Fundamental Accounting Principles
Twenty Third Edition
Chapter 1
Accounting in
Business
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1-1
Learning Objectives (1 of 2)
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.
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1-2
Learning Objectives (2 of 2)
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.
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1-3
Learning Objective C1: Explain
the purpose and importance of
accounting.
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1-4
Importance of Accounting (1 of 2)
Learning Objective C1: Explain the Purpose and Importance of
Accounting.
• Identifying
– Select transactions and events
 For example, the sale by Apple of an iPhone.
• Recording
– Input, measure, and log
 Keep a chronological log of transactions.
• Communicating
– Prepare, analyze, and interpret
 Prepare reports such as financial statements.
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Importance of Accounting (2 of 2)
Learning Objective C1: Explain the Purpose and Importance of
Accounting.
Accounting is an information and measurement
system that identifies, records, and communicates
information about an organization’s business
activities.
Exhibit 1.1
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Learning Objective C2: Identify
users and uses of, and opportunities
in, accounting.
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1-7
Users of Financial Information
Learning Objective C2: Identify users and uses of, and opportunities
in, accounting.
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.
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1-8
Exhibit 1.2 Users of Financial Information
(1 of 3)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
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Exhibit 1.2 Users of Financial Information
(2 of 3)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
External Users
• Lenders
• Shareholders
• Governments
• Consumer groups
• External auditors
• Customers
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1-10
Exhibit 1.2 Users of Financial Information
(3 of 3)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
Internal Users
• Executives
• Managers
• Internal auditors
• Sales staff
• Budget analysts
• Controllers
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1-11
Exhibit 1.3 Opportunities in Accounting
(1 of 5)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
Financial
• Preparation
• Analysis
• Auditing
• Regulatory
• Consulting
• Planning
• Criminal investigation
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1-12
Exhibit 1.3 Opportunities in Accounting
(2 of 5)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
Managerial
• General accounting
• Cost accounting
• Budgeting
• Internal auditing
• Consulting
• Controller
• Treasurer
• Strategy
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1-13
Exhibit 1.3 Opportunities in Accounting
(3 of 5)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
Taxation
• Preparation
• Planning
• Regulatory
• Investigations
• Consulting
• Enforcement
• Legal services
• Estate plans
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1-14
Exhibit 1.3 Opportunities in Accounting
(4 of 5)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
Accounting-related
• Lenders
• Consultants
• Analysts
• Traders
• Directors
• Underwriters
• Planners
• Appraisers
• FBI investigators
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1-15
Exhibit 1.3 Opportunities in Accounting
(5 of 5)
Learning Objective C2: Identify users and uses of, and
opportunities in, accounting.
Accounting-related
• Market researchers
• Systems designers
• Merger services
• Business valuation
• Forensic accounting
• Litigation support
• Entrepreneurs
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.
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1-16
NEED-TO-KNOW 1-1 (1 of 2)
Learning Objective C1: Explain the Purpose and Importance of
Accounting.
Learning Objective C2: Identify users and uses of, and opportunities in,
accounting.
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
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NEED-TO-KNOW 1-1 (2 of 2)
Learning Objective C1: Explain the Purpose and Importance of
Accounting.
Learning Objective C2: Identify users and uses of, and opportunities in,
accounting.
• 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.
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1-18
Learning Objective C3: Explain
why ethics are crucial to
accounting.
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1-19
Ethics – A Key Concept
Learning Objective C3: Explain why ethics are crucial to accounting.
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.
Exhibit 1.6
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Fraud Triangle (1 of 2)
Learning Objective C3: Explain why ethics are crucial to accounting.
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.
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Fraud Triangle (2 of 2)
Learning Objective C3: Explain why ethics are crucial to accounting.
• Opportunity: Envision a way to commit
fraud with a low perceived risk of getting
caught
• Rationalization: Fails to see the criminal
nature of the fraud or justifies the action
• Financial Pressure: Must have some
pressure to commit fraud, like unpaid bills
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Sarbanes–Oxley (SOX) (1 of 2)
Learning Objective C3: Explain why ethics are crucial to accounting.
• 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.
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Sarbanes–Oxley (SOX) (2 of 2)
Learning Objective C3: Explain why ethics are crucial to accounting.
Company
Alleged Accounting Abuses
Tesco, Plc
Inflated revenues and income, and deferred expenses
WorldCom
Understated expenses to inflate income and hid debt
AQL Time Warner
Inflated revenues and income
Fannie Mae
Inflated income
Xerox
Inflated income
Bristol-Myers Squibb
Inflated revenues and income
Tyco
Hid debt and CEO evaded taxes
Global Crossing
Inflated revenues and income
Nortel Networks
Understated expenses to inflate income
Enron
Inflated income, hid debt, and bribed officials
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Dodd-Frank Wall Street Reform and
Consumer Protection Act
Learning Objective C3: Explain why ethics are crucial to accounting.
