Horngren Fin13 F01

Horngren’s Accounting
Thirteenth Edition
Chapter 1
Accounting in the Business
Environment
Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Learning Objectives (1 of 2)
1.1 Explain why accounting is
important and list the
users of accounting
information
1.2 Describe the organizations
and rules that govern
accounting
1.3 Describe the accounting
equation and define
assets, liabilities, and
equity

Learning Objectives (2 of 2)
1.4 Use the accounting
equation to analyze
transactions
1.5 Prepare financial
statements
1.6 Use financial statements
and return on assets (RO
A) to evaluate business
performance

Learning Objective 1.1
Explain why accounting is
important and list the users of
accounting information

Why Is Accounting Important?
Accounting is the information system that:
• Measures business activities
• Processes the information into reports
• Communicates the results to decision makers

Exhibit F:1-1 Pathways Vision Model
This work is by The Pathways Commission. The Pathways

Vision Model: A I artwork: AA A Commons. American
Accounting Association.
Decision Makers: The Users of
Accounting Information (1 of 2)
Exhibit F:1-2 Decision Making: Financial Versus Managerial
Accounting

Decision Makers: The Users of
Accounting Information (2 of 2)
• Financial accounting provides information for external
decision makers, such as:
– Investors who own a portion of the business
– Creditors to whom the business owes money
– Taxing authorities, to whom the business owes taxes
• Managerial accounting provides information to internal
decision makers, such as:
– Managers
– Employees
– Individuals
– Businesses

Accounting Matters (1 of 2)
Types of accountants:
• Certified Public Accountants (CP As) are licensed
professional accountants who serve the general public.
• Chartered Global Management Accountants (CG M As)
have advanced knowledge in finance, operations, strategy,
and management.
• Certified Management Accountants (CM As) specialize
in accounting and financial management knowledge and
often work for a single company.

Accounting Matters (2 of 2)
• Types of accountants:
– Certified Financial Planners (CF Ps) work with
individuals to help them budget, plan for retirement,
save for education, and manage their finances.
• Accounting positions:
– Corporate or industry accounting
– Public accounting
– Financial services
– Governmental accounting

Exhibit F:1-3 Comparison of
Accounting Positions
Position Job Description Salary Range
Controllers Compile financial statements, interact with $92,000 – $207,750
auditors, and oversee regulatory reporting.
92,000 dollars to 207,750 dollars.
Financial analysts Review financial data and help to explain

$42,500 – $201,250
the story behind the numbers.
Business systems analysts Use accounting knowledge to create $42,500 – $185,000

computer systems.
Tax accountants Help companies navigate tax laws. $39,500 – $212,250

39, 500 dollars to 212, 250 dollars.
Auditors Perform reviews of companies to ensure

$39,500 – $208,750
compliance to rules and regulations.
Cost accountants Typically work in a manufacturing $42,000 – $143,750

business. Help analyze accounting data.
Accounting Record financial transactions and help

clerks/Bookkeepers prepare financial records.
$28,250 – $65,750
Based on Robert Half’s 2019 Salary Guide https://www.roberthalf.com/salary-guide

Data Analytics in Accounting
• Accountants need to understand how technology is used to
process financial information
• Accounting and finance individuals actively work with
information technology teams to develop accounting
systems.
• Artificial intelligence, cloud-based systems, and robotic
process automation are all changing the way companies
handle financial information.

Describe the organizations
and rules that govern
accounting

What Are the Organizations and Rules
That Govern Accounting? (1 of 2)
Governing organizations:
• The Financial Accounting Standards Board (FAS B)
oversees creation and governance of accounting
standards.
• The Securities and Exchange Commission (SE C)
oversees the U.S. financial markets.

Generally Accepted Accounting
Principles
• Accounting guidelines are called Generally Accepted
Accounting Principles (GAA P).
• Useful accounting information must:
– Be relevant, allowing users to make decisions
– Have faithful representation by being complete,
neutral, and free from error

The Economic Entity Assumption (1 of 3)
• An organization that stands apart as a separate economic
unit follows the economic entity assumption.
• An Economic Entity can be a:
– Sole Proprietorship
– Partnership
– Corporation
– Limited-liability company (LL C)

Exhibit F:1-4 Business Organizations
Sole Limited-Liability
Blank
Proprietorship Partnership Corporation Company (L L C)
Definition A business with a A business with A business A company in which
single owner two or more organized under each member is
owners and not state law that is a only liable for his or
organized as a separate legal her own actions
corporation entity
Number of One (called the Two or more One or more One or more (called
owners proprietor) (called partners) (called members or
stockholders) partners)
Life of the Terminates at Terminates at a Indefinite Indefinite
organization owner’s choice or partner’s choice or
death death
Personal The owner is The partners are Stockholders are Members are not
liability of the personally liable. personally liable. not personally personally Liable.
owner(s) for Liable.
the business’s
debts

