acc225_week1_reading1
44 Pages

acc225_week1_reading1

Course Number: ACCOUNTING ADJ/235, Spring 2010

College/University: University of Phoenix

Word Count: 20948

Rating:

Document Preview

LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 I love chocolate, and so Im having fun making money Elise Macmillan (Evan Macmillan on right) 1 Accounting in Business A Look at This Chapter Accounting plays a crucial role in the information age. In this chapter, we discuss the importance of accounting to different...

Unformatted Document Excerpt
Coursehero >> Arizona >> University of Phoenix >> ACCOUNTING ADJ/235

Course Hero has millions of student submitted documents similar to the one
below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Course Hero has millions of student submitted documents similar to the one below including study guides, practice problems, reference materials, practice exams, textbook help and tutor support.

Fundamental LarsonWildChiappetta: Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 I love chocolate, and so Im having fun making money Elise Macmillan (Evan Macmillan on right) 1 Accounting in Business A Look at This Chapter Accounting plays a crucial role in the information age. In this chapter, we discuss the importance of accounting to different types of organizations and describe its many users and uses. We explain that ethics are crucial to accounting. We also describe business transactions and how they are reflected in financial statements. A Look Ahead Chapter 2 further describes and analyzes business transactions. We explain the analysis and recording of transactions, the ledger and trial balance, and the double-entry system. More generally, Chapters 2 through 4 focus on accounting and analysis, and they illustrate (via the accounting cycle) how financial statements reflect business activities. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Learning Objectives CAP Conceptual Analytical Learning Objectives are organized by conceptual, analytical, and procedural. Procedural prepare basic financial P1 Identify andand explain how they statements interrelate. (p. 17) C1 Explain the purpose and importance of accounting in the information age. (p. 4) A1 Define and interpret the accounting equation and each of its components. (p. 12) C2 Identify users and uses of accounting. (p. 5) C3 Identify opportunities6)in accounting and related fields. (p. ethics C4 Explain why(p. 8) are crucial to accounting. C5 Explain the meaning of generallyand accepted accounting principles, define and apply several key principles of accounting. (p. 9) A2 Analyze business transactions using the accounting equation. (p. 13) and A3 Compute 20) interpret return on assets. (p. Decision Feature Sweet Taste of Success DENVERElise and Evan Macmillansister and brother entrepreneursaim to satisfy. Our whole business is about customers, says Elise. These teenagers head The Chocolate Farm (TheChocolateFarm.com), which specializes in making chocolates and in helping their customers make them. We thought our business was going to be a one-day thing, says Elise, but it turned into a real business. This meant Elise and Evan had to deal with issues such as organization form, accounting and information systems, transaction analysis, and financial reports. Adds Elise, Im kept busy with the companys future plans and new product ideas and everything else that there is to a company. Special attention is directed at accounting information; because without income, The Chocolate Farm would be knee-deep in cocoa. Elise and Evan were able to set up a transaction-based accounting [Sources: Ernst & Young Website, January 2004; The Chocolate Farm Website, January 2004; Entrepreneur Magazine, May 2002; Denver Business Journal, January 2002; The Wall Street Journal, March 2003.] system to profitably handle customer sales and orders. They also used accounting information to make good business decisions. Relying on sales and expense information, Elise and Evan focused efforts on their best-sellers such as Brown Cows, Mint Sheep Munch, Pecan Turtles, and Pigs in Mud. Moreover, after an analysis of the accounting information, they decided to expand and now employ more than a dozen people. Evan admits that even with the best accounting information, one must accept some risk. We accept the fact that its a risk, says Evan, but thats the reality of money making. Elise concurs, I love chocolate, and so Im having fun making money. The Farm now produces more than $1 million per year in revenues. We could all become chocolate-lovers with results like that! A Decision Feature launches each chapter showing the relevance of accounting for a real entrepreneur. An Entrepreneurial Decision problem at the end of the assignments returns to this feature with a mini-case. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter Preview A Preview opens each chapter with a summary of topics covered. Todays world is one of informationits preparation, communication, analysis, and use. Accounting is at the heart of this information age. Knowledge of accounting gives us career opportunities and the insight to take advantage of them. By studying this book, you will learn about concepts, procedures, and analyses that will help you make better decisions throughout your life. In this chapter we describe accounting, the users and uses of accounting information, the forms and activities of organizations, and several accounting principles. We also introduce transaction analysis and financial statements. Accounting in Business Importance of Accounting Accounting information users Opportunities in accounting Fundamentals of Accounting Ethicskey concept Generally accepted accounting principles Transaction Analysis Accounting equation Transaction analysis illustrated Financial Statements Income statement Statement of owners equity Balance sheet Statement of cash flows Importance of Accounting communication and access to data, C1 Explain the purpose and We live in an information agea time of affects how we live, immediate associate with, importance of accounting news, facts, and commentary. Information whom we in the information age. and the opportunities we have. To fully benefit from the available information, we need knowledge of the information system. An information system involves the collecting, processing, and reporting of information to decision makers. Providing information about what businesses own, what they owe, and how they perform is an important aim of accounting. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organizations business activities. Identifying business activities requires selecting transactions and events relevant to an organization. Examples are the sale of vehicles by Ford and the receipt of ticket money by TicketMaster. Recording business activities requires keeping a chronological log of transactions and events measured in dollars and classified and summarized in a useful format. Communicating business activities requires preparing accounting reports such as financial statements. It also requires analyzing and interpreting such reports. (The financial statements and notes of Krispy Kreme are shown in Appendix A of this book. This appendix also shows the financial statements of Tastykake and HarleyDavidson.) Exhibit 1.1 summarizes accounting activities. We must guard against a narrow view of accounting. The most common contact with accounting is through credit approvals, checking accounts, tax forms, and payroll. These Identifying Recording Communicating Exhibit 1.1 Accounting Activities Select transactions and events Log, measure and classify Prepare, analyze and interpret LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 5 experiences are limited and tend to focus on the recordkeeping parts of accounting. Recordkeeping, or bookkeeping, is the recording of transactions and events, either manually or electronically. This is just one part of accounting. Accounting also identifies and communicates information on transactions and events, and it includes the crucial processes of analysis and interpretation. Technology is a key part of modern business and plays a major role in accounting. Technology reduces the time, effort, and cost of recordkeeping while improving clerical accuracy. Some small organizations continue to perform various accounting tasks manually, but even they are impacted by information technology. As technology has changed the way we store, process, and summarize masses of data, accounting has been freed to expand. Consulting, planning, and other financial services are now closely linked to accounting. These services require sorting through data, interpreting their meaning, identifying key factors, and analyzing their implications. Margin notes further enhance the textual material. Point: Technology is only as useful as the accounting data available, and users decisions are only as good as their understanding of accounting. The best software and recordkeeping cannot make up for lack of accounting knowledge. Users of Accounting Information Accounting is often called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. Exhibit 1.2 shows that the accounting information system serves many kinds of users who can be divided into two groups: external users and internal users. External users Internal users Exhibit 1.2 Users of Accounting Information Lenders Shareholders Governments Consumer groups External auditors Customers Managers Officers Internal auditors Sales staff Budget officers Controllers Infographics reinforce key concepts through visual learning. External Information Users External users of accounting information are not di- rectly involved in running the organization. They include shareholders (investors), lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. External users have limited access to an organizations information. Yet many of their important decisions depend on information that is reliable, relevant, and comparable. Financial accounting is the area of accounting aimed at serving external users by providing them with financial statements. These statements are known as general-purpose financial statements. The term general-purpose refers to the broad range of purposes for which external users rely on these statements. Each external user has special information needs depending on the types of decisions to be made. Lenders (creditors) loan money or other resources to an organization. Banks, savings and loans, co-ops, and mortgage and finance companies often are lenders. Lenders look for information to help them assess whether an organization is likely to repay its loans with interest. Shareholders (investors) are the owners of a corporation. They use accounting reports in deciding whether to buy, hold, or sell stock. Shareholders typically elect a board of directors to oversee their interests in an organization. Since directors are responsible to shareholders, their information needs are similar. External (independent) auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles. Employees and labor unions use financial statements to judge the fairness of C2 Identify users and uses of accounting. Point: World Wrestling Entertainment has more than 70 mil. shares of stock outstanding. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 6 Chapter 1 Accounting in Business Point: Microsofts high income levels encouraged antitrust actions against it. wages, assess future job prospects, and bargain for better wages. Regulators often have legal authority over certain activities of organizations. For example, the Internal Revenue Service (IRS) and other tax authorities require organizations to file accounting reports in computing taxes. Other regulators include utility boards that use accounting information to set utility rates and securities regulators that require reports for companies that sell their stock to the public. Accounting serves the needs of many other external users. Voters, legislators, and government officials use accounting information to monitor and evaluate a governments receipts and expenses. Contributors to nonprofit organizations use accounting information to evaluate the use and impact of their donations. Suppliers use accounting information to judge the soundness of a customer before making sales on credit, and customers use financial reports to assess the staying power of potential suppliers. Internal Information Users Internal users of accounting information are those di- rectly involved in managing and operating an organization. They use the information to help improve the efficiency and effectiveness of an organization. Managerial accounting is the area of accounting that serves the decision-making needs of internal users. Internal reports are not subject to the same rules as external reports and are designed with the special needs of internal users in mind. There are several types of internal users, and many are managers of key operating activDecision Insight boxes highlight ities. Research and development managers need information about projected costs and relevant items from practice. revenues of proposed changes in products and services. Purchasing managers need to know what, when, and how much to purchase. Human resource managers need information Decision Insight about employees payroll, benefits, performance, and compensation. Production managers Know-Nothing CEO The know-nothing depend on information to monitor costs and defense of CEOs such as Global Crossing s ensure quality. Distribution managers need Gary Winnick and Enrons Jeffrey Skilling and reports for timely, accurate, and efficient delivKenneth Lay could soon be shattered.Through ery of products and services. Marketing mannovel legal moves, prosecutors are achieving agers use reports about sales and costs to convictions provided they prove that the target consumers, set prices, and monitor conCEO knew the companys internal picture sumer needs, tastes, and price concerns. Service was different than the picture shown managers require information on both the to outsiders. costs and benefits of looking after products and services. Both internal and external users rely on internal controls to monitor and control company activities. Internal controls are procedures set up to protect company property and equipment, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Examples are good records, physical controls (locks, passwords, guards), and independent reviews. Opportunities in Accounting C3 Identify opportunities in accounting and related fields. Point: The top 5 greatest investors of the 20th century, as compiled in a recent survey: 1. Warren Buffett, Berkshire Hathaway 2. Peter Lynch, Fidelity Funds 3. John Templeton, Templeton Group 4. Benjamin Graham & David Dodd, professors 5. George Soros, Soros Fund Accounting information affects many aspects of our lives. When we earn money, pay taxes, invest savings, budget earnings, and plan for the future, we are influenced by accounting. Accounting has four broad areas of opportunities: financial, managerial, taxation, and accounting-related. Exhibit 1.3 lists selected opportunities in each area. The majority of accounting opportunities are in private accounting, as shown in Exhibit 1.4. Public accounting offers the next largest number of opportunities. Still other opportunities exist in government (and not-for-profit) agencies, including business regulation and investigation of law violations. Accounting specialists are highly regarded. Their professional standing often is denoted by a certificate. Certified public accountants (CPAs) must meet education and experience requirements, pass an examination, and exhibit ethical character. Many accounting specialists hold certificates in addition to or instead of the CPA. Two of the most common are the LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 7 Opportunities in accounting Exhibit 1.3 Accounting Opportunities Financial Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Managerial General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Taxation Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Accounting-related Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs certificate in management accounting (CMA) and the certified internal auditor (CIA). Employers also Private look for specialists with designations such as accounting 60% certified bookkeeper (CB), certified payroll professional (CPP), and personal financial specialist (PFS). Individuals with accounting knowledge are al- Public ways in demand as they can help with financial analy- accounting sis, strategic planning, e-commerce, product feasibil- 25% ity analysis, information technology, and financial Government, management. Benefit packages can include flexible not-for-profit work schedules, telecommuting options, career path and education alternatives, casual work environments, extended 15% vacation time, and child and elder care. Demand for accounting specialists is boosting salaries. Exhibit 1.5 reports average annual salaries for several accounting positions. Salary variation depends on location, company size, professional designation, experience, and other factors. For example, salaries for chief financial officers (CFO) range from under $75,000 to more than $1 million per year. Likewise, salaries for bookkeepers range from under $30,000 to more than $80,000. Exhibit 1.4 Accounting Jobs by Area Point: The firm of Ernst & Young gave its interns a vacation at Disney World. Point: The CFOs of Cisco Systems and Qualcom received an annual salary of more than $20 mil. Field Public Accounting: Title (experience) Partner Manager (68 years) Senior (35 years) Junior (02 years) 2003 Salary $181,000 89,500 68,500 49,000 221,000 140,000 83,000 69,000 47,000 55,000 48,500 52,000 30,500 2008 Estimate* $231,000 114,000 87,500 62,500 282,000 179,000 106,000 88,000 60,000 70,000 62,000 66,000 39,000 Exhibit 1.5 Accounting Salaries for Selected Fields Private Accounting: CFO Controller/Treasurer Manager (68 years) Senior (35 years) Junior (02 years) Recordkeeping: Full-charge bookkeeper Accounts manager Payroll manager Accounting clerk (01 years) Point: For updated salary information: www.AICPA.org Abbott-Langer.com Kforce.com * Estimates assume a 5% compounded annual increase over current levels. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 8 Chapter 1 Accounting in Business Quick Check is a chance to stop and reflect on key points. Quick Check 1. What is the purpose of accounting? 2. What is the relation between accounting and recordkeeping? 3. Identify some advantages of technology for accounting. 4. Who are the internal and external users of accounting information? 5. Identify at least five types of managers who are internal users of accounting information. 6. What are internal controls and why are they important? Answersp. 26 Fundamentals of Accounting Accounting is guided by principles, standards, concepts, and assumptions. This section describes several of these key fundamentals of accounting. EthicsA Key Concept C4 Explain why ethics are crucial to accounting. The goal of accounting is to provide useful information for decisions. For information to be useful, it must be trusted. This demands ethics in accounting. Ethics are beliefs that distinguish right from wrong. They are accepted standards of good and bad behavior. Identifying the ethical path is sometimes difficult. The preferred path is a course of action that avoids casting doubt on ones decisions. For example, accounting users are less likely to trust an auditors report if the auditors pay depends on the success of the client. To avoid such concerns, ethics rules are often set. For example, auditors are banned from direct investment in their client and cannot accept pay that depends on figures in the clients reports. Exhibit 1.6 gives guidelines for making ethical decisions. Exhibit 1.6 Guidelines for Ethical Decision Making Identify ethical concerns Analyze options Make ethical decision Use personal ethics to recognize an ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences. Global: Business ethics differ across countries. This is due to cultural, political, legal, economic, and other important factors. Point: A survey of executives, educators, and legislators showed that 9 of 10 participants believe organizations are troubled by ethical problems. Point: The American Institute of Certified Public Accountants Code of Professional Conduct is available at www.AICPA.org. Providers of accounting information often face ethical choices as they prepare financial reports. These choices can affect the price a buyer pays and the wages paid to workers. They can even affect the success of products and services. Misleading information can lead to a wrongful closing of a division that harms workers, customers, and suppliers. There is an old saying worth remembering: Good ethics are good business. Some extend ethics to social responsibility, which refers to a concern for the impact of actions on society. An organizations social responsibility can include donations to hospitals, colleges, community programs, and law enforcement. It also can include programs to reduce pollution, increase product safety, improve worker conditions, and support continuing education. These programs are not limited to large companies. For example, many independently owned theaters and small businesses offer discounts to students and senior citizens. Still others help sponsor events such as the Special Olympics and summer reading programs. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 9 Graphical displays are often used to illustrate key points. Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). To use and interpret financial statements effectively, we need to understand these principles. A main purpose of GAAP is to make information in financial statements relevant, reliable, and comparable. Relevant information affects the decisions of its users. Reliable information is trusted by users. Comparable information is helpful in contrasting organizations. Decision Insight Virtuous Returns Virtue is not always its own reward. Compare the S&P 500 with the Domini Social Index (DSI), which covers 400 companies that have especially good records of social responsibility. Notice that returns for companies with socially responsible behavior are at least as high as those of the S&P 500. 7.5 7 6.5 6 5.5 Value of $1 invested 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 Jan-90 Jan-91 Jan-92 Jan-93 DSI 400 S&P 500 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Setting Accounting Principles Two main groups establish generally accepted ac- counting principles in the United States. The Financial Accounting Standards Board (FASB) is the private group that sets both broad and specific principles. The Securities and Exchange Commission (SEC) is the government group that establishes reporting requirements for companies that issue stock to the public. In todays global economy, there is increased demand by external users for comparability in accounting reports. This often arises when companies wish to raise money from lenders and investors in different countries. To that end, the International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices. The IASB hopes to create more harmony among accounting practices of different countries. If standards are harmonized, one company can use a single set of financial statements in all financial markets. Many countries standard setters support the IASB, and interest in moving U.S. GAAP toward the IASBs practices is growing, yet the IASB does not have the authority to impose its standards on companies. Principles of Accounting Accounting principles are of two types. General princi- C5 Explain the meaning of generally accepted accounting principles, and define and apply several key principles of accounting. Point: State ethics codes require CPAs who audit financial statements to disclose areas where those statements fail to comply with GAAP. If CPAs fail to report noncompliance, they can lose their licenses and be subject to criminal action and fines. ples are the basic assumptions, concepts, and guidelines for preparing financial statements. Specific principles are detailed rules used in reporting business transactions and events. General principles stem from long-used accounting practices. Specific principles arise more often from the rulings of authoritative groups. We need to understand both general and specific principles to effectively use accounting information. Several general principles are described in this section and several others are described in later chapters. General principles are portrayed as building blocks of GAAP in Exhibit 1.7. The specific principles are described as we encounter them. The objectivity principle means that accounting information is supported by independent, unbiased evidence. It demands more than a persons opinion. Information is not reliable if it is based only on what a preparer thinks might be true. A preparer can be too optimistic or pessimistic. The objectivity principle is intended to make financial statements useful by ensuring they report reliable and verifiable n information. Mo cer net con ary The cost principle means that acing uni Go t ty Ful Co iali counting information is based on actual nse ter l di ncy Ma scl rva ste osu tism nsi cost. Cost is measured on a cash or re ing Re Co ty tch ven tivi Ma ue jec equal-to-cash basis. This means if cash rec Ob Tim ogn iod e per itio ity is given for a service, its cost is measn ent ess Co sin ured as the amount of cash paid. If somest Bu thing besides cash is exchanged (such as Point: An audit examines whether financial statements are prepared using GAAP. It does not attest to the