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.
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Learning Objective C4: Explain
generally accepted accounting
principles and define and apply
several accounting principles.
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Generally Accepted Accounting
Principles (GAAP)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
Financial accounting is governed by concepts and
rules known as generally accepted accounting
principles (GAAP). GAAP aims to make information
relevant, reliable, and comparable.
• Relevant information affects decisions of users.
• Reliable information is trusted by users.
• Comparable information is helpful in contrasting
organizations.
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1-27
International Standards (1 of 2)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
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 Standards Board (IASB)
– An independent group (consisting of individuals from
many countries), issues International Financial Reporting
Standards (IFRS)
• International Financial Reporting Standards
(IFRS)
– Identify preferred accounting practices
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International Standards (2 of 2)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
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.
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Conceptual Framework (1 of 2)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
The FASB and IASB are attempting to converge and enhance
the conceptual framework that guides standard setting. The
framework consists broadly of the following:
• Objectives—to provide information useful to investors,
creditors, and others.
• Qualitative Characteristics—to require information that is
relevant, reliable, and comparable.
• Elements—to define items that financial statements can
contain.
• Recognition and Measurement—to set criteria that an
item must meet for it to be recognized as an element; and
how to measure that element.
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Conceptual Framework (2 of 2)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
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Principles and Assumptions of
Accounting
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• General principles are the basic assumptions,
concepts, and guidelines for preparing financial
statements. General principles stem from longused accounting practices.
• Specific principles are detailed rules used in
reporting business transactions and events.
Specific principles arise more often from the
rulings of authoritative groups.
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Exhibit 1.7 Principles and Assumptions
of Accounting
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
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Accounting Principles (1 of 2)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• Measurement Principle (or Cost Principle)
– Accounting information is based on actual cost.
Actual cost is considered objective.
• Revenue Recognition Principle
1. Recognize revenue when it is earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received plus cash
value of items received.
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Accounting Principles (2 of 2)
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• Expense Recognition Principle (or
Matching Principle)
– A company must record its expenses incurred to
generate the revenue reported.
• Full Disclosure Principle
– A company is required to report the details
behind financial statements that would impact
users’ decisions.
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Accounting Assumptions
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• Going-Concern Assumption
– Reflects assumption that the business will continue
operating instead of being closed or sold.
• Monetary Unit Assumption
– Express transactions and events in monetary, or money,
units.
• Business Entity Assumption
– A business is accounted for separately from other business
entities, including its owner.
• Time Period Assumption
– Presumes that the life of a company can be divided into
time periods, such as months and years.
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Exhibit 1.8 Proprietorship, Partnership,
and Corporation
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
Here are some of the major attributes of proprietorships,
partnerships, and corporations:
Attribute Present
Proprietorship
Partnership
Corporation
One owner allowed………
Yes
no
yes
Business taxed……………
no
no
yes
Limited liability…………..
no*
no*
yes
Business entity……………
yes
yes
yes
Legal entity………………...
no
no
yes
Unlimited life……………….
no
no
yes
*Proprietorships and partnerships that are set up as LLCs
provide limited liability.
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Accounting Constraints
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• Materiality
– Only information that would influence the
decisions of a reasonable person need be
disclosed.
• Cost-benefit
– Only information with benefits of disclosure
greater than their cost need be disclosed.
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NEED-TO-KNOW 1-2 Part 1 (1 of 3)
Learning Objective C3: Explain why ethics are crucial to accounting.
Learning Objective C4: Explain generally accepted accounting principles
and define and apply several accounting principles.
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
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NEED-TO-KNOW 1-2 Part 1 (2 of 3)
Learning Objective C3: Explain why ethics are crucial to accounting.
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
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.
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NEED-TO-KNOW 1-2 Part 1 (3 of 3)
Learning Objective C3: Explain why ethics are crucial to accounting.
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
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.
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NEED-TO-KNOW 1-2 Part 1 SOLUTION
Learning Objective C3: Explain why ethics are crucial to accounting.
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• 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
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NEED-TO-KNOW 1-2 Part 2
Learning Objective C3: Explain why ethics are crucial to accounting.
Learning Objective C4: Explain generally accepted accounting
principles and define and apply several accounting principles.
• 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
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Learning Objective A1: Define
and interpret the accounting
equation and each of its
components.
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Transaction Analysis and the
Accounting Equation
Learning Objective A1: Define and interpret the accounting
equation and each of its components.
