CHAPTER 1
DISCUSSION QUESTIONS
1. The three functions of an accounting system Obviously, this list is not exhaustive. Fur-
are to (1) analyze transactions, (2) handle thermore, selecting from among these alter-
routine bookkeeping tasks, and (3) structure natives—like making most decisions—
information so it can be used to evaluate the involves many factors besides accounting
performance and health of a business. considerations.
2. The objective of decision making is to de- 4. The term “business” refers to the general
termine an appropriate course of action. The process of producing or distributing goods or
essential elements in the decision-making providing services. It also may refer to an
process generally include the following: entity that has been organized to earn a
problem identification, accumulation and profit.
analysis of facts, consideration of alternative
5. Accounting is considered the “language of
courses of action, formulation of a judgment,
business” because it provides the means of
and action. Accounting assists in this proc-
accumulating, measuring, and recording the
ess by providing and interpreting many of
successes and failures of business opera-
the facts (the financial data) to be consid-
tions. Accounting also provides a mecha-
ered in making decisions.
nism for communicating the financial results
3. Many personal decisions involve the use of of businesses to the decision makers (e.g.,
accounting data. Some examples of student- investors, creditors, managers, government,
related decisions follow: labor unions, etc.).
a. Whether to borrow money from a uni- 6. Internal and external users of accounting
versity or from a bank for tuition assis- information have similar needs in that both
tance. groups are required to make financial deci-
b. Whether to buy or lease a car. sions. Managers (internal users) are re-
c. Whether to rent or to buy a house while quired to make many day-to-day decisions
going to school. in running their organizations; they generally
d. Whether to invest $200 on an elaborate need more detailed and more timely infor-
dinner date. mation. The information supplied to manag-
e. Whether to put a new set of tires on the ers can be in any form that fits the specific
car for a spring vacation trip. questions and circumstances facing the
f. Whether to invest summer earnings in manager. Investors and creditors, the pri-
certificates of deposit or in the stock mary external users, need summarized data
market. to assist in making investing and lending de-
g. Whether to trade in the 10-speed bicycle cisions. The information supplied to external
on a new 21-speed model. users should follow generally accepted ac-
h. Whether to buy a season ski pass or counting principles (GAAP) so that the in-
pay as you go. formation is consistent and comparable and,
i. Whether to eat at the cafeteria or at therefore, more useful for decision making.
home.
7. Generally accepted accounting principles
j. Whether to pay cash for a new stereo or
(GAAP) are accounting standards recog-
to purchase it on a time contract.
nized by the accounting profession and the
k. Whether to purchase a laptop computer
business community. These standards must
for schoolwork.
be followed when preparing financial state-
l. Whether to go to a private or a state
ments for external users. Only when con-
school, given different tuition and other
cepts and principles prove useful over time
cost structures.
are they incorporated into GAAP.
m. Whether to live in the dormitory or
commute to school.
1
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
,2 Chapter 1
Currently, the Financial Accounting Stan- 10. When different countries have different
dards Board (FASB) issues Statements of accounting standards, the ability to compare
Financial Accounting Standards (SFAS) and financial statements across countries be-
Interpretations of SFAS after extensive re- comes extremely difficult. Some countries
view and discussion with groups involved in prohibit certain accounting procedures, while
preparing and using external reports. other countries allow a wide variety of ac-
counting alternatives. As a potential inves-
The purpose of GAAP is to ensure consis-
tor, these differences make the comparabil-
tent application of accounting principles in
ity of results increasingly difficult. As the
preparing external financial reports. Thus,
president of a multinational company, you
GAAP allows comparability among firms and
would have difficulty comparing your com-
provides users of external reports with the
pany’s performance to the performance of
foundation for sound decision making.
foreign competitors who report using differ-
8. Financial reports are prepared primarily for ent accounting standards.
external users, mainly investors and credi-
11. Accountants are responsible to the public
tors. It is important that the financial reports
and the companies that they work for to en-
of different companies be based on the
sure that financial statements are in accor-
same set of generally accepted accounting
dance with GAAP and are reported in an
principles (GAAP) so that the results are
unbiased manner. Thus, accountants must
comparable. Thus, investors can choose
maintain the reputation of being ethical to
from among several companies the ones in
meet their professional responsibilities.
which they wish to invest, and lenders can
select those entities that they feel are credit- 12. No. Although the role of accountants may
worthy. If there were no general guidelines change in the future, the need for judgment,
upon which financial reports were based, the which is provided by accountants, will not
reports of companies would likely be so dif- decrease. While technology has aided ac-
ferent that comparisons and meaningful countants in the everyday bookkeeping
analysis of company results would be im- tasks, computers cannot analyze and inter-
possible. pret financial information as an accountant
can. In the future, accountants could be re-
9. The Securities and Exchange Commission
quired to perform all the financial tasks for a
(SEC) holds legal authority to set accounting
business. These include tax preparation,
standards. The SEC, however, delegates its
auditing, and financial planning.
