CHAPTER 1 1
CHAPTER 1
INTRODUCTION TO ACCOUNTING
DISCUSSION QUESTIONS
1. The purpose of accounting is to provide financial information about a business to individuals,
agencies, and organizations.
2. Four user groups normally interested in financial information about a business are owners,
managers, creditors, and government agencies.
3. The six major steps of the accounting process are listed below.
a. Analyzing is looking at events that have taken place and thinking about how these affect the
business. This first step in the accounting process usually occurs when the business receives
some type of information, such as a bill, that needs to be properly entered into the business’s
records. This first step also involves deciding if the piece of information should result in an
accounting entry or not.
b. Recording is entering financial information into the accounting system.
c. Classifying is sorting and grouping like items together.
d. Summarizing is the aggregation of many similar events to provide information that is easy to
understand.
e. Reporting is telling the results.
f. Interpreting is deciding the importance of information in the various reports.
4. Generally accepted accounting principles (GAAP) are the rules that businesses must follow when
preparing financial statements.
5. FASB takes the following steps to develop an accounting standard:
1. The issue is placed on the Board’s agenda.
2. After researching the issue, a Preliminary Views document is issued.
3. Public hearings are held.
4. An Exposure Draft is issued.
5. An Accounting Standards Update is issued, which amends the FASB Accounting Standards
Codification.
6. The International Accounting Standards Board.
7. The three types of ownership structures are listed below.
a. A sole proprietorship is owned by one person. The owner assumes all risks for the business. The
advantage is that the owner can make all of the business decisions.
b. A partnership is owned by more than one person. Partners assume the risks for the business,
and their assets may be taken to pay creditors. An advantage of a partnership is that owners
share risks and decision making. A disadvantage is that partners may disagree about the best
way to run the business.
c. A corporation is owned by stockholders. The owners’ risk is usually limited to their initial
investment, but they typically have very little influence on business decisions.
8. Three types of businesses classified by activities are service businesses, merchandising businesses,
and manufacturing businesses.
9. An accounting clerk performs accounting tasks such as recording, sorting, and filing accounting
information.
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10. Four areas of specialization for a public accountant are auditing, taxation, management advisory
services, and forensic accounting.
Auditing—Auditing involves the application of standard review and testing procedures to be
certain that proper accounting policies and practices have been followed. The purpose of the
audit is to provide an independent opinion that the financial information about a business is fairly
presented.
Taxation—The work of tax specialists includes offering advice on tax planning, preparing tax
returns, and representing clients before governmental agencies, such as the Internal Revenue
Service.
Management Advisory Services—Given the financial training and business experience of public
accountants, many businesses seek their advice on a wide variety of managerial issues.
Forensic Accounting—Forensic accounting is a specialized field that combines fraud detection,
fraud prevention, litigation support, expert witnessing, business valuations, and other
investigative activities.
11. The Sarbanes-Oxley Act (SOX) was passed by Congress to help improve reporting practices of
public companies. One important provision prohibits accounting firms from providing audit and
management advisory services to the same company.
12. Six areas of specialization for a managerial accountant are accounting information systems, financial
accounting, cost accounting, budgeting, tax accounting, and internal auditing.
Accounting Information Systems—Accountants in this area design and implement manual and
computerized accounting systems.
Financial Accounting—Based on the accounting data prepared by the bookkeepers and
accounting clerks, the accountant prepares various reports and financial statements.
Cost Accounting—The cost of producing specific products or providing services must be
measured. Further analysis is also done to determine whether the products and services are
produced in the most cost-effective manner.
Budgeting—In the budgeting process, accountants help management develop a financial plan
for the future.
Tax Accounting—A firm may have its own accountants to focus on tax planning, preparation of
tax returns, and dealing with the Internal Revenue Service and other governmental agencies.
Internal Auditing—The main functions of an internal auditor are to review the operating and
accounting control procedures adopted by management and to see that accurate and timely
information is provided.
© 2025 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Exercise 1-1A
1. d Owners a. Whether the firm can pay its bills on time
2. b Managers b. Detailed, up-to-date information to measure business
performance (and plan for future operations)
3. a Creditors c. To determine taxes to be paid and whether other
regulations are met
4. c Government d. The firm’s current financial condition
agencies
Exercise 1-2A
Order Accounting Process Definition
2 Recording entering financial information into the accounting
system
4 Summarizing aggregating many similar events to provide
information that is easy to understand
5 Reporting telling the results
1 Analyzing looking to see what events have taken place and
thinking about how these affect the business
6 Interpreting deciding the importance of information on the
various reports
3 Classifying sorting and grouping like items together
© 2025 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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Exercise 1-3A
1. Airline Service
2. Hotel Service
3. Clothing Store Merchandising
4. Concert Service
5. Convenience Store Merchandising
6. Shoe Factory Manufacturing
7. Car Dealership Merchandising
8. Dry Cleaner Service
Exercise 1-1B
Users Information
Owners (present and future): firm’s profitability and current financial condition
Managers: detailed, up-to-date information about the business to
measure performance
Creditors (present and future): firm’s profitability, debt outstanding, and assets that could
be used to secure debt
Government agencies: firm’s profitability, cash flows, and overall financial
condition
Exercise 1-2B
Letter Accounting Process Definition
b Analyzing a. Telling the results
f Recording b. Looking at events that have taken place and thinking
about how they affect the business
e Classifying c. Deciding the importance of the various reports
d Summarizing d. Aggregating many similar events to provide information
that is easy to understand
a Reporting e. Sorting and grouping like items together
c Interpreting f. Entering financial information into the accounting system
© 2025 Cengage®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
