Nature And Purpose Of Accounting Essay

5125 words - 21 pages

Chapter 1
THE NATURE AND PURPOSE OF ACCOUNTING

Changes from Eleventh Edition

The chapter has been updated. The Maria Hernandez & Associates case has been replaced with the Ribbons an’ Bows Inc. case.

Approach

On the first day, the usual objective is to create interest in the subject, to set the scene, and to give an overview of the course. The first part of the chapter does this. The second part of the chapter gives a fairly specific introduction to the nature of financial accounting. Instructors probably may want to bring in material from their own reading or experience to make the introductory points.

Cases

The cases are intended to get the student to start ...view middle of the document...

For example, the use of double lines to underscore a total, the position of the dollar sign at the top of a column of numbers, and the dating of the balance sheet.

The purpose of this problem is to illustrate the equality of the basic accounting equation: assets equal liabilities plus owners’ equity.

Problem 1-2

The missing numbers are:

Year 1

|Noncurrent assets |$410,976 |
|Noncurrent liabilities |240,518 |

Year 2

|Current assets |$ 90,442 |
|Total assets |288,456 |
|Noncurrent liabilities |78,585 |

Year 3

|Total assets |$247,135 |
|Current liabilities |15,583 |
|Total liabilities and owners’ equity |247,135 |

Year 4

|Current assets |$ 69,090 |
|Current liabilities |17,539 |

The basic accounting equation is

Assets = Liabilities + Owners’ equity

The instructor might want to explain how this equation is used (as it is in this problem) to calculate “plug” numbers when managers construct projected balance sheets. The manager does not have to complete every balance because the manager can plug certain balances.

The instructor may also draw attention to the other equations illustrated in the problem. These include:

Current assets + Noncurrent assets = Total assets

Current liabilities + Noncurrent liabilities = Total liabilities

Paid-in capital + Retained earnings = Owners’ equity.

Later in the course the instructor should explain that the additional paid-in capital account is a special account to record the excess of capital received over par value in common stock issuances. At this stage in the course it is better to simply use a descriptive term, like paid-in capital, to describe capital received from stockholders. Also it avoids the use of the term common stock, which some students many not understand.

Problem 1-3

The missing numbers are:

Year 1

|Gross margin |$9,000 |
|Tax expense |1,120 |

Year 2

|Sales |$11,968 |
|Profit before taxes |2,547 |

Year 3

|Cost of goods sold |$2,886 |
|Other expenses |6,296 |

Other accounting equations such as the following are also illustrated by this problem:

Gross margin = Sales - Cost of goods sold

Profit before taxes = Gross margin -...

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