absolute accuracy of the statements. Point: The largest accounting firms are Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers, and KPMG. Exhibit 1.7 Building Blocks for GAAP LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 10 Chapter 1 Accounting in Business a car traded for a truck), cost is measured as the cash value of what is given up or received. Name that Value Abuse of the The cost principle emphasizes reliability, and objectivity and cost principles brought down information based on cost is considered objecexecutives at Itex Corp who bartered tive. To illustrate, suppose a company pays assets of little or no value and then $5,000 for equipment. The cost principle rereported them at grossly inflated values quires that this purchase be recorded at a cost recognizing fictitious gains and assets. The of $5,000. It makes no difference if the owner deals involved difficult-to-value assets such as thinks this equipment is worth $7,000. artwork and stamps. The going-concern principle means that accounting information reflects an assumption that the business will continue operating instead of being closed or sold. This implies, for example, that property is reported at cost instead Point: The cost principle is also called the historical cost principle. of, say, liquidation values that assume closure. Point: For currency conversion: The monetary unit principle means that we can express transactions and events in moncnnfn.com/markets/currencies etary, or money, units. Money is the common denominator in business. Examples of monetary units are the dollar in the United States, Canada, Australia, and Singapore; the pound Example: Cadbury Schweppes, a sterling in the United Kingdom; and the peso in Mexico, the Philippines, and Chile. The leading beverage and confectionery monetary unit a company uses in its accounting reports usually depends on the country producer, recently reported sales of where it operates, but many companies today are expressing reports in more than one mon5,500 million. What is the U.S.$ equivaetary unit. lent of these sales if the exchange rate is 1 $1.50? Answer: $8,250 million Revenue (sales) is the amount received from selling products and services. The rev(5,500 $1.50). enue recognition principle provides guidance on when a company must recognize revenue. To recognize means to record it. If revenue is recognized too early, a company would look more profitable than it is. If revenue is recognized too late, a company would look less profitable than it is. The following three concepts are important to revenue recognition. (1) Revenue is recognized when earned. The earnings process is normally complete when services are rendered or a seller transfers ownership of products to the buyer. (2) Example: When a bookstore sells a Proceeds from selling products and services need not be in cash. A common noncash protextbook on credit is its earnings process ceed received by a seller is a customers promise to pay at a future date, called credit complete? Answer: The bookstore can sales. (3) Revenue is measured by the cash received plus the cash value of any other items record sales for these books minus an received. amount expected for returns. The business entity principle means that a business is accounted for separately from other business entities, including its owner. The reason for this principle is that separate information about each business is necessary for good decisions. A business entity can take Point: Abuse of the entity principle was one of three legal forms: sole proprietorship, partnership, or corporation. a main culprit in the collapse of Enron. Decision Insight 1. A sole proprietorship, or simply proprietorship, is a business owned by one person. No special legal requirements must be met to start a proprietorship. It is a separate entity for accounting purposes, but it is not a separate legal entity from its owner. This means, for example, that a court can order an owner to sell personal belongings to pay a proprietorships debt. This unlimited liability of a proprietorship is a disadvantage. However, an advantage is that a proprietorships income is not subject to a business income tax but is instead reported Decision Insight and taxed on the owners personal income Revenues for the New York Yankees baseball tax return. Proprietorship characteristics team include ticket sales, television and cable are summarized in Exhibit 1.8. broadcasts, radio rights, concessions, and ad2. A partnership is a business owned by two vertising. Revenues from ticket sales are or more people, called partners. Like a earned when the Yankees play each game. proprietorship, no special legal requireAdvance ticket sales are not revenues; inments must be met in starting a partnerstead, they represent a liability until the ship. The only requirement is an agreement Yankees play the game for which the ticket between partners to run a business towas sold. gether. The agreement can be either oral or LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 11 Characteristic Business entity Legal entity Limited liability Unlimited life Business taxed One owner allowed Proprietorship yes no no* no no yes Partnership yes no no* no no no Corporation yes yes yes yes yes yes Exhibit 1.8 Characteristics of Businesses * Proprietorships and partnerships that are set up as LLCs provide limited liability. written and usually indicates how income Decision Insight and losses are to be shared. A partnership, Web Info Most organizations maintain like a proprietorship, is not legally sepaWebsites that include accounting information rate from its owners. This means that each see Krispy Kremes (KrispyKreme.com) partners share of profits is reported and Website as one example.The SEC keeps taxed on that partners tax return. It also an online database called EDGAR means unlimited liability for its partners. (www.SEC.gov/edgar.shtml), which has However, at least three types of partneraccounting information for thousands of ships limit liability. A limited partnership companies that sell their stock to the public. (LP) includes a general partner(s) with unlimited liability and a limited partner(s) with liability restricted to the amount invested. A limited liability partnership (LLP) restricts partners liabilities to their own acts and the acts of individuals under their control. This protects an innocent partner from the negligence of another partner, yet all partners remain responsible for part- Lightbulb icon highlights nership debts. A limited liability company (LLC ), offers the limited liability of a cor- entrepreneurial-related info. poration and the tax treatment of a partnership (or proprietorship). Most propriDecision Insight etorships and partnerships are now organized as an LLC. New Age Entrepreneurship will be the defining trend of business 3. A corporation is a business legally sepain this century, according to a survey of business leaders. Respondents see rate from its owners, meaning it is rethe biggest opportunities for entrepreneurship in technology, medicine, food sponsible for its own acts and its own services, hospitality, and information services. debts. Separate legal status means that a corporation can conduct business with the rights, duties, and responsibilities of a person. A corporation acts through its managers, who are its legal agents. Separate legal status also means that its owners, who are called shareholders (or stockholders), are not personally liable for corporate acts and debts. This limited liability is its main advantage. A main disadvantage is whats called double taxationmeaning that (1) the corporation income is taxed and (2) any Decision Ethics boxes are roledistribution of income to its owners through dividends is taxed as part of the owners playing exercises that stress ethics personal income (usually at the 15% rate). An exception to this is an S corporation, in accounting and business. a corporation with certain characteristics that give it a tax status that removes its Decision Ethics corporate income tax. Owners of S corporations report their share of corporate inEntrepreneur You and a friend develop a new design for in-line come with their personal income. (Note: skates that improves speed and performance by 25% to 40%.You plan to For lower income taxpayers, the dividend form a business to manufacture and market these skates.You and your friend tax is less than 15%, and in some cases want to minimize taxes, but your prime concern is potential lawsuits from zero.) Ownership of corporations is divided individuals who might be injured on these skates. What form of organization into units called shares or stock. When a do you set up? corporation issues only one class of stock, Answerp. 26 we call it common stock (or capital stock). LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 12 Point: Sole proprietorships and partnerships are usually managed on a regular basis by their owners. In a corporation, the owners (shareholders) elect a board of directors who appoint managers to run the business. Chapter 1 Accounting in Business Quick Check 7. What three-step guidelines can help people make ethical decisions? 8. Why are ethics and social responsibility valuable to organizations? 9. Why are ethics crucial in accounting? 10. Who sets U.S. accounting rules? 11. How are U.S. companies affected by international accounting standards? 12. How are the objectivity and cost principles related? 13. Why is the business entity principle important? 14. Why is the revenue recognition principle important? 15. What are the three basic forms of business organization? 16. Identify the owners of corporations and the terminology for ownership units. Answersp. 26 Transaction Analysis and the Accounting Equation accounting information, we need to accounting interpret the A1 Define and equation and To understanddata about transactions, and classifies,know how anreports data. system capaccounting tures relevant records, and each of its components. Accounting Equation The accounting system reflects two basic aspects of a company: what it owns and what it owes. Assets are resources with future benefits that are owned or controlled by a company. Examples are cash, supplies, equipment, and land. The claims on a companys assetswhat it owesare separated into owner and nonowner claims. Liabilities are what a company owes its nonowners (creditors) in future products or services. Equity (also called owners equity or capital) refers to the claims of its owner(s). Together, liabilities and equity are the source of funds to acquire assets. The relation of assets, liabilities, and equity is reflected in the following accounting equation: Assets Liabilities and Equity Assets Liabilities Equity Liabilities are usually shown before equity in this equation because creditors claims must be paid before the claims of owners. (The terms in this equation can be rearranged; for example, Assets Liabilities Equity.) The accounting equation applies to all transactions and events, to all companies and forms of organization, and to all points in time. To illustrate, Krispy Kremes assets equal $410,487, its liabilities equal $137,135, and its equity equals $273,352 ($ in thousands). Lets now look at the accounting equation in more detail. Real company names are printed in bold magenta. Point: The phrase on credit implies that the cash payment will occur at a future date. Assets Assets are resources owned or controlled by a company. These resources are ex- pected to yield future benefits. Examples are Web servers for an online services company, musical instruments for a rock band, and land for a vegetable grower. The term receivable is used to refer to an asset that promises a future inflow of resources. A company that provides a service or product on credit is said to have an account receivable from that customer. Liabilities Liabilities are creditors claims on assets. These claims reflect obligations to provide assets, products, or services to others. The term payable refers to a liability that promises a future outflow of resources. Examples are wages payable to employees, accounts payable to suppliers, notes payable to banks, and taxes payable to the government. Equity Equity is the owners claim on assets. Equity is equal to assets minus liabilities. This is the reason equity is also called net assets or residual equity (interest). LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 13 For a proprietorship, owner investments and revenues increase equity, and owner withdrawals and expenses decrease it. Owner investments are the assets an owner puts into the companyincluded under the title Owner, Capital. Revenues are the gross increase in equity from a companys earnings activities. Examples are consulting services provided, sales of products, facilities rented to others, and commissions from services. Owner withdrawals are