authority to the Financial Accounting Stan-
dards Board (FASB). The SEC can, at any 13. Accounting is necessary to make wise fi-
time, take over the accounting standard- nancial decisions. Almost without exception,
setting process. everyone will be faced with some type of
decision requiring financial analysis. Ac-
The Internal Revenue Service (IRS) moni-
counting provides the needed tools to make
tors businesses to see if they are in compli-
sound decisions. Furthermore, in selecting
ance with its rules and regulations, which
investments, working within the business
may or may not coincide with generally ac-
environment, and budgeting for a house-
cepted accounting principles (GAAP).
hold, accounting concepts can prove very
useful.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
,Chapter 1 3
EXERCISES
Note: Because Chapter 1 is fairly general and is intended to be a brief introduc-
tion to important accounting concepts, these exercises can be used most effec-
tively to initiate class discussion.
PE 1–1 (LO1) The Role and Importance of Accounting
Every organization, regardless of its size or purpose, should have a means of
monitoring its activities and measuring how well it is accomplishing its objec-
tives. Accounting provides such a mechanism by helping organizations to deter-
mine the optimal use of resources and to analyze the costs and benefits of deci-
sion alternatives. Accounting helps a retailer make such decisions as which lines
of clothing to carry and what prices to charge. Numerous other examples are
possible.
PE 1–2 (LO1) Bookkeeping Is Everywhere
Bookkeeping is “the preservation of a systematic, quantitative record of an activ-
ity.” As such, bookkeeping is applied in many settings, not just in maintaining fi-
nancial records. This point is illustrated with the following examples:
a. Your college English class. Even though most English professors claim that
the only numbers they ever look at are on the bottoms of the pages of the
books they read, they must use numbers to record performance on assign-
ments and papers in order to fairly assign final grades.
b. The National Basketball Association. The NBA—and sports in general—is a
record keeper’s delight. Official statisticians record every turnover, every as-
sist, every foul, every three-point attempt, etc. In addition, with teams always
struggling to sign key players and still remain under the “salary cap,” the
most valuable player in the franchise is often the accountant.
c. A hospital emergency room. Most emergency rooms have a status board
where the status of the patient in each room is posted. This ensures that
everyone can easily see where the high-risk patients are so that they can be
given priority treatment. In addition, when you receive your bill from the
emergency room, you realize that someone has been doing a lot of book-
keeping.
d. Jury selection for a major murder trial. Juror pools typically come from lists
of registered voters. That list must be maintained, a random selection must
be made, and the potential jurors must be tracked as they report for jury
duty. The rival lawyer teams also study all potential jurors and rank them as
to how sympathetic each might be to the team’s legal arguments.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
, 4 Chapter 1
PE 1–2 (LO1) (Concluded)
e. Four college roommates on a weekend skiing trip. Even among friends, bills
must be settled up. Not every bill can be equally split at the time of pay-
ment—convenience store cashiers don’t like four people coming in, each
paying for one-fourth of a tank of gas. So, someone must track who pays for
what during the skiing trip so that a fair settlement can be reached at the end
of the trip.
PE 1–3 (LO1) Accounting Information and Decision Making
The following items of information are typical of those that would help in deciding
which types of computer to sell and in determining the profitability of Automated
Systems, Inc.:
1. The number of computers and related equipment sold during a period (for
example, a month).
2. The selling prices and costs of the items sold.
3. The number of items purchased for sale during a period and the quantity of
units remaining on hand at the end of the period.
4. The amount of office supplies used during the period and their cost.
5. The amounts paid for employee wages, rent, utilities, advertising, and mis-
cellaneous items.
6. The amount of cash or other items personally invested in the business.
In addition to the above information, which is related to the general business ac-
tivities of Automated Systems, Inc., you also would want to collect specific infor-
mation concerning (1) comparative costs of the Apple and Windows-based per-
sonal computers, (2) expected number of sales of both products, (3) comparative
sales prices of the two computers, and (4) any additional costs that may have to
be paid or savings that may result in switching from one computer line to the
other. Other information, such as the impact of consumer preferences, also
would have to be analyzed. Accounting provides only part of the information
needed for making business decisions, but it is an important part.
PE 1–4 (LO1) Allocation of Limited Resources
Accounting information will tell you the financial results of your company. The fol-
lowing steps will help you identify and determine how to efficiently allocate the com-
pany’s limited resources:
• Identify and value the limited resources in your business.
• Evaluate past performance of business activities for successes and fail-
ures.
