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Chapter 1

Introduction to Accounting and Business


After studying Chapter 1, the student should be able to –


(1)  Describe the nature of a business, the role of accounting, and ethics in business;


(2)  Summarize the development of accounting principles and relate them to practice;


(3)  State the accounting equation and define each element of the equation;


(4)  Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation; and


(5)  Describe the financial statements of a corporation and explain how they interrelate.


Nature of Business and Accounting


What is a business – ________________________________________________________


What is the objective of most businesses – _______________________________________


What is a profit – ____________________________________________________________


1.    Profit is the difference between:

a.    Assets and liabilities

b.    Assets and equities

c.     The assets purchased with cash contributed by the stockholders and the cash spent to operate the business

d.    The assets received for goods and services and the amounts used to provide the goods and services


Types of Businesses


What are the three types of businesses operated for profit and give examples of each.


(1)  _______________  ___________________________________________________



(2)  _______________  ___________________________________________________



(3)  _______________  ___________________________________________________



Exercise 1 – 1          P 32   

What is the Role of Accounting in Business – _____________________________________


What is Accounting – ________________________________________________________


  1. Which of the following best describes accounting:

a.    Records economic data but does not communicate the data to users according to any specific rules

b.    Can be thought of as the “language of business”

c.     Is of no use by individuals outside of the business

d.    Is used only for filling out tax returns and for financial statements for various type of governmental reporting requirements


See Exh 1   P3


What is managerial accounting – _______________________________________________


What is financial accounting – __________________________________________________


What are General purpose financial statements – ___________________________________


_________  _____________ refers to the wide range of decision-making needs that these reports are designed to serve.


What is the role of Ethics in Accounting and Business – ______________________________



What are ethics – ____________________________________________________________


See Exh 2    P4


See Exh 3    P6


What are the opportunities for Accountants – ______________________________________


What is a private accountant – __________________________________________________


What is a public accountant – __________________________________________________



Generally Accepted Accounting Principles


What are Generally Accepted Accounting Principles – _______________________________





  1. The initials GAAP stand for:

a.    General Accounting Auditing Procedures

b.    Generally Accepted Auditing Principles

c.     Generally Accepted Accounting Principles

d.    Generally Accepted Audit Practices


How do these accounting principles develop – _____________________________________



Business Entity Concept


What is the business entity concept – ____________________________________________



  1. The business entity concept means that:

a.    The owner is part of the business entity

b.    An entity is organized according to state or federal statutes

c.     An entity is organized according to the rules set by the FASB

d.    The entity is an individual economic unit for which data are recorded, analyzed, and reported


What are the four (4) principle forms of business entities –

(1)  ___________________________________________


(2)  ___________________________________________


(3)  ___________________________________________


(4)  ___________________________________________



5.    Which of the following is not a business organization form?

a.    Governmental unit

b.    Proprietorship

c.     Partnership

d.    Corporation


Exh 4 P8


Exercise 1 – 3          Page 33


The Cost Concept


What is the cost concept – _____________________________________________________



  1. Equipment with an estimated market value of $ 45,000 is offered for sale at $ 65,000.  The equipment is acquired for $ 10,000 in cash and a note payable of $ 40,000 due in 30 days.  The amount used in the buyer’s accounting records to record this acquisition is:

$ 50,000

b.    $ 65,000

c.     $ 10,000

d.    $ 45,000


What is the objectivity concept – ________________________________________________


What is the unit of measure concept – ____________________________________________


See Example Exercise 1-1  P9



The Accounting Equation

What is the accounting equation – _______________________________________________


  1. The accounting equation may be expressed as:

a.    Assets = Equities – Liabilities

b.    Assets + liabilities = Owners’ Equity

c.     Assets = Revenues less Liabilities

d.    Assets = Liabilities + Owner’s Equity


What are assets – ___________________________________________________________


  1. Assets are:

a.     always greater than liabilities

b.    Either cash or accounts receivables

c.     The same as expenses because they are acquired with cash

d.    Financed by the owners and/or creditors


  1. Resources owned by a business are referred to as

a.    Assets

b.    Liabilities

c.     Equities

d.    Revenues


What are liabilities – __________________________________________________________

  1. Debts owed by a business are referred to as:

a.    Accounts receivables

b.    Equities

c.     Owner’s equity

d.    Liabilities


What is stockholders’ equity – ______________________________________________________

