chapter

1
INTRODUCTION TO
FINANCIAL ACCOUNTING

1.1 SCOPE AND PURPOSE OF FINANCIAL ACCOUNTING

1.2 OTHER BRANCHES OF ACCOUNTING
1.3 TYPES OF BUSINESS ENTITY
1.4 BUSINESS ACTIVITIES
1.5 UNDERLYING CONCEPTS OF FINANCIAL ACCOUNTING
1.6 THE ACCOUNTING EQUATION
 q
INTRODUCTION TO FINANCIAL ACCOUNTING

1.1 SCOPE AND PURPOSE OF FINANCIAL ACCOUNTING

Financial accounting(재무회계) is the language of business. It is concerned with

assisting economic entities(경제실체) like business firms(영리기업) in processing
business transactions and events(사업상의 거래 및 사건) into financial statements
(재무제표), showing the operating performance(영업성과) for a period of time(일정
기간) and the financial position(재무상태) at a specific point in time(특정시점). The
main purpose of financial accounting is to help financial statement users(재무
제표이용자) make rational economic decisions(합리적 경제의사결정). Thus, financial
accounting may be defined as an information-providing process(정보제공과정)
through recording, classifying, summarizing and reporting business
transactions and events in the financial statements(재무제표) with the purpose
of showing the operating performance and financial position of an entity.
Many people have an interest in knowing about the activities, financial
status and operating results of a company. These people are providers of
resources(자원제공자) to the company, and hence users of accounting
information(회계정보) or financial information(재무정보).1 They are also called

－ 17 －
18 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

stakeholders(이해관계자) and make diverse economic decisions with respect to

the company. The purpose of financial accounting is to provide useful
information for rational decision-making by diverse stakeholders. The
stakeholders use financial information generated by the accounting process.
The stakeholders of a business typically include owners, managers, creditors,
tax authorities, regulatory agencies, suppliers, customers, employees, and
other users. The stakeholders and their information needs are summarized in
Table 1-1.

Table 1-1 Accounting Information Users and Their Information Needs

Stakeholders Information Needs
(이해관계자) (정보요구사항)
Investors(Owners) To evaluate the risk inherent in, and return(이익) provided by their
(투자자, 소유주) investment.
Creditors ’
To evaluate a firm s financial capacity to meet its obligations when
(채권자) they become due.
Managers To evaluate the financial strengths and weaknesses of the business
(경영자) in the process of planning, organizing and running the business.
Tax Authorities ’
To determine tax revenue based on the company s profitability and
(과세당국) to know whether the company is complying with the tax laws.
To monitor whether the company is operating within prescribed
Regulatory Agencies
rules(감독규범). They are interested in the efficient allocation of
(감독기관)
resources.
Suppliers To evaluate whether amounts owed to them will be paid when due.
(납품업자)
Customers ’
To evaluate the company s continuing ability to honor product
(고객) warranties(제품보증) and support the product lines.
Employees ’
To evaluate the company s financial ability to pay increased wages
(종업원) and benefits.
Security exchanges(증권거래소), trade associations(산업연합회), general
public(일반대중), financial analysts(재무분석가) and the business media
Other users
(business newspapers and global business information sources such
as Reuters and Bloomberg), and others for various reasons.

1 “Financial” is synonymous with accounting in the sense that all accounting information is expressed in
terms of monetary unit. Therefore, “financial” implies “of monetary.”
 1.2 OTHER BRANCHES OF ACCOUNTING 19

