Type:
Instructor Manual
Resource:
Horngren_s Financial & Managerial Accounting
Edition:
7th Edition
Author(s):
Tracie Miller-Nobles Brenda Mattison
Chapter 1 Accounting and the Business Environment
Chapter 1: Overview The chapter begins with an introduction to accounting and a brief discussion of why accounting is important. The differences between financial and managerial accounting are delineated. The text discusses how accounting information is needed by various users—individuals, businesses, investors, creditors, and taxing authorities. Reasons accounting is important to students not majoring in accounting and career paths available to accounting majors are briefly described, including a comparison of various accounting positions. The role of governing organizations such as the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) as well as the FASB’s relationships with both congressionally created and private accounting groups are explained. Generally Accepted Accounting Principles (GAAP) are introduced. The sole proprietorship, partnership, corporation, and limited liability company (LLC) forms of business are briefly described in the context of the economic entity assumption. In addition, the cost principle, going concern assumption, and monetary unit assumption are explained. The nature of International Financial Reporting Standards (IFRS) and the role of the International Accounting Standards Board (IASB) in their development are explained. The role of ethics in accounting and business is described. The U.S. government’s passing of the Sarbanes-Oxley Act (SOX) and the creation of the Public Company Accounting Oversight Board (PCAOB) are presented. A Data Analytics in Accounting feature highlights the importance of data analytics skills for accountants. The next section of the chapter introduces the accounting equation: Assets = Liabilities + Equity. Each element of the accounting equation is defined. Nine basic business transactions are analyzed, and their impact on the accounting equation is discussed. The financial statements—income statement, statement of retained earnings, balance sheet, and statement of cash flows—are illustrated. The interrelationship of the financial statements is emphasized. A Tying It All Together feature poses four questions regarding a company’s asset, liability, revenue, and expense accounts and the proper financial statement reporting for each. Financial statements and return on assets (ROA) are used to evaluate business performance. A Decisions feature helps students see how financial statements and ROA can be used to make real-world decisions. The Review section includes Things You Should Know which highlights the information students should have acquired from the chapter. A Check Your Understanding feature allows students to record the effects of transactions on the accounting equation, prepare financial statements, and calculate ROA. A list of Key Terms is provided. A Quick Check gives students a chance to assess their knowledge of the chapter learning objectives.
Chapter 1: Learning Objectives LO 1. Explain why accounting is important and list the users of accounting information LO 2. Describe the organizations and rules that govern accounting LO 3. Describe the accounting equation and define assets, liabilities, and equity LO 4. Use the accounting equation to analyze transactions LO 5. Prepare financial statements LO 6. Use financial statements and return on assets (ROA) to evaluate business performance
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Chapter 1: Teaching Outline with Lecture Notes LO 1. Explain why accounting is important and list the users of accounting information a) Define the term accounting and explain what accountants do b) Exhibit 1-1: Pathways Vision Model Lecture Notes: The model emphasizes that good decisions have an impact on accounting judgments and economic activity, thus creating a circular flow of cause and effect. Accounting is defined as the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. However, accountants do not simply prepare various types of accounting reports and tax returns. They also review and interpret business information using critical thinking and judgment to partner with clients and managers to help them make better business decisions. c) Differentiate between financial accounting and managerial accounting d) Exhibit 1-2: Decision Making: Financial Versus Managerial Accounting Lecture Notes: Financial accounting provides historical information—the company reports on events that have already occurred—to external decision makers, including investors and creditors. Managerial accounting provides more future-oriented information—many companies prepare budgets, forecasts, and projections based on future events—for internal decision makers (company managers and executives). e) Identify the users of accounting information: i.
Individuals
ii.
Businesses
iii.
Investors
iv.
Creditors
v.
Taxing authorities
Lecture Notes: The officers of a company may be (and probably are) stockholders as well. Not all investors are “outside” the company. The financial statements are the primary tools for providing information to outside investors; but officers may also use the statements, along with other financial information, to manage the company on a day-to-day basis. f) Describe career options and certifications available in the accounting profession Lecture Notes: Certified Public Accountants, or CPAs, are licensed professional accountants who serve the general public. Certified Management Accountants, or CMAs, are certified professionals
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who specialize in accounting and financial management knowledge. Not all accountants are licensed, and those who are may not necessarily be members of the AICPA and IMA, the professional associations described in the textbook. There are many other types of accounting-related associations and certifications in the United States and elsewhere around the world, including Certified Internal Auditor (CIA), Certified Government Financial Manager (CGFM), Certified Fraud Examiner (CFE), Certified Financial Manager (CFM), Enrolled Agent (EA), Certified Global Management Accountant (CGMA), Chartered Accountant (CA), Certified Financial Planner (CFP), and many more. Accountants also need data analytics skills to be successful. An understanding of how technology is used to process financial information is critical in today’s job market. g) Exhibit 1-3: Comparison of Accounting Positions Suggested In-Class Exercise: E1-17 LO 2. Describe the organizations and rules that govern accounting a) Identify accounting governing organizations, including the Financial Accounting Standards Board (FASB), the Security Exchange Commission (SEC), and the International Accounting Standards Board (IASB) b) Describe Generally Accepted Accounting Principles (GAAP) and introduce the primary objective of financial reporting c) Explain the economic entity assumption i.