the assets an owner takes from the company for personal use. Expenses decrease equity and are the cost of assets or services used to earn revenues. Examples are costs of employee time, use of supplies, and the advertising, utilities, and insurance services from others. This breakdown of equity yields the following expanded accounting equation: Equity Assets Liabilities Owner Capital Owner Withdrawals Revenues Expenses Key terms are printed in bold and defined again in the endof-book glossary. Point: Revenues and owner investments increase equity. Expenses and owner withdrawals decrease equity. Net income occurs when revenues exceed expenses. Net income increases equity. A net loss occurs when expenses exceed revenues, which decreases equity. The accounting equation can be used to track changes in a companys assets, liabilities, and equity, which is the focus of the next section. Transaction Analysis Business activities can be described in terms of transactions and events. External transactions are exchanges of value between two entities, which yield changes in the accounting equation. Internal transactions are exchanges within an entity; they can also affect the accounting equation. An example is a companys use of its supplies, which are reported as expenses when used. Events refer to those happenings that affect an entitys accounting equation and can be reliably measured. They include business events such as changes in the market value of certain assets and liabilities, and natural events such as floods and fires that destroy assets and create losses. They do not include, for example, the signing of service or product contracts, which by themselves do not impact the accounting equation. This section uses the accounting equation to analyze 11 selected transactions and events of FastForward, a start-up consulting business, in its first month of operations. Remember that each transaction and event leaves the equation in balance and that assets always equal the sum of liabilities and equity. Transaction 1: Investment by Owner On December 1, Chuck Taylor forms an athletic shoe consulting business, which he names FastForward. He sets it up as a proprietorship. Taylor owns and manages the business. The marketing plan for the business is to focus primarily on consulting with sports clubs, amateur athletes, and others who place orders for athletic shoes with manufacturers. Taylor personally invests $30,000 cash in the new company and deposits the cash in a bank account opened under the name of FastForward. After this transaction, the cash (an asset) and the owners equity each equal $30,000. The source of increase in equity is the owners investment, which is included in the column titled C. Taylor, Capital. (Note: Owner investments are always included under the title Owner name, Capital.) The effect of this transaction on FastForward is reflected in the accounting equation as follows: Assets Cash $30,000 Liabilities Equity C.Taylor, Capital $30,000 A2 Analyze business transactions using the accounting equation. Topic Tackler icon references additional help on the CD. Topic Tackler 1-1 Point: There are 3 basic types of company operations: (1) Services providing services for profit, (2) Merchandisers buying products and selling them for profit, and (3) Manufacturers creating products and selling them for profit. (1) Transaction 2: Purchase Supplies for Cash FastForward uses $2,500 of its cash to buy supplies of brand name athletic shoes for testing over the next few months. This transaction is an exchange of cash, an asset, for another kind of asset, supplies. It merely changes LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 14 Chapter 1 Accounting in Business the form of assets from cash to supplies. The decrease in cash is exactly equal to the increase in supplies. The supplies of athletic shoes are assets because of the expected future benefits from the test results of their performance. This transaction is reflected in the accounting equation as follows: Assets Cash $30,000 2,500 _______ $27,500 $30,000 Supplies $2,500 _______ $ 2,500 $30,000 Liabilities Equity C.Taylor, Capital $30,000 _______ $30,000 Old Bal. (2) New Bal. Transaction 3: Purchase Equipment for Cash FastForward spends $26,000 to acquire equipment for testing athletic shoes. Like transaction 2, transaction 3 is an exchange of one asset, cash, for another asset, equipment. The equipment is an asset because of its expected future benefits from testing athletic shoes. This purchase changes the makeup of assets but does not change the asset total. The accounting equation remains in balance. Assets Cash $27,500 26,000 ________ $1,500 Supplies $2,500 ______ $2,500 $30,000 Equipment $26,000 ________ _ $ 26,000 $30,000 Liabilities Equity C.Taylor, Capital $30,000 _______ $30,000 Old Bal. (3) New Bal. Example: If FastForward pays $500 cash in transaction 4, how does this partial payment affect the liability to CalTech? What would be FastForwards cash balance? Answers: The liability to CalTech would be reduced to $6,600 and the cash balance would be reduced to $1,000. Transaction 4: Purchase Supplies on Credit Taylor decides he needs more supplies of athletic shoes. These additional supplies total $7,100, but as we see from the accounting equation in transaction 3, FastForward has only $1,500 in cash. Taylor arranges to purchase them on credit from CalTech Supply Company. Thus, FastForward acquires supplies in exchange for a promise to pay for them later. This purchase increases assets by $7,100 in supplies, and liabilities (called accounts payable to CalTech Supply) increase by the same amount. The effects of this purchase on the accounting equation follow: Assets Cash Old Bal. (4) New Bal. $1,500 ______ $1,500 Supplies $2,500 7,100 _______ $9,600 $37,100 Equipment $26,000 ________ $26,000 $7,100 _________ $ 7,100 $37,100 Liabilities Accounts Payable Equity C.Taylor, Capital $30,000 ________ $30,000 Transaction 5: Provide Services for Cash FastForward earns revenues by consulting with clients about test results on athletic shoes. It earns net income only if its revenues are greater than its expenses incurred in earning them. In one of its first jobs, FastForward provides consulting services to an athletic club and immediately collects $4,200 cash. The accounting equation reflects this increase in cash of $4,200 and in equity of $4,200. This increase in equity is identified in the far right column under Revenues because the cash is earned by providing consulting services. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 15 Assets Cash Old Bal. (5) New Bal. $1,500 4,200 _______ $5,700 Supplies $9,600 ______ $9,600 $41,300 Equipment $26,000 ________ $26,000 Liabilities Accounts Payable $7,100 ______ $7,100 C.Taylor, Capital $30,000 ________ $30,000 $41,300 Equity Revenues $4,200 _______ $ 4,200 Transactions 6 and 7: Payment of Expenses in Cash FastForward pays $1,000 rent to the landlord of the building where its store is located. Paying this amount allows FastForward to occupy the space for the month of December. The rental payment is reflected in the following accounting equation as transaction 6. FastForward also pays the biweekly $700 salary of the companys only employee. This is reflected in the accounting equation as transaction 7. Both transactions 6 and 7 are December expenses for FastForward. The costs of both rent and salary are expenses, as opposed to assets, because their benefits are used in December (they have no future benefits after December). These transactions also use up an asset (cash) in carrying out FastForwards operations. The accounting equation shows that both transactions reduce cash and equity. The far right column identifies these decreases as Expenses. Assets Cash Old Bal. (6) Bal. (7) New Bal. $5,700 1,000 _______ 4,700 700 _______ $4,000 Supplies $9,600 ______ 9,600 ______ $9,600 $39,600 Equipment $26,000 _______ 26,000 _______ $26,000 Liabilities Accounts Payable $7,100 ______ 7,100 ______ $7,100 C.Taylor, Capital $30,000 _______ 30,000 _______ $30,000 $39,600 Equity Revenues $4,200 _______ 4,200 _______ $4,200 $1,000 1,000 700 ________ $ 1,700 Expenses Transaction 8: Provide Services and Facilities for Credit FastForward provides consulting services of $1,600 and rents its test facilities for $300 to an amateur sports club. The rental involves allowing club members to try recommended shoes at FastForwards testing grounds. The sports club is billed for the $1,900 total. This transaction results in a new asset, called accounts receivable, from this client. It also yields an increase in equity from the two revenue components reflected in the Revenues column of the accounting equation: Assets Cash Old Bal. (8) New Bal. ______ $4,000 $4,000 $1,900 _______ $ 1,900 ______ $9,600 $41,500 _______ $26,000 ______ $7,100 _______ $30,000 $41,500 Accounts Receivable Supplies $9,600 Equipment $26,000 Liabilities Accounts Payable $7,100 C.Taylor, Capital $30,000 Equity Revenues $4,200 1,600 300 ______ $6,100 Expenses $1,700 ________ $1,700 Transaction 9: Receipt of Cash from Accounts Receivable The client in transaction 8 (the amateur sports club) pays $1,900 to FastForward 10 days after it is billed for consulting services. This transaction 9 does not change the total amount of assets and LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 16 Point: Receipt of cash is not always a revenue. Chapter 1 Accounting in Business does not affect liabilities or equity. It converts the receivable (an asset) to cash (another asset). It does not create new revenue. Revenue was recognized when FastForward rendered the services in transaction 8, not when the cash is now collected. This emphasis on the earnings process instead of cash flows is a goal of the revenue recognition principle and yields useful information to users. The new balances follow: Assets Liabilities Equipment $26,000 _______ $26,000 Accounts Payable $7,100 ______ $7,100 C.Taylor, Capital $30,000 _______ $30,000 $41,500 Equity Revenues $6,100 ______ $6,100 Expenses $1,700 ______ $1,700 Cash Old Bal. (9) New Bal. $4,000 1,900 _______ $5,900 Accounts Receivable $1,900 1,900 ______ _ $ 0 $41,500 Supplies $9,600 ______ $9,600 Transaction 10: Payment of Accounts Payable FastForward pays CalTech Supply $900 cash as partial payment for its earlier $7,100 purchase of supplies (transaction 4), leaving $6,200 unpaid. The accounting equation shows that this transaction decreases FastForwards cash by $900 and decreases its liability to CalTech Supply by $900. Equity does not change. This event does not create an expense even though cash flows out of FastForward (instead the expense is recorded when FastForward derives the benefits from these supplies). Assets Cash Old Bal. (10) New Bal. $5,900 900 ______ $5,000 Accounts Receivable $ 0 _______ $ 0 Supplies $9,600 ______ $9,600 $40,600 Equipment $26,000 _______ $26,000 Transaction 11: Withdrawal of Cash by Owner The owner of FastForward withdraws $600 cash for personal use. Withdrawals (decreases in equity) are not reported as expenses because they are not part of the companys earnings process. Since withdrawals are not company expenses, they are not used in computing net income. Assets Cash Old Bal. (11) $5,000 Accounts Receivable $ 0 ______ $ 0 Supplies $9,600 ______ $9,600 $40,000 Equipment $26,000 _______ $26,000 Liabilities Accounts Payable $6,200 ______ $6,200 C.Taylor, Capital $30,000 _______ $30,000 $600 _____ $600 $40,000 Equity C.Taylor, Withdrawals Revenues $6,100 ______ $6,100 Expenses $1,700 ______ $1,700 600 ______ New Bal. $4,400 Summary of Transactions Point: Knowing how financial statements are prepared improves our analysis of them. We develop the skills for analysis of financial statements throughout the book. Chapter 17 focuses on financial statement analysis. We summarize in Exhibit 1.9 the effects of these 11 transactions of FastForward using the accounting equation. Two points should be noted. First, the accounting equation remains in balance after each transaction. Second, transactions can be analyzed by their effects on components of the accounting equation. For example, in transactions 2, 3, and 9, one asset increased while another decreased by equal amounts. $40,600 Liabilities Accounts Payable $7,100 900 ______ $6,200 C.Taylor, Capital $30,000 _______ $30,000 Equity Revenues $6,100 ______ $6,100 Expenses $1,700 ______ $1,700 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 17 Exhibit 1.9 Summary of Transactions Using the Accounting Equation Assets Cash (1) (2) Bal. (3) Bal. (4) Bal. (5) Bal. (6) Bal. (7) Bal. (8) Bal. (9) $30,000 2,500 ________ 27,500 26,000 ________ 1,500 ________ 1,500 4,200 ________ 5,700 1,000 ________ 4,700 700 ________ 4,000 $1,900 ________ 4,000 1,900 ________ __ _____ 1,900 1 __ ,900 _____ 0 __ _____ 0 __ _____ $ 0 _______ 9,600 _______ 9,600 _______ 9,600 _______ $ 9,600 __ ________ 26,000 __ ________ 26,000 __ ________ 26,000 __ ________ $ 26,000 _________ 7,100 _________ 7,100 900 _________ 6,200 _________ $ 6,200 ________ 30,000 ________ 30,000 ________ 30,000 ________ $ 30,000 $600 _____ $ 600 Accounts Receivable Supplies Equipment Liabilities Accounts Payable C.Taylor, Capital $30,000 ________ 30,000 $26,000 __ ________ 26,000 __ ________ 26,000 __ ________ 26,000 __ ________ 26,000 __ ________ 26,000 $7,100 _________ 7,100 _________ 7,100 _________ 7,100 _________ 7,100 ________ 30,000 ________ 30,000 ________ 30,000 ________ 30,000 ________ 30,000 $4,200 _ ______ 4,200 _ ______ 4,200 _ ______ 4,200 1,600 _ 300 ______ 6,100 _ ______ 6,100 _ ______ 6,100 _ ______ $6,100 $1,000 __ _____ 1,000 __ 700 _____ 1,700 __ _____ 1,700 __ _____ 1,700 __ _____ 1,700 __ _____ $1,700 Equity C.Taylor, Withdrawals Revenues Expenses $2,500 _______ 2,500 _______ 2,500 7,100 _______ 9,600 _______ 9,600 _______ 9,600 _______ 9,600 Bal. 5,900 (10) ________ 900 Bal. 5,000 (11) ________ 600 Bal. $ 4,400 Quick Check 17. When is the accounting equation in balance, and what does that mean? 18. How can a transaction not affect any liability and equity accounts? 