1.2 OTHER BRANCHES OF ACCOUNTING

Other major branches of accounting are cost accounting, managerial

accounting, auditing(public accounting), tax accounting, and governmental
accounting.
Cost accounting(원가회계) is mainly concerned with measuring, recording,
and reporting the costs of products or services. From the data accumulated,
both the total cost and the unit cost of each product is determined. Cost
information is also vital for effective performance evaluation(성과평가) of
products, employees, divisions and others.
Managerial accounting(관리회계), also called management accounting, is a
field of accounting that provides economic and financial information for
managers and other internal users. Specifically, managerial accounting
provides information for (1) explaining manufacturing and non-manufacturing
costs and how they are reported in the financial statements, (2) assisting
managers in profit planning and formalizing these plans in the form of
budgets, (3) providing a basis for controlling costs and expenses by comparing
actual results with planned objectives and standard costs(표준원가), (4)
accumulating and presenting relevant data for management decision making,
and (5) determining the relationship among activity levels, costs and profits.
Auditing(회계감사), also called public accounting(공공회계), refers to work
done by independent public accountants who audit the financial statements
of client companies to ensure that the financial statements are properly stated
in accordance with accounting standards(회계기준). To work as a public
accountant a license, called the “certified public accountant”(공인회계사), is
required.
Tax accounting(세무회계) refers primarily to the determination of corporate
income taxes(법인세). Corporate income taxes are based on accounting
earnings(회계이익) from which taxable income(과세소득) is derived by adjusting
additions and deductions. Other taxes like municipal taxes(지방세), excise
taxes(내국세 또는 소비세), value-added-taxes(부가가치세) and the like are also
areas of tax accounting.
Governmental accounting(정부회계) focuses on the special accounting needs
20 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

of central and local governmental institutions, although some not-for-profit

organizations(비영리조직), such as charitable organizations, schools, and
hospitals, also fall in this category.

1.3 TYPES OF BUSINESS ENTITY

There are different types of business entities(기업실체), such as a sole

proprietorship, a partnership, and a corporation.
In the sole proprietorship(개인기업), there is only one owner. In the event
the business fails, the owner is personally liable for all debts incurred, i.e.,
unlimited liability(무한책임). Small owner-operated businesses such as small
retail stores, auto-repair shops, beauty salons, and copy centers are often sole
proprietorships.
A partnership(파트너십) has more than one owner. The partnership
contract spells out the rights of each partner in such matters as profit
distribution and withdrawal of funds. Personal liability exists in partnerships.
Partnerships often are formed because one individual does not have enough
economic resources to establish the business. Sometimes, partners bring
unique skills or licences to the partnership. The most common partnerships
are law firms, accounting firms and hospitals.
In a corporation(주식회사), the equity interest(지분) belongs to investors
who own the shares of stock(주식) in the business. Only limited liability(유한책
임) exists for shareholders(주주) if the corporation fails, in that they will lose
only what they have invested. No personal liability exists in corporations.
Most of the large and listed firms(상장회사) are corporations because
corporations offer many advantages: limited liability, transferability of
ownership, and ease of raising funds among others.
A business entity provides goods(재화) or services(용역) or both to
customers in order to generate a profit(net income) for its owners. Profit(이익)
or net income(순이익) is the difference between revenues and expenses.
Revenues(수익) are the inflow of resources that the firm receives from its
customers for the goods or services delivered to them. Expenses(비용) are
 1.4 BUSINESS ACTIVITIES 21

resources used or consumed to produce and deliver the goods and/or to

provide services to the customers. For a manufacturing firm(제조회사) or retail
firm(소매회사), revenues consist of the sales price charged. In contrast, revenue
for a service business(e.g., an accounting firm) is the fee charged for services
rendered. Expenses are incurred in the process of generating the revenue.
Examples of expenses are cost of goods sold(매출원가), wage or salary expense
(임금), rent expense(임차료), and utilities expense(공공요금). Revenues and
expenses resulting from the profit-generating activities of business over a
period of time are shown in the income statement(손익계산서).
A company must be financially sound in order to satisfy its debts at
maturity(만기). A measure of financial health is the degree to which assets(자산)
exceed liabilities(부채). A picture of a company’s financial position at the end
of an accounting period is shown in the statement of financial position(재무상
태표) which is also called balance sheet(대차대조표).
A business entity must have sufficient cash flows in order to carry out
its business activities. The flow of cash into and out of the entity is described
in the statement of cash flows(현금흐름표).

