Accounting in Business

Chapter 1

Wild, Shaw, and Chiappetta

Financial & Managerial Accounting
7th Edition

©McGraw-Hill Education.  All rights reserved. Authorized only for instructor use in the classroom.  
No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Chapter 1 Learning Objectives
CONCEPTUAL
C1 Explain the purpose and importance of accounting.
C2 Identify users and uses of, and opportunities in, accounting.
C3 Explain why ethics are crucial to accounting.
C4 Explain generally accepted accounting principles and define and apply several accounting
principles.
C5 Appendix 1B Identify and describe the three major activities of organizations.

ANALYTICAL
A1 Define and interpret the accounting equation and each of its components.
A2 Compute and interpret return on assets.
A3 Appendix 1A Explain the relation between return and risk.

PROCEDURAL
P1 Analyze business transactions using the accounting equation.
P2 Identify and prepare basic financial statements and explain how they interrelate.

© McGraw-Hill Education  2
 Learning Objective

C1:
Explain the purpose and
importance of accounting.

© McGraw-Hill Education  3
 1-4

Importance of Accounting Exhibit

1.1

For example, the sale Keep a chronological Prepare reports such as

by Apple of an iPhone. log of transactions. financial statements.

Accounting is an information and measurement system that identifies,

records, and communicates relevant, reliable, and comparable
information about an organization’s business activities.
© McGraw-Hill Education  4
Learning Objective C1: Explain the purpose and importance of accounting.
 Learning Objective

C2:
Identify users and uses of, and
opportunities in, accounting.

© McGraw-Hill Education  5
 1-6

Users of Financial Information Exhibit

1.2
Accounting is called the language of business because all organizations
set up an accounting information system to communicate data to help
people make better decisions. Accounting serves many users who can
be divided into two groups: external users and internal users.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education  6
 1-7

Opportunities in Accounting Exhibit

1.3

Accounting information is in all aspects of our lives. When

we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.

Learning Objective C2: Identify users and uses of, and opportunities in, accounting. © McGraw-Hill Education  7
 NEED-TO-KNOW 1-1
Identify the following users of accounting information as either an (a) external or (b) internal user.

Regulator a) External user

CEO b) Internal user
Shareholder a) External user
Controller b) Internal user
Executive Employee b) Internal user
External Auditor a) External user
Production Manager b) Internal user
Nonexecutive Employee a) External user

External users of accounting information are NOT directly involved in running the organization.

Internal users of accounting information ARE directly involved in managing and operating an organization.

Learning Objective C1: Explain the purpose and importance of accounting.

© McGraw-Hill Education  8
Learning Objective C2: Identify users and uses of, and opportunities in, accounting.
 Learning Objective

C3:
Explain why ethics
are crucial to accounting.

© McGraw-Hill Education  9
 1 - 10

Ethics – A Key Concept Exhibit

1.6
The goal of accounting is to provide useful information for
decisions. For information to be useful, it must be trusted.
This demands ethics in accounting. Ethics are beliefs that
distinguish right from wrong. They are accepted standards of
good and bad behavior.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education  10
 1 - 11

Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.

Envision a way to commit Fails to see the criminal

fraud with a low perceived nature of the fraud or
risk of getting caught justifies the action

Must have some pressure to

commit fraud, like unpaid bills
© McGraw-Hill Education  11
Learning Objective C3: Explain why ethics are crucial to accounting.
 1 - 12

Sarbanes–Oxley (SOX)
Congress passed the Sarbanes–Oxley Act to help curb financial abuses at
companies that issue their stock to the public. SOX requires that these public
companies apply both accounting oversight and stringent internal controls.
The desired results include more transparency, accountability, and
truthfulness in reporting transactions.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education  12
 1 - 13

Dodd-Frank Wall Street Reform and Consumer Protection Act

This act was designed to:

1. promote accountability and transparency in the
financial system,
2. put an end to the notion of “too big to fail,”
3. protect the taxpayer by ending bailouts, and
4. protect consumers from abusive financial services.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education  13
 Learning Objective
C4:
Explain generally accepted
accounting principles and
define and apply several
accounting principles.

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 1 - 15

Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP aims
to make information relevant, reliable, and comparable.

Reliable information is
trusted by users.

Relevant information Comparable information

affects decisions is helpful in contrasting
of users. organizations.

15
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 1 - 16

International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.
International Accounting International Financial
Standards Board (IASB) Reporting Standards (IFRS)

An independent group Identify preferred accounting

(consisting of individuals practices
from many countries), issues
International Financial
Reporting Standards (IFRS)

Differences between U.S. GAAP and IFRS are decreasing as the

FASB and IASB pursue a convergence process aimed to achieve a
single set of accounting standards for global use.