  1. On November 1 of the current year, the assets and liabilities of TSU are as follows:        Cash, $ 10,000; Accounts Receivable, $ 8,200; Supplies, $ 1,050; Land, $ 25,000; Accounts Payable, $ 6,530.  What is the amount of stockholder’s equity as of November 1 of the current year?

a.    $ 37,720

b.    $ 44,430

c.     $ 21,500

d.    $ 48,780


  1. A business paid $ 9,000 to a creditor in payment of an amount owed.  The effect of the transaction on the accounting equation was to:

a.    Increase one asset, decrease another asset

b.    Increase an asset, increase another asset

c.     Decrease an asset, decrease a liability

d.    Increase an asset, increase owner’s equity


  1. If total assets decreased by $ 47,000 during a period and owner’s equity increased by $ 24,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total liabilities is:

a.    $ 23,000 increase

b.    $ 47,000 decrease

c.     $ 71,000 decrease

d.    $ 71,000 increase


See Example Exercise 1-2 P10


Exercise 1 – 4          Page 33



Business Transactions and the Accounting Equation


What is a business transaction – ________________________________________________


Review transactions A – H Pp 10 – 13


  1. Which of the following is not a business transaction?

a.    Make a sales offer

b.    Sell goods for cash

c.     Receive cash for services to be rendered later

d.    Pay for supplies






  1. If total liabilities increased by $ 30,000 during a period and owner’s equity increased by $ 5,000 during the same period, the amount and direction (increase or decrease) of the period’s change in total assets is:

a.    $ 35,000 increase

b.    $ 20,000 decrease

c.     $ 25,000 increase

d.    $ 25,000 decrease


  1. If total liabilities decreased by $ 22,000 during a period and owner’s equity increased by $ 29,000 during the same period, the amount and direction (increase or decrease) of the period’s change in total assets is:

a.    $ 7,000 increase

b.    $ 3,000 decrease

c.     $ 12,000 increase

d.    $ 21,000 decrease


  1. If total liabilities decreased by $ 22,000 during a period and owner’s equity increased by $ 6,000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total assets is:

a.    $ 16,000 increase

b.    $ 16,000 decrease

c.     $ 6,000 decrease

d.    $ 6,000 increase


Exercise 1 – 9          Page 34


See Summary on P13


See Exh 5 – Summary of Transactions for NetSolutions  P14


Classifications of Stockholders’


How is stockholders’ equity classified




What is common stock ______________________________________________________


What are retained earnings __________________________________________________


See Exh 6 – Effects of Transactions on Stockholders’ Equity P15


See Example Exercise 1-3 P1



Financial Statements


What are financial statements – _________________________________________________


See Exh 7 P15


What are the four (4) types of financial statements –

(1)  _______________________________


(2)  _______________________________


(3)  _______________________________


(4)  _______________________________


Income Statement


What does the income statement report – _________________________________________


  1. The financial statement that presents a summary of the revenues and expenses of a business for a specific period, such as a month or year, is called a(n):

a.    Prior period statement

b.    Retained earnings statement

c.     Income statement

d.    Balance sheet


What is net income – _________________________________________________________


What is a net loss – __________________________________________________________


See Example Exercise 1-4 P16


What is the Retained Earnings Statement -________________________________________


When is it prepared – _________________________________________________________


See Example Exercise 1-5 P17


Balance Sheet

What is the balance sheet – ____________________________________________________


  1. The financial statement that presents a summary of the assets, liabilities, and owner’s equity as of a specific date is call a(n)

a.    Balance sheet

b.    Retained earnings statement

c.     Statement of cash flows

d.    Income statement


What is meant by reporting in “account form?” _____________________________________



See Exh 8 P18


See Example Exercise 1-6 P19


Statement of Cash Flows

What is the statement of cash flows – ____________________________________________


  1. Four financial statements are usually prepared for a business.  The statement of cash flows is usually prepared last.  The retained earnings statement (R), the balance sheet (B), and the income statement (I) are prepared in a certain order to obtain information needed for the next statement.  In what order are these three statements prepared?

a.    I,R,B

b.    B,I,R

c.     R,I,B

d.    B,R,I


See Example Exercise 1-7 P20-21


Exercise 1 – 20        Page 37


Study – Exhibit 9 – Interrelationship among financial statements – P21


Study – At a Glance  Pp 23 – 25


Study  – Illustrative Problem  Pp 26 – 28


Problem 1 – 6A        Page 42



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