1.4 BUSINESS ACTIVITIES

All businesses are involved in three types of activity: financing, investing and
operating.
Financing activity(재무활동) has to do with raising external funds to run
the business. The two primary sources of external funds are borrowing money
from financial institutions and issuing shares of stock in stock exchanges(주식
시장) or bonds in bond markets(사채시장). A stock or share(주식) represents an
equity certificate(지분증서) while a bond(사채) represents a debt certificate(채무증
서). Stocks and bonds are collectively called securities(증권).
Investing activity(투자활동) involves the purchase of resources a company
needs in order to run the business. Investing activity has something to do
with how to apply or invest funds raised from financing activities for operating
purposes. Those resources purchased to run the business are called assets(자
22 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

산). For example, a company obtains assets such as land, buildings, equipment,
machinery, delivery trucks and so forth.
Operating activity(영업활동) has something to do with how to run the
business using the assets obtained through investing activities. Through
operating activities, business entities generate revenues and incur expenses.
Revenues(수익) are increases in assets or decreases in liabilities resulting from
the sale of products or services in the ordinary course of business. Revenues
arise from different sources and are identified by various names depending on
the nature of the business. Common types of revenues are sales revenue(매출
수익, 매출액), service revenue(용역수익), interest revenue(이자수익), and rent
revenue(임대수익). Expenses take many forms and are identified by various
names depending on the types of assets consumed or services used. Common
types of expenses are cost of goods sold(매출원가), selling expenses(판매비),
administrative expenses(관리비), interest expenses(이자비용), and income tax
expenses(법인세비용). Operating activities regularly involve assets and liabilities
such as accounts receivable(매출채권), inventory(재고자산), prepaid expenses(선급
비용), accounts payable(매입채무), accrued liabilities(미지급부채), and income
taxes payable(미지급법인세).

1.5 UNDERLYING CONCEPTS OF FINANCIAL ACCOUNTING

(1) Objective of Financial Reporting

The objective of general purpose financial reporting(일반목적재무보고) is to

provide financial information(재무정보) about the reporting entity(보고실체) that
is useful to existing and potential investors, lenders and other creditors in
making decisions about providing resources to the entity. Investors, lenders
and other creditors are collectively called capital providers(자본제공자). Capital
providers rely on general purpose financial statements(일반목적재무제표) for
much of the financial information they need. Capital providers are the
primary users to whom general purpose financial statements are directed.
General purpose financial statements do not, and cannot, provide capital
 1.5 UNDERLYING CONCEPTS OF FINANCIAL ACCOUNTING 23

providers with all the information they need. They need to consider other
pertinent information, such as general economic and political conditions.
General purpose financial statements are focused on meeting the needs of the
maximum number of primary users, who may have different, and possibly
conflicting, needs for information.

(2) Qualitative Characteristics of Accounting Information

In order for financial information to be useful in making economic decisions,

financial reporting should provide capital providers with the types of
information which meet various qualitative characteristics(질적특성), comprising
two ‘fundamental qualitative characteristics’(근본적 질적특성) and four ‘enhancing
qualitative characteristics’(보강적 질적특성).
The fundamental qualitative characteristics are relevance(목적적합성) and
faithful representation(충실한 표현). The enhancing qualitative characteristics
are comparability(비교가능성), verifiability(검증가능성), timeliness(적시성) and
understandability(이해가능성). In order to be useful, financial information must
be relevant and faithfully represent what it intends to represent. The
enhancing qualitative characteristics may help determine which alternative
must be used to depict economic phenomena(경제적 현상) if both alternatives
are considered equally relevant and faithfully represented.
The qualitative characteristics of accounting information are summarized
in Table 1-2.
Financial information has predictive value(예측가치) if it can be used as an
input to processes employed by users to predict future outcomes. Financial
information has confirmatory value(확인가치) if it confirms or changes previous
expectations.
Completeness(완전성) refers to a complete depiction which includes all
information necessary for a user to understand the phenomenon being depicted.
Neutrality(중립성) refers to a neutral depiction which has no bias in the
selection or presentation of financial information. Free from error(무오류) refers
to the presentation of financial information which has no errors or omissions
either in the selection or application of the process used to produce reported
information.
24 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