16
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles. © McGraw-Hill Education 
 1 - 17

Conceptual Framework

17
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 1 - 18

Principles and Assumptions of Accounting

Exhibit

1.7

General principles are the basic Specific principles are detailed rules
assumptions, concepts, and used in reporting business
guidelines for preparing financial transactions and events. Specific
statements. General principles stem principles arise more often from the
from long-used accounting practices. rulings of authoritative groups.

18
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 1 - 19

Accounting Principles

Measurement Principle Revenue Recognition Principle

(or Cost Principle) 1. Recognize revenue when it is earned.
Accounting information is based on 2. Proceeds need not be in cash.
actual cost. Actual cost is 3. Measure revenue by cash received
considered objective. plus cash value of items received.

Expense Recognition Principle

Full Disclosure Principle
(or Matching Principle) A company is required to report the details
A company must record its expenses
behind financial statements that would
incurred to generate the revenue
impact users’ decisions.
reported.

19
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 1 - 20

Accounting Assumptions
Going-Concern Assumption
Monetary Unit Assumption
Reflects assumption that the
Express transactions and events in
business will continue operating
monetary, or money, units.
instead of being closed or sold.

Business Entity Assumption

A business is accounted for Time Period Assumption
separately from other business Presumes that the life of a company
entities, including its owner. can be divided into time periods,
such as months and years.

20
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 1 - 21

Proprietorship, Partnership,
Exhibit
and Corporation
1.8
Here are some of the major attributes of proprietorships, partnerships,
and corporations:

21
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 Accounting Constraints
Materiality
Cost-benefit
Only information that would
Only information with benefits of
influence the decisions of a
disclosure greater than their cost
reasonable person need be
need be disclosed.
disclosed.

22
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
© McGraw-Hill Education 
 NEED-TO-KNOW 1-2 Part 1
Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.

Materiality
Measurement
Business entity
Going concern
Expense recognition
Time period
Full disclosure
Revenue recognition

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education 
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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW 1-2 Part 1
Principles: Govern the amount and/or timing of information to be reported in financial statements.

Measurement principle Also called the cost principle

Cost is measured on a cash or equal-to-cash basis.
Governs valuation of assets and liabilities on the balance sheet.
Revenue recognition principle Governs the timing of revenues recognized on the income
statement.
Revenue is recognized when earned.
Expense recognition principle Also called the matching principle
Governs the timing of expenses reported on the income
statement.
Expenses are recognized in the same time period as the
revenues they help generate.

Full disclosure principle A company must report the details behind financial statements
that would impact users' decisions.
Disclosures are often in the footnotes to the financial
statements.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education 
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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW 1-2 Part 1
Assumptions: Generally related to the financial statement headings.

Going concern assumption Presumption that the business will continue operating instead of
being closed or sold.
Monetary unit assumption We can express transactions and events in monetary units.
(i.e., Dollars, Pesos, Euros)
Time period assumption Presumes that the life of a company can be divided into time
periods, and that useful reports can be prepared for those
periods.
Business entity assumption A business is accounted for separately from other business
entities, including its owner(s).

Accounting constraints: Reasonableness of information to be reported.

Materiality Only information that would influence the decisions of a

reasonable person needs to be disclosed.
Materiality is a function of the nature of the item and/or dollar amount.

Benefits exceed cost The benefits of the information disclosed must be greater than
the costs of providing the information.

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education 
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Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW Part 1 Solution
Identify the following terms/phrases as either an accounting (a) principle, (b) assumption, or (c) constraint.

Materiality c) Constraint
Measurement a) Principle
Business Entity b) Assumption
Going Concern b) Assumption
Expense Recognition a) Principle
Time Period b) Assumption
Full Disclosure a) Principle
Revenue Recognition a) Principle

Learning Objective C3: Explain why ethics are crucial to accounting.

© McGraw-Hill Education 
26
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 NEED-TO-KNOW 1-2 Part 2
Complete the following table with either a yes or a no regarding the attributes of a partnership and a corporation.

Attribute Present Partnership Corporation

Business taxed no yes
Limited liability no yes
Legal entity no yes
Unlimited life no yes

Learning Objective C3: Explain why ethics are crucial to accounting. © McGraw-Hill Education 
27
Learning Objective C4: Explain generally accepted accounting principles and define and apply several accounting principles.
 Learning Objective

A1:
Define and interpret the
accounting equation and each
of its components.