The Accounting Equation
Assets = Liabilities + Equity
Expanded Accounting Equation:
Equity
Assets = Liabilities + Owner, Capital – Owner,Withdrawals +Revenues – Expenses
Net Income
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NEED-TO-KNOW 1-3
Learning Objective A1: Define and interpret the accounting equation
and each of its components.
• 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.
Assets=
Liabilities +
Equity
+Owner,
Capital
– Owner,
Withdrawals
+
Revenues
Expenses
Tesla
$200
$80
$120
$100
$0
$60
($40)
YouTube
$400
$160
$240
$220
($10)
$120
($90)
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Learning Objective P1: Analyze
business transactions using the
accounting equation.
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Transaction 1
Learning Objective P1: Analyze business transactions using the
accounting equation.
Chas Taylor invests $30,000 cash to start a company.
The accounts involved are:
1) Cash (asset) ↑
2) C. Taylor, Capital (equity) ↑
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Accounting Equation: Transaction 1
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Chas Taylor invests $30,000 cash to start the
business, Fast Forward.
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Transaction 2
Learning Objective P1: Analyze business transactions using the
accounting equation.
Company purchased supplies paying $2,500 cash.
The accounts involved are:
1) Cash (asset) ↓
2) Supplies (asset) ↑
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Accounting Equation: Transaction 2
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Company purchased supplies paying $2,500 cash.
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Transaction 3
Learning Objective P1: Analyze business transactions using the
accounting equation.
Purchased equipment for $26,000 cash.
The accounts involved are:
1) Cash (asset) ↓
2) Equipment (asset) ↑
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Accounting Equation: Transaction 3
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Purchased equipment for $26,000 cash.
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Transaction 4
Learning Objective P1: Analyze business transactions using the
accounting equation.
Purchased supplies of $7,100 on credit.
The accounts involved are:
1) Supplies (asset) ↑
2) Accounts Payable (liability) ↑
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Accounting Equation: Transaction 4
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Purchased Supplies of $7,100 on credit.
• Accounting Equation still remains in balance!!
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Transaction Analysis
Learning Objective P1: Analyze business transactions using the
accounting equation.
Now, let’s look at transactions involving
revenues, expenses and withdrawals.
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Transaction 5
Learning Objective 01-P1: Analyze business transactions using the
accounting equation.
Provided consulting services to a customer and
received $4,200 cash right away.
The accounts involved are:
1) Cash (asset) ↑
2) Revenues (equity) ↑
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Accounting Equation: Transaction 5
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Provided consulting services to a customer and
received $4,200 cash right away.
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Transactions 6 and 7
Learning Objective P1: Analyze business transactions using the
accounting equation.
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 actually increase.
• But, total Equity decreases, because expenses
reduce equity.
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Accounting Equation: Transactions 6 and 7
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Paid rent of $1,000 and salaries of $700 to employees.
• Remember that expenses decrease equity.
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Transaction 8
Learning Objective P1: Analyze business transactions using the
accounting equation.
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) ↑
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Accounting Equation: Transaction 8
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Provided consulting services of $1,600 and rents
facilities for $300 to a customer for credit.
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Transaction 9
Learning Objective P1: Analyze business transactions using the
accounting equation.
Client in transaction 8 pays $1,900 for consulting
services from account receivable.
The accounts involved are:
1) Cash (asset) ↑
2) Accounts receivable (asset) ↓
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Accounting Equation: Transaction 9
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Client in transaction 8 pays $1,900 for consulting
services.
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Transaction 10
Learning Objective P1: Analyze business transactions using the
accounting equation.
FastForward pays $900 as partial payment for
supplies purchased in transaction 4.
The accounts involved are:
1) Cash (asset) ↓
2) Accounts payable (liability) ↓
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Accounting Equation: Transaction 10
Learning Objective P1: Analyze business transactions using the
accounting equation.
• FastForward pays $900 as partial payment for
supplies purchased in transaction 4.
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Transaction 11
Learning Objective P1: Analyze business transactions using the
accounting equation.
Withdrawal of Cash by Owner.
The accounts involved are:
1) Cash (asset) ↓
2) Withdrawals ↑ (equity)
Remember that the Withdrawal account actually
increases (just like our Expenses account . . . )
But, total Equity decreases because withdrawals
cause equity to go down !!
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Accounting Equation: Transaction 11
Learning Objective P1: Analyze business transactions using the
accounting equation.
• $200 cash is withdrawn by owner.
Assets
= Liabilities +
Equity
Accounts
Payable
$ 6,200
C.Taylor, C.Taylor,
Capital Withdrawals Revenue Expenses
$ 30,000
$ 4,200
(1,700)
(200) $ 1,600
300
$
$ 30,000 $
Accounts
Cash Receivable Supplies Equipment
Bal. $ 5,000
0 $ 9,600 $ 26,000
(11)
(200)
$ 4,800
0 $ 9,600 $ 26,000
$ 40,400
=
6,200
(200) $ 6,100 $
(1,700)
$ 40,400
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NEED-TO-KNOW 1-4 (1 of 2)
Learning Objective P1: Analyze business transactions using the
accounting equation.