• Prepare budgets that will express your desires and goals for the company
in quantitative terms.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
DISCUSSION QUESTIONS
1. The three functions of an accounting system Obviously, this list is not exhaustive. Fur-
are to (1) analyze transactions, (2) handle thermore, selecting from among these alter-
routine bookkeeping tasks, and (3) structure natives—like making most decisions—
information so it can be used to evaluate the involves many factors besides accounting
performance and health of a business. considerations.
2. The objective of decision making is to de- 4. The term “business” refers to the general
termine an appropriate course of action. The process of producing or distributing goods or
essential elements in the decision-making providing services. It also may refer to an
process generally include the following: entity that has been organized to earn a
problem identification, accumulation and profit.
analysis of facts, consideration of alternative
5. Accounting is considered the “language of
courses of action, formulation of a judgment,
business” because it provides the means of
and action. Accounting assists in this proc-
accumulating, measuring, and recording the
ess by providing and interpreting many of
successes and failures of business opera-
the facts (the financial data) to be consid-
tions. Accounting also provides a mecha-
ered in making decisions.
nism for communicating the financial results
3. Many personal decisions involve the use of of businesses to the decision makers (e.g.,
accounting data. Some examples of student- investors, creditors, managers, government,
related decisions follow: labor unions, etc.).
a. Whether to borrow money from a uni- 6. Internal and external users of accounting
versity or from a bank for tuition assis- information have similar needs in that both
tance. groups are required to make financial deci-
b. Whether to buy or lease a car. sions. Managers (internal users) are re-
c. Whether to rent or to buy a house while quired to make many day-to-day decisions
going to school. in running their organizations; they generally
d. Whether to invest $200 on an elaborate need more detailed and more timely infor-
dinner date. mation. The information supplied to manag-
e. Whether to put a new set of tires on the ers can be in any form that fits the specific
car for a spring vacation trip. questions and circumstances facing the
f. Whether to invest summer earnings in manager. Investors and creditors, the pri-
certificates of deposit or in the stock mary external users, need summarized data
market. to assist in making investing and lending de-
g. Whether to trade in the 10-speed bicycle cisions. The information supplied to external
on a new 21-speed model. users should follow generally accepted ac-
h. Whether to buy a season ski pass or counting principles (GAAP) so that the in-
pay as you go. formation is consistent and comparable and,
i. Whether to eat at the cafeteria or at therefore, more useful for decision making.
home.
7. Generally accepted accounting principles
j. Whether to pay cash for a new stereo or
(GAAP) are accounting standards recog-
to purchase it on a time contract.
nized by the accounting profession and the
k. Whether to purchase a laptop computer
business community. These standards must
for schoolwork.
be followed when preparing financial state-
l. Whether to go to a private or a state
ments for external users. Only when con-
school, given different tuition and other
cepts and principles prove useful over time
cost structures.
are they incorporated into GAAP.
m. Whether to live in the dormitory or
commute to school.
1
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
,2 Chapter 1
Currently, the Financial Accounting Stan- 10. When different countries have different
dards Board (FASB) issues Statements of accounting standards, the ability to compare
Financial Accounting Standards (SFAS) and financial statements across countries be-
Interpretations of SFAS after extensive re- comes extremely difficult. Some countries
view and discussion with groups involved in prohibit certain accounting procedures, while
preparing and using external reports. other countries allow a wide variety of ac-
counting alternatives. As a potential inves-
The purpose of GAAP is to ensure consis-
tor, these differences make the comparabil-
tent application of accounting principles in
ity of results increasingly difficult. As the
preparing external financial reports. Thus,
president of a multinational company, you
GAAP allows comparability among firms and
would have difficulty comparing your com-
provides users of external reports with the
pany’s performance to the performance of
foundation for sound decision making.
foreign competitors who report using differ-
8. Financial reports are prepared primarily for ent accounting standards.
external users, mainly investors and credi-
11. Accountants are responsible to the public
tors. It is important that the financial reports
and the companies that they work for to en-
of different companies be based on the
sure that financial statements are in accor-
same set of generally accepted accounting
dance with GAAP and are reported in an
principles (GAAP) so that the results are
unbiased manner. Thus, accountants must
comparable. Thus, investors can choose
maintain the reputation of being ethical to
from among several companies the ones in
meet their professional responsibilities.
which they wish to invest, and lenders can
select those entities that they feel are credit- 12. No. Although the role of accountants may
worthy. If there were no general guidelines change in the future, the need for judgment,
upon which financial reports were based, the which is provided by accountants, will not
reports of companies would likely be so dif- decrease. While technology has aided ac-
ferent that comparisons and meaningful countants in the everyday bookkeeping
analysis of company results would be im- tasks, computers cannot analyze and inter-
possible. pret financial information as an accountant
can. In the future, accountants could be re-
9. The Securities and Exchange Commission
quired to perform all the financial tasks for a
(SEC) holds legal authority to set accounting
business. These include tax preparation,
standards. The SEC, however, delegates its
auditing, and financial planning.