19. Describe a transaction increasing equity and one decreasing it. 20. Identify a transaction that decreases both assets and liabilities. Answersp. 26 Financial Statements This section shows how financial statements are prepared from the analysis of business transactions. The four financial statements and their purposes are: 1. Income statement describes a companys revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 2. Statement of owners equity explains changes in equity from net income (or loss) and from the owner investments and withdrawals over a period of time. 3. Balance sheet describes a companys financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows identifies cash inflows (receipts) and cash outflows (payments) over a period of time. We prepare these financial statements using the 11 selected transactions of FastForward. (These statements are technically called unadjusted we explain this in Chapters 2 and 3.) Identify and prepare basic financial statements and explain how they interrelate. P1 Topic Tackler 1-2 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 18 Chapter 1 Accounting in Business Income Statement Point: Net income is sometimes called earnings or profit. Point: Decision makers often compare income to the operating cash flows from the statement of cash flows to help assess how much income is in the form of cash. FastForwards income statement for December is shown at the top of Exhibit 1.10. Information about revenues and expenses is conveniently taken from the Equity columns of Exhibit 1.9. Revenues are reported first on the income statement. They include consulting revenues of $5,800 from transactions 5 and 8 and rental revenue of $300 from transaction 8. Expenses are reported after revenues. (For convenience in this chapter, we list larger amounts first, but we can sort expenses in different ways.) Rent and salary expenses are from transactions 6 and 7. Expenses reflect the costs to generate the revenues reported. Net income (or loss) is reported at the bottom of the statement and is the amount earned in December. Owners investments and withdrawals are not part of income. Statement of Owners Equity The statement of owners equity reports information about how equity changes over the reporting period. This statement shows beginning capital, events that increase it (owner investments and net income), and events that decrease it (withdrawals and net loss). Ending capital is computed in this statement and is carried over and reported on the balance sheet. FastForwards statement of owners equity is the second report in Exhibit 1.10. The beginning capital balance is measured as of the start of business on December 1. It is zero because FastForward did not exist before then. An existing business reports the beginning balance as of the end of the prior reporting period (such as from November 30). FastForwards statement shows that Taylors initial investment created $30,000 of equity. It also shows the $4,400 of net income earned during the period. This links the income statement to the statement of owners equity (see line 1 ). The statement also reports Taylors $600 withdrawal and FastForwards $33,800 end-of-period capital balance. Point: The statement of owners equity is also called the statement of changes in owners equity. Note: Beg. Capital Owner Investments Net Income Withdrawals End. Capital Balance Sheet FastForwards balance sheet is the third report in Exhibit 1.10. This statement refers to FastForwards financial condition at the close of business on December 31. The left side Decision Maker boxes are roleof the balance sheet lists FastForwards assets: cash, supplies, and equipment. The upper playing exercises that stress the right side of the balance sheet shows that FastForward owes $6,200 to creditors. Any relevance of accounting. other liabilities (such as a bank loan) would be listed here. The equity (capital) balance is $33,800. Note the link between the ending balance of the statement of owners equity and the equity balance heresee line 2 . (This presentation of the balance sheet is Decision Maker called the account form: assets on the left and Retailer You open a wholesale business selling entertainment liabilities and equity on the right. Another equipment to retail outlets.You find that most of your customers demand presentation is the report form: assets on top, to buy on credit. How can you use the balance sheets of these customers followed by liabilities and then equity at the to help you decide which ones to extend credit to? bottom. Either presentation is acceptable.) Answerp. 26 Statement of Cash Flows FastForwards statement of cash flows is the final report in Exhibit 1.10. The first section reports cash flows from operating activities. It shows the $6,100 cash received from clients and the cash paid for supplies, rent, and employee salaries. Outflows are in parentheses to denote subtraction. Net cash provided by operating activities for December is $1,000. If cash paid exceeded cash received, we would call it cash used by operating activities. The second section reports investing activities, which involve buying and selling assets such as land and equipment that are held for long-term use (typically more than one-year). The only investing activity is the $26,000 purchase of equipment. The third section shows cash flows from financing activities, which include the long-term borrowing and repaying of cash from lenders and the owners cash investments and withdrawals. FastForward reports $30,000 Point: Statement of cash flows has three main sections: operating, investing, and financing. Point: Payment for supplies is an operating activity because supplies are expected to be used up in short-term operations (typically less than one year). LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 19 FASTFORWARD Income Statement For Month Ended December 31, 2004 Revenues: Consulting revenue ($4,200 Total revenues Expenses: Exhibit 1.10 Financial Statements and Their Links $1,600) . . . . . . . . . . . . . $ 5,800 _ 300 ________ $ 6,100 1,000 _ 700 ________ _ 1,700 _________ $ 4,400 _ _________ _ _________ Point: Arrow lines show how the statements are linked. 1 Net income is used to compute equity. 2 Equity is used to prepare the balance sheet. 3 Cash from the balance sheet is used to reconcile the statement of cash flows. Point: A statements heading identifies the company, the statement title, and the date or time period. Rental revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............................. Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FASTFORWARD Statement of Owners Equity For Month Ended December 31, 2004 C.Taylor, Capital, December 1, 2004 . . . . . . . . . . . . . . . . . Plus: Investments by owner . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Withdrawals by owner . . . . . . . . . . . . . . . . . . . . . C.Taylor, Capital, December 31, 2004 . . . . . . . . . . . . . . . . $ $30,000 4,400 _______ 0 1 34,400 _______ 34,400 600 _______ $33,800 _______ _______ Point: The income statement, the statement of owners equity, and the statement of cash flows are prepared for a period of time. The balance sheet is prepared as of a point in time. FASTFORWARD Balance Sheet December 31, 2004 Assets Cash . . . . . . . . . . Supplies . . . . . . . . Equipment . . . . . . Liabilities Accounts payable . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . Equity C.Taylor, Capital . . . . . . . . . . . . Total liabilities and equity . . . . . $ 4,400 9,600 26,000 _______ $40,000 _______ _______ $ 6,200 _______ 6,200 2 Total assets . . . . . . 33,800 _______ $ 40,000 _______ _______ FASTFORWARD Statement of Cash Flows For Month Ended December 31, 2004 Cash flows from operating activities: 3 Cash Cash Cash Cash received from clients ($4,200 $1,900) paid for supplies ($2,500 $900) . . . . paid for rent . . . . . . . . . . . . . . . . . . . . paid to employee . . . . . . . . . . . . . . . . ... .... .... .... . . . . . . . . . . . . . . . . $ 6,100 (3,400) (1,000) (700) ________ $ 1,000 (26,000) ________ (26,000) 30,000 (600) ________ 29,400 _________ $ 4,400 0 _________ $ 4,400 _________ _________ Point: A single ruled line denotes an addition or subtraction. Final totals are double underlined. Negative amounts are often in parentheses. Net cash provided by operating activities . . . . . . . . . . . Cash flows from investing activities: Purchase of equipment . . . . . . . . . . . . . . . . . . . . . . . . Net cash used by investing activities . . . . . . . . . . . . . . Cash flows from financing activities: Investments by owner . . . . . . . . . . . . . . . . . . . . . . . . . Withdrawals by owner . . . . . . . . . . . . Net cash provided by financing activities Net increase in cash . . . . . . . . . . . . . . . Cash balance, December 1, 2004 . . . . . . . Cash balance, December 31, 2004 . . . . . . .. . .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 20 Point: Investing activities refer to long-term asset investments by the company, not to owner investments. Chapter 1 Accounting in Business from the owners initial investment and the $600 owner withdrawal. The net cash effect of all transactions is a $29,400 cash inflow. The final part of the statement shows FastForward increased its cash balance by $4,400 in December. Since it started with no cash, the ending balance is also $4,400see line 3 . Quick Check 21. Explain the link between the income statement and the statement of owners equity. 22. Describe the link between the balance sheet and the statement of owners equity. 23. Discuss the three major sections of the statement of cash flows. Answersp. 27 Decision Analysis (a section at the end of each chapter) introduces and explains ratios helpful in decision making using real company data. Instructors can skip this section and cover all ratios in Chapter 17. Decision Analysis Return on Assets A Decision Analysis section at the end of each chapter is devoted to financial statement analysis. We organize financial statement analysis into four areas: (1) liquidity and efficiency, (2) solvency, (3) profitability, and (4) market prospectsthe back inside cover has a ratio listing with definitions and grouping by area. When analyzing ratios, we need benchmarks to identify good, bad, or average levels. Common benchmarks include the companys prior levels and those of its competitors. This chapter presents a profitability measure, that of return on assets. Return on assets is useful in evaluating management, analyzing and forecasting profits, and planning activities. Dell Computer has its marketing department compute return on assets for every mailing. Return on assets (ROA), also called return on investment (ROI ), is defined in Exhibit 1.11. Return on assets Net income Average total assets A3 Compute and interpret return on assets. Exhibit 1.11 Return on Assets Net income is from the annual income statement, and average total assets is computed by adding the beginning and ending amounts for that same period and dividing by 2. To illustrate, Nike reports net income of $663.3 million in 2002. At the beginning of fiscal 2002, its total assets are $5,819.6 million and at the end of fiscal 2002, they total $6,443.0 million. Nikes return on assets for 2002 is: Return on assets $663.3 mil. 1 $5,819.6 mil. $6,443.0 mil. 2 2 10.8% Is a 10.8% return on assets good or bad for Nike? To help answer this question, we compare (benchmark) Nikes return with its prior performance, the returns of competitors (such as Reebok, Converse, Skechers, and Vans), and the returns from alternative investments. Nikes return for Each Decision Analysis section each of the prior five years is in the second column of Exhibit 1.12, which ranges from 7.4% to ends with a role-playing scenario 10.8%. These returns show an increase in its productive use of assets in recent years. We also comto show the usefulness of ratios. pute Reeboks returns in the third column of Exhibit 1.12. In four of the five years, Nikes return exceeds Reeboks, and its average return is Decision Maker higher for this period. We also compare Nikes Business Owner You own a small winter ski resort that earns a 21% return to the normal return for manufacturers of return on its assets. An opportunity to purchase a winter ski equipment athletic footwear and apparel (fourth column). Industry averages are available from services such manufacturer is offered to you. This manufacturer earns a 19% return on its as Dun & Bradstreets Industry Norms and Key assets. The industry return for this manufacturer is 14%. Do you purchase this Ratios and Robert Morris Associates Annual manufacturer? Statement Studies. When compared to the industry, Nike performs well. Answerp. 