Table 1-2 Qualitative Characteristics of Financial Information

Relevant financial information is that which is capable of making a
Relevance difference to the decisions made by users. Financial information is
(목적적합성) capable of making a difference in decisions if it has predictive value,
confirmatory value or both.
Faithful Financial information must faithfully represent the economic phenomena
representation it intends to represent. A faithful representation would be complete,
(충실한 표현) neutral and free from error.
Comparability is the qualitative characteristic that enables users to
identify and understand similarities in, and differences among, items.
Comparability
Information about a reporting entity is more useful if it can be
(비교가능성)
compared with similar information about other entities, or about the
same entity for another period or at another date.
Verifiability means that different knowledgeable and independent
observers could reach a consensus, although not necessarily complete
Verifiability
agreement, that a particular depiction is a faithful representation.
(검증가능성)
Verifiability helps assure users that information faithfully represents the
economic phenomena that it intends to represent.
Timeliness Timeliness means that information is available to decision-makers in
(적시성) time to be capable of influencing their decisions.
Understandability Information is made understandable by classifying, characterizing and
(이해가능성) representing it clearly and concisely.
(http://www.fasb.org/resources/ccurl/515/412/Concepts%20Statement%20No%208.pdf)

(3) The Elements of Financial Statements

Financial statements portray the financial effects of transactions and other

events by grouping them into broad classes according to their economic
characteristics. These broad classes are termed the elements of financial
statements(재무제표의 요소). The elements directly related to the measurement of
financial position in the statement of financial position(재무상태표) are assets,
liabilities and equity. The elements directly related to the measurement of
performance in the income statement(손익계산서) are income(or revenues) and
expenses. These broad elements are sometimes called the five major
categories of accounts(계정의 5대 범주).
Financial statements are normally prepared on the assumption that the
reporting entity is a going concern(계속기업) and will continue to be in
operation for the forseeable future. Hence, it is assumed that the entity has
 1.6 THE ACCOUNTING EQUATION 25

neither the intention nor the need to liquidate or curtail materially the scale
of its operations.
Table 1-3 briefly defines the elements of financial statements.

Table 1-3 The Elements of Financial Statements

An asset is a resource controlled by the entity as a result of past events and

Assets
from which future economic benefits(경제적 효익) are expected to flow to the
(자산)
entity.
A liability is a present obligation(현재의무) of the entity arising from past
Liabilities
events, the settlement of which is expected to result in an outflow from the
(부채)
entity of resources embodying economic benefits.
Equity Equity is the residual interests(잔여지분) in the assets of the entity after
‘
(소유주지분) deducting all its liabilities. As such, equity is also called net assets(순자산). ’
Revenue is an increase in economic benefits during the accounting period
Income or
in the form of inflows or enhancements of assets or decreases in liabilities
Revenues
that result in increase in equity, other than those relating to contributions
(수익)
from equity participants(지분참여자).
Expense is a decrease in economic benefits during the accounting period in
Expenses the form of outflows or uses of assets or incurrence of liabilities that result
(비용) in a decrease in equity, other than those relating to distributions to equity
participants.
(http://www.fasb.org/resources/ccurl/181/284/aop_CON6.pdf)

1.6 THE ACCOUNTING EQUATION

An entity’s financial position represents the relationship between assets,

liabilities and equity. The accounting equation(회계등식) reflects these elements
by expressing the equality of assets to the sum of liabilities and equity as
follows:

＝ ＋
Assets Liabilities Equity

The equation in effect says that a company’s assets are subject to the
claims of debt holders and equity holders(owners).
The accounting equation is the basis of double-entry book-keeping
26 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

system(복식부기제도), which means that each transaction has a dual effect. A

transaction(거래) affects either both sides of the equation by the same amount
or one side of the equation only, by both increasing and decreasing it by
identical amounts and thus netting to zero.