© McGraw-Hill Education 
28
 1 - 29

Transaction Analysis and the Accounting

Equation
The Accounting Equation

Assets = Liabilities + Equity

Expanded Accounting Equation:

Learning Objective A1: Define and interpret the accounting equation and each of its components.
Net Income 29
© McGraw-Hill Education 
 NEED-TO-KNOW 1-3

Use the accounting equation to compute the missing financial statement amounts.

Assets = Liabilities + Equity

Bose $150 = $30 + $120
Vogue $400 = $100 + $300

Use the expanded accounting equation to compute the missing financial statement amounts.

+Common - Dividends + Revenues - Expenses

Assets = Liabilities + Equity
Stock
Tesla $200 $80 $120 $100 $0 $60 ($40)
YouTube $400 $160 $240 $220 ($10) $120 ($90)

© McGraw-Hill Education 
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Learning Objective A1: Define and interpret the accounting equation and each of its components.
 Learning Objective

P1:
Analyze business transactions
using the accounting equation.

© McGraw-Hill Education 
31
 Transaction 1:
Chas Taylor invests $30,000 cash to
start a company.

The accounts involved are:

(1) Cash (asset)
(2) Common Stock (equity)

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Chas Taylor invests $30,000 cash to start
the business, Fast Forward.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000

$ 30,000 $ - $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 2:
Company purchased supplies paying
$2,500 cash.

The accounts involved are:

(1) Cash (asset)
(2) Supplies (asset)

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Company purchased supplies paying
$2,500 cash.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
Accounting Equation
must remain in
balance!!
$ 27,500 $ 2,500 $ - $ - $ - $ 30,000

$ 30,000 = $ 30,000

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 3:
Purchased equipment for $26,000 cash.

The accounts involved are:

(1) Cash (asset)
(2) Equipment (asset)

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Purchased equipment for $26,000 cash.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000 Accounting Equation
still remains in
balance!!
$ 1,500 $ 2,500 $ 26,000 $ - $ - $ 30,000

$ 30,000 = $ 30,000

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 4:
Purchased supplies of $7,100 on credit.

The accounts involved are:

(1) Supplies (asset)
(2) Accounts Payable (liability)

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Purchased Supplies of $7,100 on credit.

Assets = Liabilities + Equity

Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock
(1) $ 30,000 $ 30,000
(2) (2,500) $ 2,500
(3) (26,000) $ 26,000 Accounting Equation still
remains in balance!!
(4) 7,100 $ 7,100

$ 1,500 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000

$ 37,100 = $ 37,100

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Transaction Analysis

Now, let’s look at transactions involving

revenues, expenses and dividends.

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transaction 5:
Provided consulting services to a customer
and received $4,200 cash right away.

The accounts involved are:

(1) Cash (asset)
(2) Revenues (equity)

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Accounting Equation:
Provided consulting services to a customer
and received $4,200 cash right away.

Assets = Liabilities + Equity

Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock Revenue
Bal. $ 1,500 $ 9,600 $ 26,000 $ 7,100 $ 30,000
(5) 4,200 $ 4,200

$ 5,700 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200

$ 41,300 = $ 41,300

© McGraw-Hill Education 
Learning Objective P1: Analyze business transactions using the accounting equation.
 Transactions 6 and 7:
Paid rent of $1,000 and
salaries of $700 to employees.

The accounts involved are:

(1) Cash (asset)
(2) Rent expense (equity)
(3) Salaries expense (equity)
Remember that the balance
in the Expense accounts But, total Equity
actually increase. decreases, because
expenses reduce equity.

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Accounting Equation:
Paid rent of $1,000 and
salaries of $700 to employees.
Assets = Liabilities + Equity
Accounts Notes Common
Cash Supplies Equipment Payable Payable Stock Revenue Expenses
Bal. $ 5,700 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200
(6) (1,000) (1,000)
(7) (700) $ (700)

$ 4,000 $ 9,600 $ 26,000 $ 7,100 $ - $ 30,000 $ 4,200 $ (1,700)

$ 39,600 = $ 39,600

Remember that expenses decrease equity.

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Transaction 8:
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

The accounts involved are:

(1) Accounts receivable (asset)
(2) Consulting Revenues (equity)
(3) Rental Revenue (equity)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Accounting Equation:
Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.

Assets = Liabilities + Equity

Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Revenue Expenses
Bal. $ 4,000 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(8) 1,900 $ 1,600
300

$ 4,000 $ 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700)

$ 41,500 = $ 41,500

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Transaction 9:
Client in transaction 8 pays $1,900 for consulting
services.