[Exhibit F:1-4 Continued]
Sole Limited-Liability
Blank
Proprietorship Partnership Corporation Company (LL C)
Taxation Not separate Partnership is Separate LL C is not taxed.
taxable entities. not taxed. taxable entity. Instead members
The owner pays tax Instead Corporation pay tax on their
on the partners pay tax pays tax. share of earnings.
proprietorship’s on their share
earnings. of the earnings.
Type of Small businesses Professional From small An alternative to

business organizations of business to the partnership
physicians, large
attorneys, and multinational
accountants businesses

What Are the Organizations and Rules
That Govern Accounting? (2 of 2)
• The cost principle states that acquired assets and

services should be recorded at their actual cost (also called
historical cost).
• The going concern assumption assumes that the entity
will remain in operation for the foreseeable future.
• The monetary unit assumption requires that the items on
the financial statements be measured in terms of a
monetary unit.

International Financial Reporting
Standards
• International Financial Reporting Standards (I FR S) are
set of global accounting guidelines
• I FR S are published by the International Accounting
Standards Board (IAS B).
• I FR S are currently used by more than 166
nations/jurisdictions.

Ethics in Accounting and Business
• An audit is an examination of a company’s financial statements
and records.
• The Sarbanes-Oxley Act (SO X) requires companies to review
internal controls.
• The Public Company Accounting Oversight Board (PCAO B)
was established by SO X to monitor the work of independent
accountants who audit public companies.

Describe the accounting
equation and define assets,
liabilities, and equity

What Is the Accounting Equation?
The accounting equation is the basic tool of accounting,
measuring the resources of the business and the claims to
those resources.

Assets
• An asset is an economic resource that is expected to
benefit the business in the future.
• Examples:
– Cash
– Merchandise Inventory
– Furniture
– Land

Liabilities
• Liabilities are debts that are owed to creditors.
• Many liabilities have the word payable in their titles.
• Examples:
– Accounts Payable
– Notes Payable
– Salaries Payable

Equity (1 of 3)
• The owners’ claims to the assets of the business are
called equity.
– Also called owners’ equity
• Increases in equity result from owner contributions and

revenues.
– Owner contributions are referred to as owner’s
capital.
– Revenues are earnings that result from delivering
goods or services to customers.

Equity (2 of 3)
• Equity decreases with expenses and owner withdrawals.
– Expenses are the costs of selling goods or services.
– Owner’s withdrawals, or drawings, are payments of
equity (usually of cash) to the owner.

Equity (3 of 3)
• The accounting equation is expanded to show the
components of equity:
• Net income
– Revenues > Expenses
• Net loss
– Revenues < Expenses

Use the accounting equation
to analyze transactions

How Do You Analyze a Transaction?
A transaction is any event
that affects the financial
position of the business and
can be measured with faithful
representation.

Transaction Analysis for Smart Touch
Learning (1 of 9)
Transaction 1—Owner Contribution
Smart Touch Learning receives $30,000 cash from the
owner, Sheena Bright, and the business gave capital to her.
The effect of this transaction on the accounting equation is:

Learning (2 of 9)
Transaction 2—Purchase of Land for Cash
Smart Touch Learning purchases land for an office location,
paying cash of $20,000.

Learning (3 of 9)
Transaction 3—Purchase of Office Supplies on Account
Smart Touch Learning buys office supplies on account,
agreeing to pay $500 within 30 days. The liability created by
purchasing “on account” is an Accounts Payable.

Learning (4 of 9)
Transaction 4—Earning of Service Revenue for Cash
Smart Touch Learning earns service revenue by providing
training services for clients. The business collects $5,500
revenue in cash.

Learning (5 of 9)
Transaction 5—Earning of Service Revenue on Account
Smart Touch Learning performs a service for clients who do
not pay immediately. The clients promise to pay $3,000
within one month. The promise is an asset, an Accounts
Receivable.

Learning (6 of 9)
Transaction 6—Payment of Expenses with Cash
Smart Touch Learning pays $3,200 in cash expenses: $2,000
for office rent and $1,200 for employee salaries.

Learning (7 of 9)
Transaction 7—Payment on Account (Accounts Payable)
Smart Touch Learning pays $300 to the store from which it
purchased office supplies in Transaction 3.

Learning (8 of 9)
Transaction 8—Collection on Account (Accounts
Receivable)
Smart Touch Learning now collects $2,000 from the client
from Transaction 5.