EXAMPLE 1-1 Accounting Equation

Zinnia Company has the following transactions in the month of January 20×1:

1. Greg Woodruff started his business, Zinnia Company, with a cash investment of
$10,000 and office equipment worth $5,000.
2. Purchased office supplies of $800 for cash.
3. Bought a laptop computer for $500 on account from Eden Digital Company.
4. Paid $400 of salary to his staff.
5. Received a bill for electricity consumed during the period in the amount of $300.
6. Earned service revenue of $2,000, of which $1,200 was received in cash and $800
is to be received later from the clients.
7. Paid $300 to Eden Digital Company.
8. Greg Woodruff, the owner, withdrew $100 from the business for personal use.
9. Received $100 on account from one of the clients in Transaction 6.
10. Office supplies on hand at month’s end are $600.

The transactions will now be analyzed. Equip, OS, AR, and AP represent respectively
Equipment, Office Supplies, Accounts Receivable, and Accounts Payable.

Transaction q Greg Woodruff started his business, Zinnia Company, with a cash investment of
$10,000 and office equipment worth $5,000.
The assets Cash(현금) and Office Equipment(비품) are increased, and Capital(자본금) is
also increased for the total investment by the owner.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$10,000 $5,000 $15,000

Transaction w Acquired office supplies for cash, $800.

The asset Office Supplies(사무용소모품) increases by $800 with a corresponding

reduction in the asset Cash. This is an example of one asset being used to acquire
another one.
 1.6 THE ACCOUNTING EQUATION 27

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$10,000 $5,000 $15,000
－800 $800
$9,200 $5,000 $800 $15,000

Transaction e Purchased a laptop computer for $500 on account from Eden Digital Company.

An asset, Office Equipment(사무용비품), is acquired on account(외상), thereby creating

a liability for future payment called Accounts Payable(외상매입금). Accounts payable is
defined as the amount owed to suppliers.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$9,200 $5,000 $800 $15,000
500 $500
$9,200 $5,500 $800 $500 $15,000

Transaction r Paid $400 of salary.

Cash and capital are both reduced because of the salary expense(급여). Equity is
reduced because expenses of the firm decrease the equity of the owner.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$9,200 $5,500 $800 $500 $15,000
－400 －400
$8,800 $5,500 $800 $500 $14,600

Transaction t Received an electricity bill for $300(not paid).

Liabilities are increased by $300 since the business owes the payment for electricity
consumed. Equity is reduced for the expense.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$8,800 $5,500 $800 $500 $14,600
300 －300
$8,800 $5,500 $800 $800 $14,300
28 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

Transaction y Earned service revenue of $2,000, of which $1,200 was received in cash and
$800 is to be received later from the clients.
Cash increases by $1,200 and the account Accounts Receivable(외상매출금)(amounts
owed to the business by the clients) is created. Service revenue(용역수익) is revenue to
the firm and hence increases the owner’s equity. Thus, equity is increased by $2,000.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$8,800 $5,500 $800 $800 $14,300
1,200 $800 2,000
$10,000 $5,500 $800 $800 $800 $16,300

Transaction u Paid $300 to Eden Digital Company(in partial payment of the amount owed to
Eden Digital Company).
The payment lowers the asset Cash and reduces the liability Accounts Payable.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$10,000 $5,500 $800 $800 $800 $16,300
－300 －300
$9,700 $5,500 $800 $800 $500 $16,300

Transaction i Greg Woodruff, the owner, withdrew $100 for personal use.
Cash is reduced and so is the owner’s equity. The personal withdrawal is a
disinvestment in the business and hence reduces owner’s equity. Personal withdrawal
of money from the business is not related to running the business. Therefore, it is
not an expense of the company.

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$9,700 $5,500 $800 $800 $500 $16,300
－ 100 － 100
$9,600 $5,500 $800 $800 $500 $16,200

Transaction o Received $100 from one of the clients.

This increases Cash and reduces Accounts Receivable since the client now owes the
firm less money. One asset is being substituted for another one.
 1.6 THE ACCOUNTING EQUATION 29

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$9,600 $5,500 $800 $800 $500 $16,200
100 －100
$9,700 $5,500 $800 $700 $500 $16,200

Transaction p Office supplies on hand(determined by the count of supplies) at month s end ’

are $600.
Since the amount of office supplies originally acquired was $800 and $600 is left on
hand, the firm must have used $200 of supplies during the period. This reduces the
asset Office Supplies and correspondingly reduces owner’s equity. The supplies used
up represent Office Supplies Expense(사무용소모품비).