authority to the Financial Accounting Stan-
dards Board (FASB). The SEC can, at any 13. Accounting is necessary to make wise fi-
time, take over the accounting standard- nancial decisions. Almost without exception,
setting process. everyone will be faced with some type of
decision requiring financial analysis. Ac-
The Internal Revenue Service (IRS) moni-
counting provides the needed tools to make
tors businesses to see if they are in compli-
sound decisions. Furthermore, in selecting
ance with its rules and regulations, which
investments, working within the business
may or may not coincide with generally ac-
environment, and budgeting for a house-
cepted accounting principles (GAAP).
hold, accounting concepts can prove very
useful.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
,Chapter 1 3
EXERCISES
Note: Because Chapter 1 is fairly general and is intended to be a brief introduc-
tion to important accounting concepts, these exercises can be used most effec-
tively to initiate class discussion.
PE 1–1 (LO1) The Role and Importance of Accounting
Every organization, regardless of its size or purpose, should have a means of
monitoring its activities and measuring how well it is accomplishing its objec-
tives. Accounting provides such a mechanism by helping organizations to deter-
mine the optimal use of resources and to analyze the costs and benefits of deci-
sion alternatives. Accounting helps a retailer make such decisions as which lines
of clothing to carry and what prices to charge. Numerous other examples are
possible.
PE 1–2 (LO1) Bookkeeping Is Everywhere
Bookkeeping is “the preservation of a systematic, quantitative record of an activ-
ity.” As such, bookkeeping is applied in many settings, not just in maintaining fi-
nancial records. This point is illustrated with the following examples:
a. Your college English class. Even though most English professors claim that
the only numbers they ever look at are on the bottoms of the pages of the
books they read, they must use numbers to record performance on assign-
ments and papers in order to fairly assign final grades.
b. The National Basketball Association. The NBA—and sports in general—is a
record keeper’s delight. Official statisticians record every turnover, every as-
sist, every foul, every three-point attempt, etc. In addition, with teams always
struggling to sign key players and still remain under the “salary cap,” the
most valuable player in the franchise is often the accountant.
c. A hospital emergency room. Most emergency rooms have a status board
where the status of the patient in each room is posted. This ensures that
everyone can easily see where the high-risk patients are so that they can be
given priority treatment. In addition, when you receive your bill from the
emergency room, you realize that someone has been doing a lot of book-
keeping.
d. Jury selection for a major murder trial. Juror pools typically come from lists
of registered voters. That list must be maintained, a random selection must
be made, and the potential jurors must be tracked as they report for jury
duty. The rival lawyer teams also study all potential jurors and rank them as
to how sympathetic each might be to the team’s legal arguments.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
, 4 Chapter 1
PE 1–2 (LO1) (Concluded)
e. Four college roommates on a weekend skiing trip. Even among friends, bills
must be settled up. Not every bill can be equally split at the time of pay-
ment—convenience store cashiers don’t like four people coming in, each
paying for one-fourth of a tank of gas. So, someone must track who pays for
what during the skiing trip so that a fair settlement can be reached at the end
of the trip.
PE 1–3 (LO1) Accounting Information and Decision Making
The following items of information are typical of those that would help in deciding
which types of computer to sell and in determining the profitability of Automated
Systems, Inc.:
1. The number of computers and related equipment sold during a period (for
example, a month).
2. The selling prices and costs of the items sold.
3. The number of items purchased for sale during a period and the quantity of
units remaining on hand at the end of the period.
4. The amount of office supplies used during the period and their cost.
5. The amounts paid for employee wages, rent, utilities, advertising, and mis-
cellaneous items.
6. The amount of cash or other items personally invested in the business.
In addition to the above information, which is related to the general business ac-
tivities of Automated Systems, Inc., you also would want to collect specific infor-
mation concerning (1) comparative costs of the Apple and Windows-based per-
sonal computers, (2) expected number of sales of both products, (3) comparative
sales prices of the two computers, and (4) any additional costs that may have to
be paid or savings that may result in switching from one computer line to the
other. Other information, such as the impact of consumer preferences, also
would have to be analyzed. Accounting provides only part of the information
needed for making business decisions, but it is an important part.
PE 1–4 (LO1) Allocation of Limited Resources
Accounting information will tell you the financial results of your company. The fol-
lowing steps will help you identify and determine how to efficiently allocate the com-
pany’s limited resources:
• Identify and value the limited resources in your business.
• Evaluate past performance of business activities for successes and fail-
ures.
• Prepare budgets that will express your desires and goals for the company
in quantitative terms.
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from
the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