Learning (9 of 9)
Transaction 9—Owner Withdrawal of Cash
Sheena Bright withdraws $5,000 cash from the business.
The effect on the accounting equation is:

Exhibit F:1-5 Analysis of Transactions,
Smart Touch Learning (1 of 2)
1. Smart Touch Learning received $30,000 cash and gave capital
to Sheena Bright, owner.
2. Paid $20,000 cash for land.
3. Bought $500 of office supplies on account.
4. Received $5,500 cash from clients for service revenue earned.
5. Performed services for clients on account, $3,000.
6. Paid cash expenses: office rent, $2,000; employee salaries,
$1,200.
7. Paid $300 on the accounts payable created in Transaction 3.
8. Collected $2,000 on the accounts receivable created in
Transaction 5.
9. Sheena Bright, owner, withdrew cash of $5,000.
Exhibit F:1-5 Analysis of Transactions,
Smart Touch Learning (2 of 2)

Prepare financial statements

How Do You Prepare Financial
Statements? (1 of 2)
Exhibit F:1-6 Financial Statements
Financial
Information Provided and Purpose How Is It Prepared?
Statement
Income Provides information about profitability for a Revenues  Expenses = Net Income or Net Loss
statement particular period for the company
Revenues minus expenses equal net income or net loss.
Statement of Shows the changes in the owner's capital account for Owner, Capital, Beginning
owner's a particular period
Line 1: Plus owner contribution
+ Owner Contribution
Line 2: Plus net income or minus net loss for the period
Line 3: Minus owner withdrawal
Line 4: equal Owner, Capital, Ending.
equity + Net Income or  Net Loss for the period

 Owner withdrawal
= Owner, Capital, Ending
Assets = Liabilities + Owner's Equity

Assets equal liabilities plus owner's equity.
Balance Provides valuable information to financial statement

sheet users about economic resources the company has
(assets) as well as debts the company owes
(liabilities), and allows decision makers to determine
their opinion about the financial position of the
company
Statement of Reports on a business’s cash receipts and cash Cash flows from operating activities
cash flows payments for a period of time Cash flows from investing activities
Cash flows from financing activities

How Do You Prepare Financial
Statements? (2 of 2)
Financial statements are business documents that are used
to communicate information needed to make business
decisions.
• Income Statement - reports the net income or net loss of
the business for a specific period.
• Statement of Owner’s Equity - shows the changes in the
owner’s capital account for a specific period.
• Balance Sheet - reports on the assets, liabilities, and
owner’s equity of the business as of a specific date.
• Statement of Cash Flows - reports on a business’s cash
receipts and cash payments for a specific period.

Exhibit F:1-7 Income Statement

Exhibit F:1-8 Statement of Owner’s
Equity

Exhibit F:1-9 Balance Sheet

Exhibit F:1-10 Statement of Cash
Flows

Use financial statements and
return on assets (RO A) to
evaluate business
performance

How Do You Use Financial Statements to
Evaluate Business Performance? (1 of 2)
• One of the many tools used to evaluate performance is

return on assets.
• Return on assets (RO A) measures how profitably a
company uses it assets.
– RO A is calculated by dividing net income by average
total assets.
Net income
Return on assets =
Average total assets
(Beginning total assets + Ending total assets)

Average total assets =
2
How Do You Use Financial Statements to
Evaluate Business Performance? (2 of 2)
On its 2018 income statement, Kohl’s reported net income of

$801 million. The corporation reported beginning total assets
(found on the balance sheet) of $13,389 million and ending
total assets of $12,469 million. Kohl’s return on assets for
2018 is (all amounts in millions):
$801
Return on assets =
 ($13,389 + $12,469) 
 
 2 
$801
=
$12,929
= 0.0620 = 6.2%

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Horngren’s Accounting

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

This work is by The Pathways Commission. The Pathways

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Financial analysts Review financial data and help to explain

Business systems analysts Use accounting knowledge to create $42,500 – $185,000

Tax accountants Help companies navigate tax laws. $39,500 – $212,250

Auditors Perform reviews of companies to ensure

Cost accountants Typically work in a manufacturing $42,000 – $143,750

Accounting Record financial transactions and help

Based on Robert Half’s 2019 Salary Guide https://www.roberthalf.com/salary-guide

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

[Exhibit F:1-4 Continued]

Type of Small businesses Professional From small An alternative to

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

• The cost principle states that acquired assets and

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Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

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• Increases in equity result from owner contributions and

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equity + Net Income or  Net Loss for the period

Assets = Liabilities + Owner's Equity

Balance Provides valuable information to financial statement

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved

Copyright © 2021 Pearson Education, Inc. All Rights Reserved