A ＝ L ＋ E
Cash Equip OS AR AP Capital
$9,700 $5,500 $800 $700 $500 $16,200
－200 －200
$9,700 $5,500 $600 $700 $500 $16,000

From the change in owner’s equity, we can determine the firm’s net income, which is
equal to revenues less expenses.

Zinnia Company
Income Statement
For the Month of January 20×1
Service Revenue $2,000
Less: Expenses
　 Salary Expense $400
　Utilities Expense 300
　Office Supplies Expense 200
　　Total Expenses 900
Net Income $1,100

As mentioned earlier, the Withdrawal(Drawing) account(인출금계정) is not an expense since it

was not necessary to generate service revenue. An increase in equity resulting from
investments by owners is not a revenue. For the same reason, a decrease in equity resulting
from withdrawals by owners is not an expense.
30 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

CHAPTER 1
Multiple Choice Questions

1.1 Financial accounting:

a Provides information primarily for external decision makers.
b Provides information primarily for a company’s employees.
c Provides information primarily for the use of managers of the company.
d Is primarily used to compute a company’s tax obligation.

1.2 The accounting equation is defined as:

a ＝ ＋
Assets Liabilities Shareholders’ Equity.
b Assets＝Liabilities－Shareholders’ Equity.
c Net Income＝Revenues－Expenses.
d Liabilities＋Revenues＝Assets.

1.3 The form of business organization that is legally separate from its owners is a:
a Partnership.
b Sole proprietorship.
c Corporation.
d Separation entity.

1.4 The accounts which represent the resources of the company are called:
a Liabilities.
b Revenues.
c Expenses.
d Assets.
 Multiple Choice Questions 31

1.5 Net income can best be described as:

a Net cash received by a company during the year.
b Revenues minus expenses.
c The amount of profits retained in a company for the year.
d Resources owned by a company.

1.6 The costs associated with producing revenues are referred to as:
a Dividends.
b Assets.
c Liabilities.
d Expenses.

1.7 If accounting information is considered to have faithful representation, then which of

the following is true?
a The information represents to users what it claims to represent.
b The information follows conservatism principles and is also material.
c The information is considered pertinent to or affects decisions.
d The information will have predictive value, feedback value, and is timely.

1.8 For accounting information to be relevant, it must have which of the following
characteristics?
a Predictive value or confirmatory value
b Large in amount and timely
c Comparability or consistency
d Freedom from material error, neutrality, or completeness

1.9 Primary qualitative characteristics of accounting information are:

a Relevance and comparability.
b Comparability and consistency.
c Relevance and faithful representation.
d Faithful representation and consistency.
32 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

1.10 Enhancing qualitative characteristics of accounting information include:

a Relevance and understandability.
b Comparability and consistency.
c Relevance and faithful representation.
d Cost effectiveness and materiality.
 Exercises 33

CHAPTER 1
Exercises

1.1 Effect of transactions on assets

＝＋；decrease＝－；
For each of the following transactions, show the effect(increase
＝
no effect 0) on assets.
＋, －, 0
a Owner withdrew cash for personal use.
b Purchased land on credit.
c Made a cash sale.
d Purchased a delivery truck for cash.
e Paid a telephone bill.
f Paid an account payable.
g Sold merchandise on account.
h Discussed plans with the bank for a future loan.

1.2 Accounting equation (1)

Write the missing amount for each of the following cases based on the accounting
equation:
Assets Liabilities Equity
a $4,000 $2,500 $ ?
b 12,800 ? 5,700
c ? 2,800 3,900
d 5,560 ? 2,820
e 57,000 28,000 ?
34 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

1.3 Accounting equation (2)

Compute the missing amount for each of the following cases based on the accounting
equation:
A B C
Cash $ 5,970 $5,500 $8,000
Accounts Receivable 15,500 30,000 13,000
Office Supplies 2,700 5,000 2,500
Office Equipment 30,000 12,000
Land 14,000 2,500 10,000
Accounts Payable 5,000 2,000
Capital 49,000 57,500

1.4 Accounting equation (3)

The liabilities of a company increased by $35,000 during a month and the owner s ’
equity decreased by $21,000 during that same month.

