Chapter 1
1. Nature of Business and role of accountant in business
Distinguish between service, merchandising and manufacturing business (See page 2-3)
Role of accounting: As language of business
Managerial Accounting (Internal users) V.S. Financial Accounting (External users)
Private and Public accounting
Ethics: Moral principles, Sarbanes-Oxley Act of 2002, Public Company Accounting Oversight Board
(PCAOB)
2. General Accepted Accounting Principles and related concepts
Financial accounting follows GAAP. Financial Accounting Standards Board (FASB) has primary
responsibility for developing GAAP. Currently FASB and International Accounting Standards
Board(IASB) are working together for a merger of GAAP and IFRSs
Business Concept: activities of a business separate from activities of its owners, creditors or other
businesses
Cost Concept: recorded in original purchase price (debated concept)
3. Accounting Equation (Important)
Assets=Liabilities+ Owner’s Equity
Assets: resources owned by business. After being used, assets will bring future benefit to business.
Meanwhile, all or part of them will turn into expense. Examples of Assets
Liabilities: rights of creditors. Liabilities are going to bring future sacrifice from business
Owner’s equity: rights of the owners
4. Business Transactions and the Accounting Equation (Important)
See examples from Page 10-14
Pay attention to all the accounting terms such as capital, withdraw, account receivable, prepaid
expenses, account payable, revenue, fee earned, sales, rent revenue, interest revenue, expense
Pay attention to summary in the bottom of Page 13
5. Financial statements and their relationship (Important)
Income statement: summary of revenue and expense for a specific period of time
Statement of owner’s equity: summary of changes in owner’s equity that occurred during a specific
period
Balance Sheet: List of assets, liabilities and owner’s equity as of a specific date
Statement of cash flow: summary of cash receipts and cash payments for a specific period of time
Relationship between financial statements: See Exhibit 6 on Page 17 and explanation on Page 20
Be familiar with items in Balance Sheet and Income Statement (Including Statement of owner’s
equity)
Equation of Statement of Owner’s Equity=Beginning Owner’s Equity + Net Income – Withdrawals=
Ending Owner’s Equity
6. Financial Analysis and Interpretation
Ratio of Liabilities on Owner’s Equity=Total Liabilities/Total Owner’s Equity
Interpretation: