one person. It is not a
separate legal entity, which means that the business and the owner
are considered to be the same. For example, the profits of a
proprietorship are reported on the owner’s personal income tax
return. Proprietorship accounting is covered in a later chapter.
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Partnership
A partnership is a business owned by two or more individuals. Like
the proprietorship, it is not a separate legal entity. Partnership
accounting is also covered in a later chapter.
Corporation
A corporation is a business owned by one or more owners.1 The
owners are known as shareholders. A shareholder owns shares of
the corporation. Shares are units of ownership in a corporation. For
example, if a corporation has 1,000 shares, there may be three
shareholders who own 700 shares, 200 shares, and 100 shares
respectively. The number of shares held by a shareholder represents
how much of the corporation they own. The first shareholder who
owns 700 shares owns 70% of the corporation (700/1,000 = 70%).
A corporation can have different types of shares; this topic is
discussed in a later chapter.
A corporation’s shares can be privately held or available for public
sale. A corporation that sells its shares publicly typically does so on a
stock exchange. It is called a publicly accountable enterprise. It
may have thousands or millions of shareholders. A corporation that
holds its shares privately is known as a private enterprise. Its
shares are often held by only one or a few shareholders.
Unlike the proprietorship and partnership, a corporation is a
separate legal entity. This means, for example, that from an income
tax perspective, a corporation files its own tax return. The owners or
shareholders of a corporation are not responsible for the
corporation’s debts so have limited liability meaning that the most
they can lose is the amount they invested in the corporation. They
are not responsible for all the debts of an organization.
In larger corporations, there can be many shareholders. In these
cases, shareholders do not manage a corporation but participate
indirectly through the election of a Board of Directors. The Board of
Directors does not participate in the day-to-day management of the
corporation but delegates this responsibility to the officers of the
corporation.

1 Equivalent designations for a corporation are “Corp.”, “Incorporated”, “Inc.”,
“Limited”, and “Ltd.”

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C. Ethics in financial reporting:
Financial reporting depends heavily on some ethical behaviour.
Ethics is the standards of conduct that judges ones actions as right
or wrong, honest or dishonest and fair or unfair.
The following illustration shows the necessary steps applied when
analysing various ethics cases and also in personal experiences.
1. Recognize an 2. Identify and analyse 3. Identify the
unethical situation the principle alternatives and
and the involved elements in the weigh the impact of
ethical issues situation. each to the involved
This involves using This involves stakeholders.
your personal ethics identifying Consider all the
to identify unethical individuals or consequences and
situations and issues. participants that can then select the most
Some business be harmed or ethical alternative. It
organizations utilize benefited by the involves a thorough
a written code of situation and then evaluation of the
ethics to guide them identify their alternatives because
in some business responsibilities and in some cases there is
situations. obligations. one right solution
while in other cases
there is more than
one solution
D. Generally Accepted Accounting Principles (GAAP)
The goal of accounting is to ensure information provided to decision
LO3 – Identify and
makers is useful. To be useful, information must be relevant and
explain generally
faithfully represent a business’s economic activities. This requires
accepted
ethics, beliefs that help us differentiate right from wrong, in the
accounting
application of underlying accounting concepts or principles. These
principles (GAAP).
underlying accounting concepts or principles are known as
generally accepted accounting principles (GAAP).

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