Required:
How much did assets change during the month?

1.5 Accounting equation (4)

Below is statement of financial position information for three independent situations.
Calculate the answer to each.

a A company reports total assets of $2,500 and total liabilities of $900. What is the
amount of shareholders’ equity?
b A company reports total liabilities of $2,400 and shareholders’ equity of $1,100.
What is the amount of total assets?
c A company reports total assets of $2,800 and total shareholders’ equity of $800.
What is the amount of total liabilities?
 Exercises 35

1.6 Accounting equation (5)

Below is statement of financial position information for two independent situations.
Calculate the answer to each.

a A company reports an increase in assets of $1,700 and an increase in liabilities

of $400. What is the amount of the change in shareholders’ equity?
b A company reports an increase in liabilities of $500 and a decrease in
shareholders’ equity of $800. What is the amount of the change in total assets?

1.7 Business activities (1)

Below are typical transactions for a company.

Transactions
a Purchase office building
b Pay building insurance premium
c Pay property taxes to the local government
d Provide services to customers
e Borrow money from the bank
f Pay salaries to employees
g Sell equipment used in operations
h Sell ordinary shares to shareholders

Required:
Indicate whether each transaction is classified as an operating, investing, or financing
activity.

1.8 Business activities (2)

Indicate whether a company would classify the transaction as financing, investing, or
operating.

Transactions
a Receive cash from investors
b Pay rent for the current period
c Pay cash to shareholders
d Purchase office equipment
e Provide services to customers
36 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

1.9 Effect of transactions on accounting equation (1)

Charles Pryor invested his savings in a small laundry shop. Record the transactions
listed below in the form provided; then total and prove the results.

a Opened the shop by investing $15,000 in cash.

b Bought $1,500 of supplies on account from Woodchuck Company.
c Bought cleaning equipment for $8,500 cash.
d Received cash for cleaning services, $1,550.
e Paid salaries and other expenses of $450.
f Bought additional $2,500 of supplies from Woodchuck Company; paid $1,500
cash, remainder on account.
g Charles Pryor withdrew $500 for personal use.

Assets ＝ Liabilities ＋ Equity

Cash ＋ Supplies ＋ Equipment ＝ Accounts

Payable
＋ C. Pryor,
Capital
a

Balance
b

Balance
c

Balance
d

Balance
e

Balance
f

Balance
g

Balance
 Exercises 37

1.10 Effect of transactions on accounting equation (2)

Analyze the transactions of a business described below and indicate their effect on
＋
the accounting equation. Use a plus sign( ) to indicate an increase and a minus
－
sign( ) to indicate a decrease.
Assets ＝ Liabilities ＋ Equity
a Received cash for services rendered.
b Purchased office equipment on credit.
c Paid employees’ salaries.
d Received cash from customer in payment
of accounts receivable.
e Paid a telephone bill for the month.
f Paid for office equipment purchased in
transaction b .
g Purchased inventory on credit.
h Paid dividends to shareholders.
i Obtained a loan from the bank.
j Billed customers for services rendered.

1.11 Effect of transactions on accounts

Following are transactions of Grackle Inc., a new company, during the month of
January 20×2:

a Issued 10,000 shares of ordinary share for $15,000 cash.

b Purchased land for $12,000, signing a note payable for the full amount.
c Purchased office equipment for $1,200 cash.
d Received cash of $14,000 for services provided to customers during the month.
e Purchased $300 of office supplies on account.
f Paid employees $10,000 for their first month’s salaries.

Required:
1. What is the balance of Grackle’s Cash account following these six transactions?
2. What is the total amount of Grackle’s liabilities following these six transactions?
38 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

1.12 Qualitative characteristics

Match each qualitative characteristic with its definition.