26 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 21 Nike Fiscal Year 2002 2001 2000 1999 1998 Return on Assets Nike 10.8% 10.1 10.4 8.5 7.4 Reebok 6.8% 5.3 0.7 1.4 7.7 Industry 3.6% 6.4 5.1 6.4 6.1 Exhibit 1.12 Nike, Reebok, and Industry Returns The Demonstration Problem is a review of key chapter content.The Planning the Solution offers strategies in solving the problem. Demonstration Problem After several months of planning, Sylvia Workman started a haircutting business called Expressions. The following events occurred during its first month: a. b. c. d. e. f. g. h. i. j. k. On August 1, Workman invested $3,000 cash and $15,000 of equipment in Expressions. On August 2, Expressions paid $600 cash for furniture for the shop. On August 3, Expressions paid $500 cash to rent space in a strip mall for August. On August 4, it purchased $1,200 of equipment on credit for the shop (using a long-term note payable). On August 5, Expressions opened for business. Cash received from services provided in the first week and a half of business (ended August 15) is $825. On August 15, it provided $100 of haircutting services on account. On August 17, it received a $100 check for services previously rendered on account. On August 17, it paid $125 cash to an assistant for working during the grand opening. Cash received from services provided during the second half of August is $930. On August 31, it paid a $400 installment toward principal on the note payable entered into on August 4. On August 31, Workman made a $900 cash withdrawal for personal use. Required 1. Arrange the following asset, liability, and equity titles in a table similar to the one in Exhibit 1.9: 2. 3. 4. 5. 6. Cash; Accounts Receivable; Furniture; Store Equipment; Note Payable; S. Workman, Capital; S. Workman, Withdrawals; Revenues; and Expenses. Show the effects of each transaction using the accounting equation. Prepare an income statement for August. Prepare a statement of owners equity for August. Prepare a balance sheet as of August 31. Prepare a statement of cash flows for August. Determine the return on assets ratio for August. Planning the Solution Set up a table like Exhibit 1.9 with the appropriate columns for accounts. Analyze each transaction and show its effects as increases or decreases in the appropriate columns. Be sure the accounting equation remains in balance after each transaction. Prepare the income statement, and identify revenues and expenses. List those items on the statement, compute the difference, and label the result as net income or net loss. Use information in the Equity columns to prepare the statement of owners equity. Use information in the last row of the transactions table to prepare the balance sheet. Prepare the statement of cash flows; include all events listed in the Cash column of the transactions table. Classify each cash flow as operating, investing, or financing. Calculate return on assets by dividing net income by average assets. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 22 Chapter 1 Accounting in Business Solution to Demonstration Problem 1. Assets Cash Accounts Receivable Furniture Store Equipment $15,000 _______ 15,000 _______ 15,000 1,200 _______ 16,200 _______ 16,200 _______ 16,200 _______ 16,200 _______ 16,200 _______ 16,200 _______ 16,200 _______ $ 16,200 _______ _______ Liabilities Note Payable S.Workman, Capital $18,000 ________ 18,000 ________ 18,000 $1,200 _________ 1,200 _________ 1,200 _________ 1,200 _________ 1,200 _________ 1,200 _________ 1,200 400 _________ 800 _________ $ 800 _________ _________ ________ 18,000 ________ 18,000 ________ 18,000 ________ 18,000 ________ 18,000 ________ 18,000 ________ 18,000 ________ $ 18,000 ________ ________ $900 _____ $900 _____ _____ $____ 825 ___ 825 1 ___ 00 ____ 925 ___ ____ 925 ___ ____ 925 9 ___ 30 ____ 1,855 ___ ____ 1,855 ___ ____ $1,855 ___ ____ ___ ____ $500 _____ 500 _____ 500 _____ 500 _____ 500 _____ 500 125 _____ 625 _____ 625 _____ 625 _____ $625 _____ _____ Equity S. Workman Withdrawals Revenues Expenses a. b. Bal. c. Bal. d. Bal. e. Bal. f. Bal. g. Bal. h. Bal. i. Bal. j. Bal. k. Bal. $3,000 600 ______ 2,400 500 ______ 1,900 ______ 1,900 825 ______ 2,725 ______ 2,725 100 ______ 2,825 125 ______ 2,700 930 ______ 3,630 400 ______ 3,230 900 ______ $2,330 ______ ______ $100 _ ____ 100 100 _ ____ 0 _ ____ 0 _ ____ 0 _ ____ 0 _ ____ _0 ____ _ ____ $600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ 600 __ ___ $600 __ ___ __ ___ 2. EXPRESSIONS Income Statement For Month Ended August 31 Revenues: Haircutting services revenue . . . . . . . . Expenses: Rent expense . . . . . . . . . . . . . . . . . . Wages expense . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . $500 125 _ ___ __ 625 ____ $1,230 ___ ___ ___ ___ $1,855 3. EXPRESSIONS Statement of Owners Equity For Month Ended August 31 S. Workman, Capital, August 1* . . . . . . . Plus: Investments by owner . . . . . . . . . Net income . . . . . . . . . . . . . . . . Less: Withdrawals by owner . . . . . . . . $ $18,000 1,230 ___ ___ 19,230 ____ ___ 19,230 900 ____ ___ $18,330 ____ ___ ____ ___ 0 S. Workman, Capital, August 31 . . . . . . . * If Expressions had been an existing business from a prior period, the beginning capital balance would equal the Capital account balance from the end of the prior period. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 4. EXPRESSIONS Balance Sheet August 31 Assets Cash . . . . . . . . . . . . . . . . Furniture . . . . . . . . . . . . . Store equipment . . . . . . . . Total assets . . . . . . . . . . . Accounting in Business 23 $ 2,330 600 16,200 ____ ___ $19,130 ____ ___ ____ ___ Liabilities Note payable . . . . . . . . . . . . . . . . Equity S. Workman, Capital . . . . . . . . . . . . Total liabilities and equity . . . . . . . . $ 800 18,330 ____ ___ $19,130 ____ ___ ____ ___ 5. EXPRESSIONS Statement of Cash Flows For Month Ended August 31 Cash flows from operating activities: Cash received from customers . . . . . . . . . . . . . . . . . . . Cash paid for rent . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for wages . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . Cash flows from investing activities: Cash paid for furniture . . . . . . . . . . . . . . . . Cash flows from financing activities: Cash received from owner . . . . . . . . . . . . . Cash paid for owner withdrawal . . . . . . . . . Partial repayment of (long-term) note payable ........ ........ ........ ........ ........ 3,000 (900) (400) ___ ___ 1,700 ___ ___ $2,330 ___ 0 ___ $2,330 ___ ___ ___ ___ $1,855 (500) (125) ___ ___ $1,230 (600) Net cash provided by financing activities . . . . . . . . . . . . Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash balance, August 1 . . . . . . . . . . . . . . . . . . . . . . . . . . Cash balance, August 31 . . . . . . . . . . . . . . . . . . . . . . . . . 6. Return on assets Net income Average assets $1,230 1 $18,000* $19,130 2 2 $1,230 $18,565 6.63 % * Uses the initial $18,000 investment as the begining balance for the startup period only. APPENDIX Return and Risk Analysis This appendix explains return and risk analysis and its role in business and accounting. Net income is often linked to return. Return on assets (ROA) is stated in ratio form as income divided by assets invested. For example, banks report return from a savings account in the form of an interest return such as 4%. If we invest in a savings account or in U.S. Treasury bills, we expect a return of around 2% to 7%. We could also invest in a companys stock, or even start our own business. How do we decide among these investment options? The answer depends on our trade-off return between and risk. 1A A4 Explain the relation between return and risk. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 24 Chapter 1 Accounting in Business Decision Insight Celebrity Investing How do fame and fortune translate into return and risk? A poll asked people which celebrity is the best investment. Similar to business investments, many people named performers with years of earning power aheadsee results to the right. Exhibit 1A.1 Average Returns for Bonds with Different Risks U.S. Treasury Low-risk corporate Medium-risk corporate High-risk corporate 0% Risk is the uncertainty about the return we will earn. All business investments involve risk, but some investments involve more risk than others. The lower Oprah Winfrey 27% Steven Spielberg 19 the risk of an investment, the lower is our expected Tiger Woods 15 return. The reason that savings accounts pay such a Michael Jordan 14 low return is the low risk of not being repaid with Tom Cruise 8 interest (the government guarantees most savings Jerry Seinfeld 4 accounts from default). If we buy a share of Nike or Madonna 2 any other company, we might obtain a large return. However, we have no guarantee of any return; there is even the risk of loss. The bar graph in Exhibit 1A.1 shows recent returns for bonds with different risks. Bonds are written promises by organizations to repay amounts loaned with interest. U.S. Treasury bonds provide a low expected return, but they 6.1% also offer low risk since they are backed by the U.S. government. High-risk corporate bonds of6.7% fer a much larger potential return but with much higher risk. 7.2% The trade-off between return and risk is a normal part of business. Higher risk implies 8.2% higher, but riskier, expected returns. To help us 8% 2% 4% 6% make better decisions, we use accounting inReturn formation to assess both return and risk. APPENDIX 1B C6 Identify and describe the three major activities in organizations. Point: Management must understand accounting data to set financial goals, make financing and investing decisions, and evaluate operating performance. Point: Investing (assets) and financing (liabilities plus equity) totals are always equal. Business Activities and the Accounting Equation This appendix explains how the accounting equation is derived from business activities. There are three major types of business activities: financing, investing, and operating. Each of these requires planning. Planning involves defining an organizations ideas, goals, and actions. Most public corporations use the Management Discussion and Analysis section in their annual reports to communicate plans. However, planning is not cast in stone. This adds risk to both setting plans and analyzing them. Financing Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. Organizations are careful in acquiring and managing financing activities because they can determine success or failure. The two sources of financing are owner and nonowner. Owner financing refers to resources contributed by the owner along with any income the owner leaves in the organization. Nonowner (or creditor) financing refers to resources contributed by creditors (lenders). Financial management is the task of planning how to obtain these resources and to set the right mix between owner and creditor financing. Investing Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. Assets are funded by an organizations financing. Organizations differ on the amount and makeup of assets. Some require land and factories to operate. Others need only an office. Determining the amount and type of assets for operations is called asset management. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 25 Invested amounts are referred to as assets. Financing is made up of creditor and owner financing, which hold claims on assets. Creditors claims are called liabilities, and the owners claim is called equity. This basic equality is called the accounting equation and can be written as: Assets Liabilities Equity. Operating Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. Sales and revenues are the inflow of assets from selling products and services. Costs and expenses are the outflow Pla of assets to support operating activities. Strategic mannn ing i nn agement is the process of determining the right mix of operating activities for the type of organization, its plans, and its market. Exhibit 1B.1 summarizes business activities. Planning is part of each activity and gives them meaning and focus. Investing (assets) and financing (liabilities and equity) are Financing Investing set opposite each other to stress their balance. Operating activities are below investing and financing activities to Operating show that operating activities are the result of investing Pla nnin g and financing. ng Exhibit 1B.1 Activities in Organizations A Summary organized by learning objectives concludes each chapter. Summary C1 Pl a C2 C3 C4 C5 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. 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. 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. 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. Explain the meaning of generally accepted accounting principles, and define and apply several key principles of accounting. 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. activities in organC6B Identify and describe the three majormajor activities: fiizations. Organizations carry out three nancing, 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 organizations plans. 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 owners claim on assets (the residual). The expanded accounting equation is: Assets Liabilities [Owner Capital Owner Withdrawals Revenues Expenses]. 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. 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%. 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. Identify and prepare basic financial statements and explain how they interrelate. Four financial statements report on an organizations activities: balance sheet, income statement, statement of owners equity, and statement of cash flows. A1 A2 A3 A4 P1 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 26 Chapter 1 Accounting in Business Guidance Answers to Decision Maker and Decision Ethics Entrepreneur (p. 11) You should probably form the business as a corporation if potential lawsuits are of prime concern. The corporate form of organization protects your personal property from lawsuits directed at the business and places only the corporations resources at risk. A downside of the corporate form is double taxation: The corporation must pay taxes on its income, and you normally must pay taxes on any money distributed to you from the business (even though the corporation already paid taxes on this money). You should also examine the ethical and socially responsible aspects of starting a business in which you anticipate injuries to others. Formation as an LLC or S corp. should also be explored. Retailer (p. 18) You can use the accounting equation (Assets Liabilities Equity) to help identify risky customers to whom you would likely not want to extend credit. A balance sheet provides amounts for each of these key components. The lower a customers equity is relative to liabilities, the less likely you would extend credit. A low equity means the business has little value that does not already have creditor claims to it. Business Owner (p. 20) The 19% return on assets for the man- ufacturer exceeds the 14% industry return (and many others). This is a positive factor for a potential purchase. Also, the purchase of this manufacturer is an opportunity to spread your risk over two businesses as opposed to one. Still, you should hesitate to purchase a business whose return of 19% is lower than your current resorts return of 21%. You are probably better off directing efforts to increase investment in your resort, assuming you can continue to earn a 21% return. Guidance Answers to Quick Checks 1. Accounting is an information and measurement system that 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. identifies, records, and communicates relevant information to help people make better decisions. Recordkeeping, also called bookkeeping, is the recording of financial transactions and events, either manually or electronically. Recordkeeping is essential to data reliability; but accounting is this and much more. Accounting includes identifying, measuring, recording, reporting, and analyzing business events and transactions. Technology offers increased accuracy, speed, efficiency, and convenience in accounting. External users of accounting include lenders, shareholders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. Internal users of accounting include managers, officers, and other internal decision makers involved with strategic and operating decisions. Internal users (managers) include those from research and development, purchasing, human resources, production, distribution, marketing, and servicing. Internal controls are procedures set up to protect assets, ensure reliable accounting reports, promote efficiency, and encourage adherence to company policies. Internal controls are crucial for relevant and reliable information. Ethical guidelines are threefold: (1) identify ethical concerns using personal ethics, (2) analyze options considering all good and bad consequences, and (3) make ethical decisions after weighing all consequences. Ethics and social responsibility yield good behavior, and they often result in higher income and a better working environment. For accounting to provide useful information for decisions, it must be trusted. Trust requires ethics in accounting. Two major participants in setting rules include the SEC and the FASB. (Note: Accounting rules reflect societys needs, not those of accountants or any other single constituency). Most U.S. companies are not directly affected by international accounting standards. International standards are put forth as 12. 13. 14. 15. 16. 17. 18. 19. 20. preferred accounting practices. However, stock exchanges and other parties are increasing the pressure to narrow differences in worldwide accounting practices. International accounting standards are playing an important role in that process. The objectivity and cost principles are related in that most users consider information based on cost as objective. Information prepared using both principles is considered highly reliable and often relevant. Users desire information about the performance of a specific entity. If information is mixed between two or more entities, its usefulness decreases. The revenue recognition principle gives preparers guidelines on when to recognize (record) revenue. This is important; for example, if revenue is recognized too early, the statements report revenue sooner than it should and the business looks more profitable than it is. The reverse is also true. The three basic forms of business organization are sole proprietorships, partnerships, and corporations. Owners of corporations are called shareholders (or stockholders). Corporate ownership is divided into units called shares (or stock). The most basic of corporate shares is common stock (or capital stock). The accounting equation is: Assets Liabilities Equity. This equation is always in balance, both before and after each transaction. A transaction that changes the makeup of assets would not affect liability and equity accounts. FastForwards transactions 2 and 3 are examples. Each exchanges one asset for another. Earning revenue by performing services, as in FastForwards transaction 5, increases equity (and assets). Incurring expenses while servicing clients, such as in transactions 6 and 7, decreases equity (and assets). Other examples include owner investments that increase equity and withdrawals that decrease equity. Paying a liability with an asset reduces both asset and liability totals. One example is FastForwards transaction 10 that reduces a payable by paying cash. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 21. An income statement reports a companys revenues and ex- Accounting in Business 27 23. Cash flows from operating activities report cash receipts and penses along with the resulting net income or loss. A statement of owners equity shows changes in equity, including that from net income or loss. Both statements report transactions occurring over a period of time. 22. The balance sheet describes a companys financial position (assets, liabilities, and equity) at a point in time. The equity account in the balance sheet is obtained from the statement of owners equity. payments from the primary business the company engages in. Cash flows from investing activities involve cash transactions from buying and selling long-term assets. Cash flows from financing activities include long-term cash borrowings and repayments to lenders and the cash investments and withdrawals of the owner. e.com/larso hh m n A list of key terms with page references concludes each chapter (a complete glossary is at the end of the book and also on the books Website). Key Terms Key Terms are available at the books Website for learning and testing in an online Flashcard Format. Accounting (p. 4) Accounting equation (p. 12) Assets (p. 12) Audit (p. 9) Balance sheet (p. 17) Bookkeeping (p. 5) Business entity principle (p. 10) Common stock (p. 11) Corporation (p. 11) Cost principle (p. 9) Equity (p. 12) Ethics (p. 8) Events (p. 13) Expanded accounting equation (p. 13) Expenses (p. 13) External transactions (p. 13) External users (p. 5) Financial accounting (p. 5) Financial Accounting Standards Board (FASB) (p. 9) Generally Accepted Accounting Principles (GAAP) (p. 9) Going-concern principle (p. 10) Income statement (p. 17) Internal transactions (p. 13) Internal users (p. 6) International Accounting Standards Board (IASB) (p. 9) Liabilities (p. 12) Managerial accounting (p. 6) Monetary unit principle (p. 10) Net assets (p. 12) Net income (p. 13) Net loss (p. 13) Objectivity principle (p. 9) Owner investment (p. 13) Owner withdrawals (p. 13) Partnership (p. 10) Proprietorship (p. 10) Recordkeeping (p. 5) Return (p. 23) Return on assets (p. 20) Revenues (p. 13) Revenue recognition principle (p. 10) Risk (p. 24) Securities and Exchange Commission (SEC) (p. 9) Shareholders (p. 11) Shares (p. 11) Sole proprietorship (p. 10) Statement of cash flows (p. 17) Statement of owners equity (p. 17) Stock (p. 11) Stockholders (p. 11) Withdrawals (p. 13) e.com/larso hh m n Personal Interactive Quiz Personal Interactive Quizzes A and B are available at the books Website to reinforce and assess your learning. Superscript letter A ( B) denotes assignments based on Appendix 1A (1B). Discussion Questions 1. What is the purpose of accounting in society? 2. Identify three actual businesses that offer services and three 4. Technology is increasingly used to process accounting data. Why then must we study and understand accounting? 5. Identify four kinds of external users and describe their uses actual businesses that offer products. 3. Why do organizations license and monitor accounting and accounting-related professionals? of accounting information. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 28 Chapter 1 Accounting in Business 6. What are at least three questions business owners might be 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. able to answer by looking at accounting information? Describe the internal role of accounting for organizations. What type of accounting information might be useful to those who carry out the marketing activities of a business? Identify three types of services typically offered by accounting professionals. Why is accounting described as a service activity? Identify at least three tasks you would expect to be performed by government accounting professionals. What work do tax accounting professionals perform in addition to preparing tax returns? What ethical issues might accounting professionals face in dealing with confidential information? Identify the two main categories of accounting principles. What does the objectivity principle prescribe for information reported in financial statements? Why? A business reports its own office stationery on the balance sheet at its $430 cost, although it cannot be sold for more than $10 as scrap paper. Which accounting principle(s) justifies this treatment? Why is the revenue recognition principle needed? What does it prescribe? Describe the three basic forms of business organization and their key characteristics. Identify three types of organizations that can be formed as either profit-oriented entities or government (or non-profit) entities. Define (a) assets, (b) liabilities, (c) equity, and (d ) net assets. What events or transactions change equity? What do accountants mean by the term revenue? Define net income and explain its computation. Identify the four basic financial statements of a business. What information is reported in an income statement? Give two examples of expenses a business might incur. What information is reported in a balance sheet? The statement of cash flows reports on what major activities? 