Identify the different types of business organizations: ▪
Sole proprietorship
▪
Partnership
▪
Corporation
▪
Limited-liability company (LLC)
ii.
Exhibit 1-4: Business Organizations
iii.
Describe the distinguishing characteristics and organization of a corporation: ▪
Separate legal entity
▪
Continuous life and transferability of ownership
▪
No mutual agency
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iv.
▪
Limited liability of stockholders
▪
Separation of ownership and management
▪
Corporate taxation
▪
Government regulation
▪
Organization of a corporation
Exhibit 1-5: Structure of a Corporation
Lecture Notes: Corporate status is not based on the size of the company. Not all large companies are corporations, and not all small companies are sole proprietorships or partnerships. A corporation could have only one stockholder. Why would a one-shareholder business incorporate the business in this case? One reason is limited liability protection. Regardless of the number of stockholders, all corporations follow the same general corporate procedures. d) Explain the cost principle e) Explain the going concern assumption Lecture Note: Point out to students that if it is known that a company should not be considered a going concern, different accounting rules from those covered in this course apply to that company. f) Explain the monetary unit assumption Lecture Note: Point out to students that an implication of the monetary unit assumption is that business activities that cannot be expressed in monetary units are not represented within the financial statements. For example, a company with a well-trained workforce, talented managers, a good reputation with customers, and innovative research and development has important assets that are not represented on the balance sheet. g) Describe International Financial Reporting Standards (IFRS) h) Ethics in accounting and business i.
Sarbanes-Oxley Act (SOX)
ii.
Public Company Accounting Oversight Board (PCAOB)
Lecture Notes: Not all accounting information and financial statements are publicly available; such information is disclosed by public companies only. Company size is not a determinant of public ownership; some large companies are still privately held. All companies, public and private, can follow GAAP. However, this may not be a requirement for private companies. Private companies can use other bases of accounting, such as the cash basis, unless GAAP is required due to an audit. There is also a difference between record keeping and financial statement preparation. Companies can keep their accounting records on another basis and convert the financial statements to GAAP. For example, ..
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small private companies may use the cash basis for record keeping and convert to the accrual basis for financial statement preparation. The Sarbanes-Oxley Act and the PCAOB relate to public companies. As a rule, public companies are more regulated (in terms of accounting information) than private companies. Some companies are now going private; one reason for doing so may be to reduce the compliance cost associated with these additional regulations. Although much has been written and discussed about the possibility of convergence of U.S. GAAP and IFRS, complete convergence appears to be increasingly unlikely. The SEC previously announced a policy dedicated to investigating endorsement of IFRS, but political winds now seem to be shifting. Furthermore, standard-setting paths of FASB and IASB sometimes converge, as in recent development of unified revenue recognition standards, but sometimes fail to converge, as in recent issuance of very different guidance on leases. For now, U.S. GAAP continue to be different in many respects from IFRS, a condition which seems likely to continue for the foreseeable future, although efforts to increase similarities also continue to meet with some degree of success. Suggested In-Class Exercise: E1-18 LO 3. Describe the accounting equation and define assets, liabilities, and equity a) The accounting equation: Assets = Liabilities + Equity b) Define assets c) Define liabilities d) Define equity Lecture Notes: The accounting equation must always balance. Demonstrate that the accounting equation always balances, not just at the beginning of the year (or any accounting period). During the year, the change in assets equals the change in liabilities plus the change in equity. At the end of the year, the new values of the accounting equation will balance. Beginning of Year During the Year End of Year
Assets = Δ Assets = New Assets =
Liabilities + Δ Liabilities + New Liabilities +
Equity. Δ Equity. New Equity.
Discuss with students that while most textbook examples show companies that are profitable from the very beginning and always have positive equity balances, stockholders’ equity can be negative if liabilities exceed assets, but the accounting equation would still balance. If a company records net losses in the very beginning, Retained Earnings will be negative, and the company will record Accumulated Deficit instead of Retained Earnings. For example, a company could have $100 of assets, $150 of liabilities, and $(50) of equity, and the accounting equation would equal $100 on each side. While this position is usually not desirable, it is not unusual in the business world, especially for new businesses. Suggested In-Class Exercise: E1-21 ..
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