Qualitative characteristics
a Completeness
b Neutrality
c Verifiability
d Confirmatory value
e Timeliness
f Predictive value

Definitions
1. ＿＿＿ Information provides feedback on past activities.
2. ＿＿＿ All information necessary to describe an item is reported.
3. ＿＿＿ Information is presented in time to make useful decisions.
4. ＿＿＿ Measurements that independent parties would agree upon.
5. ＿＿＿ Information that does not bias the decision maker.
6. ＿＿＿ Information is useful in helping to forecast future outcomes.
 ACCOUNTING TERMINOLOGY 39

ACCOUNTING TERMINOLOGY IN CHAPTER 1

a period of time 일정기간 debt certificate 채무증서

a specific point in time 특정시점 double-entry bookkeeping system
accounting equation 회계등식 복식부기제도
accounting information 회계정보 economic decisions 경제의사결정
accounting standards 회계기준 economic entity 경제실체
accounts payable 외상매입금 economic phenomena 경제적 현상
accounts receivable 외상매출금 employees 종업원
accrued liabilities 미지급부채 enhancing qualitative characteristics
administrative expenses 관리비 보강적 질적특성
assets 자산 equity certificate 지분증서
auditing 회계감사 equity interest 지분
bond market 사채시장 excise tax 내국세, 소비세
bonds 사채 expense 비용
business entity 기업실체 faithful representation 충실한 표현
business events 사업상의 사건 financial accounting 재무회계
business transactions 사업상의 거래 financial information 재무정보
capital 자본금 financial position 재무상태
capital providers 자본제공자 financial statement users 재무제표이용자
certified public accountant 공인회계사 financial statements 재무제표
comparability 비교가능성 financing activities 재무활동
completeness 완전성 five major categories of accounts
confirmatory value 확인가치 계정의 5대 범주
corporate income tax 법인세 free from error 무오류
corporation 주식회사 fundamental qualitative characteristics
cost accounting 원가회계 근본적 질적특성
cost of goods sold 매출원가 general public 일반대중
creditors 채권자 general purpose financial statements
customers 고객 일반목적재무제표
40 CHAPTER 1 INTRODUCTION TO FINANCIAL ACCOUNTING

going concern 계속기업 public accounting 공공회계

goods 재화 qualitative characteristics 질적특성
governmental accounting 정부회계 regulatory agencies 감독기관
income statement 손익계산서 relevance 목적적합성
income taxes payable 미지급법인세 rent expense 임차료
information-providing process 정보제공과정 rent revenue 임대수익
interest revenue 이자수익 reporting entity 보고실체
inventory 재고자산 retail firm 소매회사
investing activities 투자활동 revenue 수익
investors 투자자 salary expense 급여
liability 부채 sales revenue 매출수익, 매출액
limited liability 유한책임 securities 증권
listed firm 상장회사 security exchanges 증권거래소
managerial accounting 관리회계 selling expenses 판매비
managers 경영자 service revenue 용역수익
manufacturing firm 제조회사 services 용역
maturity 만기 share 주식
municipal taxes 지방세 shareholders 주주
net income 순이익 sole proprietorship 개인기업
neutrality 중립성 stakeholders 이해관계자
not-for-profit organization 비영리조직 standard costs 표준원가
office equipment 사무용비품 statement of cash flows 현금흐름표
office supplies 사무용소모품 statement of financial position 재무상태표
office supplies expense 사무용소모품비 stock 주식
operating activities 영업활동 stock exchange 주식시장
operating performance 영업성과 suppliers 납품업자
owners 소유주 tax authority 과세당국
’
owners equity 소유주지분 taxable income 과세소득
partnership 파트너십 timeliness 적시성
performance evaluation 성과평가 trade associations 산업연합회
predictive value 예측가치 understandability 이해가능성
prepaid expenses 선급비용 unlimited liability 무한책임
prescribed rules 감독규범 value-added tax 부가가치세
product warranty 제품보증 wage 임금
profit 이익