Financial Accounting
IFRS 5th Edition
Weygandt ● Kimmel
Chapter 1
Accounting in Action
Part 1
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Learning Objective 1
Identify the activities and users
associated with accounting.
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Accounting?
• Accounting is an information system that identifies,
records, and communicates the economic events of an
organization to interested users
• A slim definition of Accounting?
• Financial statement -> based on Accounting standards
• (International Accounting Standards Board (IASB), setting
setting financial reporting requirements for most
companies in the world, across more than 140
jurisdictions)
• Think about “sustainability”
• A Central concern of managers, investors, and consumers
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Accounting?
• How about “ESG” movement?
• No universally adopted standards for companies to measure
and report on their sustainability performance
• The IFRS Foundation proposed the creation of the
Sustainability Accounting Standards Board (SASB)
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Accounting Activities
There are three basic activities in accounting:
1. Identification,
2. Recording, and
3. Communicating economic events.
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Accounting Activities Illustrated
Three Activities
Illustration 1.1: The activities of the accounting process.
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Financial Information User Groups
• Internal: Managers who plan, organize, and run the
business.
o Rely on managerial accounting for decision-making.
o Examples: Marketing, production, finance managers.
• External: Users outside of the organization.
o Rely on financial accounting for decision-making.
o Examples: Investors and creditors.
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Internal Users
Illustration 1.2: Questions that internal users ask.
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External Users
Illustration 1.3: Questions that external users ask.
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Additional External Users
• Taxing authorities: Does the company comply with
the tax laws?
• Regulatory agencies: Is the company operating
within prescribed rules?
• Labor unions: Does the company have the ability to
pay increased wages and benefits to union
members?
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Types of Accounting Information
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Data Analytics
• Data analytics involves analyzing data, often
employing both software and statistics, to draw
inferences.
• As both data access and analytical software improve,
the use of data analytics to support decisions is
becoming increasingly common at virtually all types
of companies
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Types of Data Analytics
Illustration 1.4: Four types of data analytics.
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DO IT! 1: Basic Concepts
Indicate whether each of the five statements presented below
is true or false. If false, indicate how to correct the statement.
1. The three steps in the accounting process are identification,
recording, and communication. True
2. Bookkeeping encompasses all steps in the accounting
process. False (Bookkeeping involves only the recording step)
3. Accountants prepare, but do not interpret, financial reports. False
4. The two most common types of external users are investors
and company officers. False (The two most common are investors and creditors)
5. Managerial accounting activities focus on reports for
internal users. True
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Learning Objective 2
Explain the building blocks of
accounting: ethics, principles, and
assumptions.
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Ethics in Financial Reporting
Illustration 1.5: Steps in analyzing ethics cases and situations.
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Accounting Standards
Ensure high-quality financial reporting.
Primary accounting standard-setting bodies:
• International Accounting Standards Board (IASB)
o Determines International Financial Reporting Standards (IFRS)
o Used in more than 150 countries
• Financial Accounting Standards Board (FASB)
o Determines generally accepted accounting principles (GAAP)
o Used by most companies in the U.S.
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Measurement Principles
• IFRS generally uses one of two measurement principles,
the historical cost principle or the fair value principle.
• Historical cost principle (or cost principle): dictates that
companies record assets at their cost. This is true not
only at the time the asset is purchased, but also over
the time the asset is held.
• Fair value principle: states that assets and liabilities
should be reported at fair value (the price received to
sell an asset or settle a liability), value in use (present
value of future cash flows), or current cost
(replacement cost).
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Selecting Measurement Principles
• Selection of which principle to follow generally relates to
trade-offs between relevance and faithful representation.
<Conceptual Framework>
Fundamental qualitative characteristics
• Relevance means that financial information is capable of
making a difference in a decision.
• Faithful representation means that the numbers and
descriptions match what really existed or happened—they
are factual. A faithful representation seeks to maximize the
underlying characteristics of completeness, neutrality and
freedom from error.
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Selecting Measurement Principles
<Conceptual Framework>
Enhancing qualitative characteristics
• Comparability: information is more useful if it can be
compared with a similar information about other entities
and with similar information about the same entity for
another period or another date. Comparability enables
users to identify and understand similarities in, and
differences among, items.
• Verifiability: different knowledgeable and independent
observers could reach consensus, although not necessarily
complete agreement, that a particular depiction is a
faithful representation.
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Selecting Measurement Principles
<Conceptual Framework>
Enhancing qualitative characteristics
• Timeliness: information is available to decision-makers in
time to be capable of influencing their decisions.
• Understandability: classifying, characterising and
presenting information clearly and concisely makes it
understandable. Financial reports are prepared for users
who have a reasonable knowledge of business and
economic activities and who review and analyse the
information with diligence.
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Assumptions
• Assumptions provide a foundation for the accounting
process. Two main assumptions are the monetary unit
assumption and the economic entity assumption.
o Monetary unit assumption: requires that companies
include in the accounting records only transaction data
that can be expressed in money terms.
o Economic Entity Assumption: requires that the activities
of the entity be kept separate and distinct from the
activities of its owner and all other economic entities.
Typical entity forms are proprietorship, partnership,
corporation.
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DO IT! 2: Building Blocks of Accounting
Indicate whether each of the five statements presented below is true or false.
If false, indicate how to correct the statement.
1. Ethics are the standards of conduct by which actions are judged as right or
wrong, honest or dishonest, fair or not fair. True.
2. The primary accounting standard-setting body headquartered in London is
the International Accounting Standards Board (IASB). True.
3. An asset recorded using the historical cost basis results in recording assets
at their cost. In later periods, however, the current value of the asset must be
used if current value is higher than its cost.
False.
Assets recorded using the historical cost basis are not adjusted in later periods to
current value. They remain at their original cost.
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DO IT! 2: Building Blocks of Accounting
Indicate whether each of the five statements presented below is true or false.
If false, indicate how to correct the statement.
4. Relevance means that financial information matches what really happened;
the information is factual.
False.
Faithful representation means that financial information matches what
really happened; the information is factual.
5. A business owner’s personal expenses must be separated from expenses of
the business to comply with accounting’s economic entity assumption.
True.
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Learning Objective 3
State the accounting equation, and
define its components.
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The Accounting Equation
The Basic Accounting Equation
Assets = Liabilities + Equity
Illustration 1.6: The basic accounting equation.
Assets: resources a business owns.
Liabilities: claims against assets, i.e. existing debts and obligations.
Equity: the ownership claim on a company’s total assets.
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Equity
• Share capital—ordinary: describes the amounts paid in
by shareholders for the ordinary shares they purchase.
• Revenues: are the gross increases in equity resulting
from business activities entered into for the purpose of
earning income. Revenues usually result in an increase
in an asset.
• Expenses: are the cost of assets consumed or services
used in the process of earning revenue.
• Dividends: are distribution of cash or other assets to
shareholders. They are not expenses.
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Equity Illustrated
Illustration 1.7: Increases and decreases in equity.
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DO IT! 3: Equity Effects
Classify the following items as issuance of shares (I),
dividends (D), revenues (R), or expenses (E). Then
indicate whether each item increases or decreases
equity.
a. Rent Expense expense (E); it decreases equity
b. Service Revenue revenue (R); it increases equity
c. Dividends distribution to shareholders (D); it decreases equity
d. Salaries and Wage Expense expense (E); it decreases equity
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