The accounts involved are:

(1) Cash (asset)
(2) Accounts receivable (asset)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Accounting Equation:
Client in transaction 8 pays $1,900 for consulting services.

Assets = Liabilities + Equity

Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Revenue Expenses
Bal. $ 4,000 1,900 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(9) 1,900 (1,900) $ 1,600
300

$ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 6,100 $ (1,700)

$ 41,500 = $ 41,500

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Transaction 10:
FastForward pays $900 as partial payment for
supplies purchased in transaction 4.

The accounts involved are:

(1) Cash (asset)
(2) Accounts payable (liability)

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Accounting Equation:
FastForward pays $900 as partial payment for supplies
purchased in transaction 4.
Assets = Liabilities + Equity
Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Revenue Expenses
Bal. $ 5,900 0 $ 9,600 $ 26,000 $ 7,100 $ 30,000 $ 4,200 (1,700)
(10) (900) (900) $ 1,600
300

$ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 6,100 $ (1,700)

$ 40,600 = $ 40,600

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Transaction 11:
Dividends of $200 are paid to shareholders.

The accounts involved are:

(1) Cash (asset)
(2) Dividends (equity)
But, total Equity
Remember that the decreases because
Dividend account actually dividends cause
increases (just like our equity to go down !!
Expenses account . . . )

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 Accounting Equation:
Dividends of $200 are paid to shareholders.

Assets = Liabilities + Equity

Accounts Accounts Common
Cash Receivable Supplies Equipment Payable Stock Dividends Revenue Expenses
Bal. $ 5,000 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ 4,200 (1,700)
(11) (200) (200) $ 1,600
300

$ 4,800 0 $ 9,600 $ 26,000 $ 6,200 $ 30,000 $ (200) $ 6,100 $ (1,700)

$ 40,400 = $ 40,400

Learning Objective P1: Analyze business transactions using the accounting equation. © McGraw-Hill Education 
 NEED-TO-KNOW 1-4
Assume Tata Company began operations on January 1 and completed the following transactions during its first
month of operations.

Jan. 1 Jamsetji invested $4,000 cash in the Tata company in exchange for its common stock.
Jan. 5 The company purchased $2,000 of equipment on credit.
Jan. 14 The company provided $540 of services for a client on credit.
Jan. 21 The company paid $250 cash for an employee’s salary

Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment;
Accounts Payable; Common Stock; Dividends; Revenues; and Expenses.

Assets = Liabilities + Equity

Cash Accounts Equipment Accounts + Common - Dividends + Revenues- Expenses
Receivable Payable Stock
Jan. 1 $4,000 $4,000
Jan. 5 $2,000 $2,000
Jan. 14 $540 $540
Jan. 21 ($250) ($250)
$3,750 $540 $2,000 $2,000 $4,000 $0 $540 ($250)

Total Assets $6,290

Total Liabilities 2,000
Total Equity $4,290

© McGraw-Hill Education  53
Learning Objective P1: Analyze business transactions using the accounting equation.
 Learning Objective

P2:
Identify and prepare basic financial
statements and explain how they
interrelate.

© McGraw-Hill Education  54
 1 - 55

Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
2. Statement of retained earnings— explains changes in
equity from net income (or loss) and from any dividends
over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a
point in time.
4. Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.

© McGraw-Hill Education  55
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 1 - 56

Exhibit 1.10
Financial Statements
and Their Links

(cont. next slide)

© McGraw-Hill Education  56
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 1 - 57

Exhibit 1.10
Financial Statements
and Their Links

© McGraw-Hill Education  57
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 NEED-TO-KNOW 1-5
Prepare the (a) income statement, (b) statement of retained earnings, and (c) balance sheet, for Apple using the
following condensed data from its fiscal year ended September 26, 20X2.
Accounts payable $35,490 Investments and other assets $230,039
Other liabilities 135,634 Land and equipment 22,471
Cost of sales (expense) 140,089 Selling and other expense 40,232
Cash 21,120 Accounts receivable 16,849
Retained earnings, September 29, 20X1 87,152 Net income 53,394
Dividends in fiscal year 20X2 48,262 Retained earnings, September 26, 20X2 92,284
Revenues 233,715 Common stock 27,071

Income Statement Statement of Retained Earnings Balance Sheet

Assets Detail of Assets
Liabilities Detail of Liabilities
Equity:
+ Retained earnings Beginning Retained earnings
- Dividends - Dividends Ending Retained earnings
+ Revenues Detail of Revenues ± Net income (loss)
- Expenses Detail of Expenses Ending Retained earnings
Net income (loss)

