A  Summary  organized by learning objectives concludes each chapter.

C1   Explain the purpose and importance of accounting in the information age. Accounting is an information and measurement system that aims to identify, record, and communicate relevant, reliable, and comparable information about business activities. It helps assess opportunities, products, investments, and social and community responsibilities.

C2   Identify users and uses of accounting. Users of accounting are both internal and external. Some users and uses of accounting include (a) managers in controlling, monitoring, and planning; (b) lenders for measuring the risk and return of loans; (c) shareholders for assessing the return and risk of stock; (d) directors for overseeing management; and (e) employees for judging employment opportunities.

C3   Identify opportunities in accounting and related fields. Opportunities in accounting include financial, managerial, and tax accounting. They also include accounting-related fields such as lending, consulting, managing, and planning.

C4   Explain why ethics are crucial to accounting. The goal of accounting is to provide useful information for decision making. For information to be useful, it must be trusted. This demands ethical behavior in accounting.

C5   Explain the meaning of generally accepted accounting principles and define and apply several key accounting principles. Generally accepted accounting principles are a common set of standards applied by accountants. Accounting principles aid in producing relevant, reliable, and comparable information. The business entity principle means that a business is accounted for separately from its owner(s). The objectivity principle means independent, objective evidence supports the information. The cost principle means financial statements are based on actual costs incurred. The monetary unit principle assumes transactions can be reflected in money terms. The going-concern principle means financial statements assume the business will continue. The revenue recognition principle means revenue is recognized when earned.

C6^B   Identify and describe the three major activities in organizations. Organizations carry out three major activities: financing, investing, and operating. Financing is the means used to pay for resources such as land, buildings, and machines. Investing refers to the buying and selling of resources used in acquiring and selling products and services. Operating activities are those necessary for carrying out the organization’s plans.

A1   Define and interpret the accounting equation and each of its components. The accounting equation is: Assets = Liabilities + Equity. Assets are resources owned by a company. Liabilities are creditors’ claims on assets. Equity is the owner’s claim on assets (the residual). The expanded accounting equation is: Assets = Liabilities + [Owner Capital – Owner Withdrawals + Revenues – Expenses].

A2   Analyze business transactions using the accounting equation. A transaction is an exchange of economic consideration between two parties. Examples include exchanges of products, services, money, and rights to collect money. Transactions always have at least two effects on one or more components of the accounting equation. This equation is always in balance.

A3   Compute and interpret return on assets. Return on assets is computed as net income divided by average assets. For example, if we have an average balance of $100 in a savings account and it earns $5 interest for the year, the return on assets is $5/$100, or 5%.

A4^A   Explain the relation between return and risk. Return refers to income, and risk is the uncertainty about the return we hope to make. All investments involve risk. The lower the risk of an investment, the lower is its expected return. Higher risk implies higher, but riskier, expected return.

P1   Identify and prepare basic financial statements and explain how they interrelate. Four financial statements report on an organization’s activities: balance sheet, income statement, statement of owner’s equity, and statement of cash flows.