• Assume Tata 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
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; J. Tata, Capital; J. Tata,
Withdrawals; Revenues; and Expenses.
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NEED-TO-KNOW 1-4 (2 of 2)
Learning Objective P1: Analyze business transactions using the
accounting equation.
Assets
Cash
Jan. 1
Accounts
Receivable
=
Equipment
Liabilitie
s
Accounts
Payable
$4,000
$2,000
Jan. 21
+ J. Tata,
Capital
- J. Tata,
Withdrawals
+
Revenues
$2,000
$540
$540
($250)
$3,750
Expenses
$4,000
Jan. 5
Jan. 14
+ Equity
($250)
$540
$2,000
Total Assets
Total Liabilities
Total Equity
$2,000
$4,000
$0
$540
($250)
$6,290
2,000
$4,290
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Learning Objective P2: Identify
and prepare basic financial
statements and explain how they
interrelate.
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Financial Statements
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
2. Statement of owner’s equity— explains changes in
equity from net income (or loss) and from any owner
investments and withdrawals over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a
point in time.
4. Statement of cash flows — identifies cash inflows
(receipts) and cash outflows (payments) over a period of
time.
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Exhibit 1.10 Financial Statements and
Their Links (1 of 2)
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
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Exhibit 1.10 Financial Statements and
Their Links (2 of 2)
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
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NEED-TO-KNOW 1-5 (1 of 2)
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
Prepare the (a) income statement, (b) statement of
owner’s equity, and (c) balance sheet, for Apple using
the following condensed data from its fiscal year
ended September 26, 2015 ($ in millions).
Accounts payable
$35,490
Investments and other assets
Other liabilities
135,634
Land and equipment (net)
22,471
Cost of sales
140,089
Selling, general and other
expenses
40,232
Accounts receivable
16,849
Net income
53,394
Cash
21,120
Owner, Capital, September 27,
2014
111,547
Withdrawals in fiscal year 2015
45,586
Revenues
233,715
$230,039
Owner, Capital, September 26,
2015
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NEED-TO-KNOW 1-5 (2 of 2)
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
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NEED-TO-KNOW (1 of 2)
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
Accounts payable
$35,490
Other liabilities
135,634
Cost of sales
140,089
Cash
21,120
Owner, Capital, September 26,
2014
111,547
Withdrawals in fiscal year 2015
45,586
Revenues
233,715
Investments and other assets
$230,039
Land and equipment (net)
22,471
Selling, general and other
expenses
40,232
Accounts receivable
16,849
Net income
53,394
Owner, Capital, September 26,
2015
119,355
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NEED-TO-KNOW (2 of 2)
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
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Sustainability and Accounting
Learning Objective P2: Identify and prepare basic financial
statements and explain how they interrelate.
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.
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Learning Objective A2:
Compute and interpret return
on assets.
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Return on Assets
Learning Objective A2: Compute and interpret return on assets.
Return on assets (ROA) is stated in ratio form as net
income divided by the average total assets invested.
Return on assets 
Net income
Average total assets
Return on Assets
Fiscal
Year
Return on Assets
Verizon
Industry
2015
7.7%
4.8%
2014
4.7
4.1
2013
9.4
5.4
2012
4.6
3.3
2011
4.5
3.1
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Learning Objective A3 (Appendix
1A): Explain the relation between
return and risk.
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Appendix 1A Return and Risk Analysis
Learning Objective A3: Explain the relation between return and risk.
Many different returns may be reported.
• ROA
• Interest return on savings accounts.
• Interest return on corporate bonds.
Risk is the uncertainty about the return we will
earn.
• The lower the risk, the lower our expected
return.
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Exhibit 1A.1: Appendix 1A: Return and
Risk Analysis
Learning Objective A3: Explain the relation between return and risk.
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Learning Objective C5 (Appendix
1B): Identify and describe the three
major activities of organizations.
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Appendix 1B Business Activities and
the Accounting Equation (1 of 3)
Learning Objective C5: Identify and describe the three major
activities of organizations.
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.
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Appendix 1B Business Activities and
the Accounting Equation (2 of 3)
Learning Objective C5: Identify and describe the three major
activities of organizations.
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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Appendix 1B Business Activities and
the Accounting Equation (3 of 3)
Learning Objective C5: Identify and describe the three major
activities of organizations.
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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Exhibit 1B.1: Appendix 1B Business
Activities and the Accounting Equation
Learning Objective C5: Identify and describe the three major
activities of organizations.
Activities of Organizations
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