© McGraw-Hill Education  58
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
 NEED-TO-KNOW 1-5
Accounts payable $35,490 Investments and other assets $230,039
Other liabilities 135,634 Land and equipment 22,471
Cost of sales (expense) 140,089 Selling and other expense 40,232
Cash 21,120 Accounts receivable 16,849
Retained earnings, September 26, 20X1 87,152 Net income 53,394
Dividends in fiscal year 20X2 48,262 Retained earnings, September 28, 20X2 92,284
Revenues 233,715 Common stock 27,071

APPLE APPLE
Income Statement Statement of Retained Earnings
For Fiscal Year Ended September 26, 20X2 For Fiscal Year Ended September 26, 20X2
Revenues $233,715 Retained earnings, September 29, 20X1 $ 87,152
Expenses Plus: Net income 53,394
Cost of sales (expense) $140,089 Less: Dividends 48,262
Selling and other expense 40,232 Retained earnings, September 28, 20X2 $ 92,284
Total expenses 180,321
Net income $53,394

APPLE
Balance Sheet
September 26, 20X2
Assets Liabilities
Cash $21,120 Accounts payable $35,490
Accounts receivable 16,849 Other liabilities 135,634
Land and equipment 22,471 Total liabilities 171,124
Investments and other assets 230,039 Equity
Common stock 27,071
Retained earnings 92,284
Total assets $290,479 Total equity 119,355
Total liabilities and equity $290,479 59
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
© McGraw-Hill Education 
 1 - 60

Sustainability and Accounting

Sustainability Accounting Standards Board (SASB)

 Nonprofit entity engaged in creating and disseminating

sustainability accounting standards for companies.
 Sustainability refers to environmental, social and
governance.
 Environmental aspects include programs to reduce
pollution and support green activities.
 Standards intended to complement financial accounting
standards.
 SASB created their own Conceptual Framework.

© McGraw-Hill Education  60
 Learning Objective

A2:
Compute and interpret return
on assets.

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 1 - 62

Return on Assets
Return on assets (ROA) is stated in ratio form as net
income divided by the average total assets invested.

Net income
Return on assets =
Average total assets

© McGraw-Hill Education  62
Learning Objective A2: Compute and interpret return on assets.
 Learning Objective

A3 (Appendix 1A):
Explain the relation
between return and risk.

© McGraw-Hill Education  63
 1 - 64

Appendix 1A Exhibit
Return and Risk Analysis 1A.1
Many different Risk is the uncertainty
returns may be about the return we will
reported. earn.

The lower the risk, the lower our expected return.

ROA
Interest return on
savings accounts.
Interest return on
corporate bonds.

© McGraw-Hill Education  64
Learning Objective A3: Explain the relation between return and risk.
 1 - 65

Learning Objective

C5 (Appendix 1B):
Identify and describe the
three major activities of
organizations.

© McGraw-Hill Education  65
 1 - 66

Appendix 1B
Business Activities and the Accounting Equation

Three major types of business activities:

Financing activities provide the means organizations use to pay

for resources such as land, buildings, and equipment to carry
out plans.

 Owner financing—resources contributed by the owner

along with any income the owner leaves in the organization.
 Nonowner financing—resources contributed by creditors
(lenders).
 Financial management —the task of planning how to obtain
these resources and to set the right mix between owner
and creditor financing.

© McGraw-Hill Education  66
Learning Objective C5: Identify and describe the three major activities of organizations.
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Appendix 1B
Business Activities and the Accounting Equation

Three major types of business activities:

Investing activities are the acquiring and disposing of resources

(assets) that an organization uses to acquire and sell its
products or services.

 Asset management—determining the amount and type of

assets for operations.
 Assets—invested amounts.
 Liabilities—creditors’ claims.
 Equity—owner’s claim.

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Learning Objective C5: Identify and describe the three major activities of organizations.
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Appendix 1B
Business Activities and the Accounting Equation

Three major types of business activities:

Operating activities involve using resources to research,

develop, purchase, produce, distribute, and market products
and services.

 Strategic management —the process of determining the

right mix of operating activities for the type of organization,
its plans, and its market.

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Learning Objective C5: Identify and describe the three major activities of organizations.
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Appendix 1B
Business Activities and the Accounting Equation

Exhibit
Activities of Organizations
1B.1

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Learning Objective C5: Identify and describe the three major activities of organizations.
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End of Chapter 1

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