29. Define and explain return on assets. 30.AExplain return and risk. Discuss the trade-off between them. 31.BDescribe the three major activities in organizations. 32.BExplain why investing (assets) and financing (liabilities and equity) totals are always equal. 33. Refer to the financial statements of Krispy Kreme in Appendix A. To what level of significance are dollar amounts rounded? What time period does its income statement cover? 34. Identify the dollar amounts of Tastykakes 2002 assets, liabilities, and equity shown in its statements in Appendix A near the end of the book. 35. Access the SEC EDGAR database Harley(www.SEC.gov) and retrieve Harley-Davidsons Davidson 2002 10-K (filed 2003-03-28). Identify its auditor. What responsibility does its independent auditor claim regarding its financial statements? 20. 21. 22. 23. 24. 25. 26. 27. 28. Red numbers denote Discussion Questions that involve decision-making. Homework Manager repeats all numerical Quick Study assignments on the books Website with new numbers each time it is worked. It can be used in practice, homework, or exam mode. Quick Study exercises give readers a brief test of key elements. QUICK STUDY QS 1-1 Identifying accounting users Identify the following users as either external users (E) or internal users (I). a. Managers d. FBI and CIA g. Consumer group j. Shareholders b. Controllers e. Sales staff h. Customers k. Congress c. Business press f. Brokers i. Lenders l. District attorney C2 QS 1-2 Identifying accounting terms C1 QS 1-3 Accounting opportunities (a) Identify the meaning of these accounting-related acronyms: GAAP, SEC, and FASB, and then briefly explain the importance of each to accounting. (b) Identify the international accounting standards setting organization, and then briefly explain its purpose. Identify at least three main areas of opportunities for accounting professionals. For each area, identify at least three job possibilities linked to accounting. C3 QS 1-4 C4 Accounting professionals must sometimes choose between two or more acceptable methods of accounting for business transactions and events. Explain why these situations can involve difficult matters of ethical concern. Thinker icon highlights assignments that use decision-making skills. Identifying ethical concerns LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 29 Accounting provides information about an organizations business transactions and events that both affect the accounting equation and can be reliably measured. Identify at least two examples of both (a) business transactions and (b) business events that meet these requirements. QS 1-5 Identifying transactions and events A2 An important responsibility of many accounting professionals is to design and implement internal control procedures for organizations. Explain the purpose of internal control procedures. QS 1-6 Explaining internal control C1 Identify which general accounting principle best describes each of the following practices: a. Marilyn Choi owns both Sailing Passions and Dockside Supplies. In preparing financial statements for Dockside Supplies, Choi makes sure that the expense transactions of Sailing Passions are kept separate from Docksides statements. b. In December 2004, A-Plus Floors received a customers order and cash prepayment to install carpet in a new house that would not be ready for installation until March 2005. A-Plus Floors should record the revenue from the customer order in March 2005, not in December 2004. c. If $30,000 cash is paid to buy land, the land is reported on the buyers balance sheet at $30,000. a. Total assets of HLC Financial Co. equal $40,000 and its equity is $10,000. What is the amount QS 1-7 Identifying accounting principles C5 QS 1-8 Applying the accounting equation of its liabilities? b. Total assets of Deep Valley Co. equal $55,000 and its liabilities and equity amounts are equal. What is the amount of its liabilities? What is the amount of its equity? A1 Use the accounting equation to compute the missing financial statement amounts (a), (b), and (c). Company 1 2 3 Assets $30,000 $ ____ ( ___ b) $90,000 Liabilities $ ____ ( ___ a) $50,000 $10,000 Equity $20,000 $30,000 $ ____ ___(c) QS 1-9 Applying the accounting equation A1 Use Harley-Davidsons December 31, 2002, financial statements, in Appendix A near the end of the book, to answer the following: a. Identify the dollar amounts of Harleys 2002 (1) assets, (2) liabilities, and (3) equity. b. Using Harleys amounts from part a, verify that Assets Liabilities Equity. QS 1-10 Identifying and computing assets, liabilities, and equity HarleyA2 Davidson Indicate in which financial statement each item would most likely appear: income statement (I), balance sheet (B), statement of owners equity (E), or statement of cash flows (CF). a. Assets d. Equipment g. Total liabilities and equity b. Revenues e. Withdrawals h. Cash from operating activities c. Liabilities f. Expenses i. Net decrease (or increase) in cash In a recent years financial statements, Boeing Company, which is the largest aerospace company in the United States, reported the following. Compute and interpret Boeings return on assets (assume competitors average a 6% return on assets). Sales . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . Average total assets . . . . . . . . $21,924 million 856 million 21,463 million QS 1-11 Classifying items by financial statements P1 QS 1-12 Computing and interpreting return on assets A3 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 30 Chapter 1 Accounting in Business Homework Manager repeats all numerical Exercises on the books Website with new numbers each time they are worked. It can be used in practice, homework, or exam mode. EXERCISES Exercise 1-1 Distinguishing business organizations C5 The following describe several different business organizations. Determine whether the description refers to a sole proprietorship, partnership, or corporation. a. Ownership of Spirit Company is divided into 1,000 shares of stock. b. Delta is owned by Sarah Gomez, who is personally liable for the debts of the business. c. Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen nor Fitch has personal responsibility for the debts of Financial Services. d. Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally liable for the debts of the business. e. XLT Services does not have separate legal existence apart from the one person who owns it. f. BioProducts does not pay income taxes and has one owner. g. Tampa Biz pays its own income taxes and has two owners. Exercise 1-2 Identifying accounting principles C5 Match each of the numbered descriptions with the principle it best reflects. Indicate your answer by writing the letter for the appropriate principle in the blank space next to each description. A. General accounting principle E. Specific accounting principle B. Cost principle F. Objectivity principle C. Business entity principle G. Going-concern principle D. Revenue recognition principle 1. Usually created by a pronouncement from an authoritative body. 2. Financial statements reflect the assumption that the business continues operating. 3. Derived from long-used and generally accepted accounting practices. 4. Financial statement information is supported by evidence other than someones opinion or belief. 5. Every business is accounted for separately from its owner or owners. 6. Revenue is recorded only when the earnings process is complete. 7. Information is based on actual costs incurred in transactions. Exercise 1-3 Describing accounting responsibilities C2 C3 Many accounting professionals work in one of the following three areas: A. Financial accounting B. Managerial accounting C. Tax accounting Identify the area of accounting that is most involved in each of the following responsibilities: 1. External auditing. 5. Planning transactions to minimize taxes. 2. Cost accounting. 6. Preparing external financial statements. 3. Budgeting. 7. Reviewing reports for SEC compliance. 4. Internal auditing. 8. Investigating violations of tax laws. Exercise 1-4 Identifying accounting users and uses Much of accounting is directed at servicing the information needs of those users that are external to an organization. Identify at least three external users of accounting information and indicate two questions they might seek to answer through their use of accounting information. C2 Exercise 1-5 Identifying ethical concerns C4 Assume the following role and describe a situation in which ethical considerations play an important part in guiding your decisions and actions: a. You are a student in an introductory accounting course. b. You are a manager with responsibility for several employees. c. You are an accounting professional preparing tax returns for clients. d. You are an accounting professional with audit clients that are competitors in business. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 31 Match each of the numbered descriptions with the term or phrase it best reflects. Indicate your answer by writing the letter for the term or phrase in the blank provided. A. Audit C. Ethics E. SEC G. Net income B. GAAP D. Tax accounting F. Public accountants H. IASB 1. Amount a business earns after paying all expenses and costs associated with its sales and revenues. 2. An examination of an organizations accounting system and records that adds credibility to financial statements. 3. Principles that determine whether an action is right or wrong. 4. Accounting professionals who provide services to many clients. 5. An accounting area that includes planning future transactions to minimize taxes paid. Exercise 1-6 Learning the language of business C1C4 Answer the following questions. (Hint: Use the accounting equation.) a. Fongs Medical Supplies has assets equal to $123,000 and liabilities equal to $53,000 at year-end. What is the total equity for Fongs business at year-end? b. At the beginning of the year, Beyonce Companys assets are $200,000 and its equity is $150,000. During the year, assets increase $70,000 and liabilities increase $30,000. What is the equity at the end of the year? c. At the beginning of the year, New Wave Companys liabilities equal $60,000. During the year, assets increase by $80,000, and at year-end assets equal $180,000. Liabilities decrease $10,000 during the year. What are the beginning and ending amounts of equity? Exercise 1-7 Using the accounting equation A1 A2 Check (c) Beg. equity, $40,000 Determine the missing amount from each of the separate situations a, b, and c below. Assets a. ? b. $ 89,000 c. $132,000 Liabilities $30,000 $22,000 ? Equity $65,000 ? $20,000 Exercise 1-8 Using the accounting equation A1 Provide an example of a transaction that creates the described effects for the separate cases a through g. a. Decreases an asset and decreases equity. e. Increases an asset and decreases an asset. b. Increases an asset and increases a liability. f. Increases a liability and decreases equity. c. Decreases a liability and increases a liability. g. Increases an asset and increases equity. d. Decreases an asset and decreases a liability. Exercise 1-9 Identifying effects of transactions on the accounting equation A1 A2 Mulan began a new consulting firm on January 5. The accounting equation showed the following balances after each of the companys first five transactions. Analyze the accounting equation for each transaction and describe each of the five transactions with their amounts. Assets Accounts Receivable $ 0 0 0 3,000 3,000 Office Supplies $ 0 1,500 1,500 1,500 1,500 Office Furniture $ 0 0 8,000 8,000 8,000 Liabilities Equity Exercise 1-10 Analysis using the accounting equation A1 A2 Transaction Cash a. $20,000 b. c. d. e. 19,000 11,000 11,000 11,500 Accounts Payable $0 500 500 500 500 Mulan, Capital $20,000 20,000 20,000 20,000 20,000 Revenues $ 0 0 0 3,000 3,500 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 32 Chapter 1 Accounting in Business Exercise 1-11 Identifying effects of transactions on accounting equation The following table shows the effects of five transactions (a through e) on the assets, liabilities, and equity of Bonita Boutique. Write short descriptions of the probable nature of each transaction. Assets Cash $ 10,500 2,000 Accounts Receivable $0 Office Supplies $1,500 500 950 500 950 _____ $0 _____ _____ ____ __ $2,000 ____ __ ____ __ _____ ___ $ 11,500 _____ ___ _____ ___ _____ _ $_ ____0 _____ __ ____ ___ $21,500 ____ ___ ____ ___ ___ __ $__ 950 ___ _ __ __ Land $ 9,500 2,000 Liabilities Accounts Payable $0 500 950 Bonita, Capital $21,500 Equity Revenues $ 0 A1 A2 a. b. c. d. 500 e. _____ 50 9 ___ $ 8,950 _____ ___ _____ ___ Exercise 1-12 Identifying effects of transactions on the accounting equation and computing return on assets A1 A2 Pamela Maben began a professional practice on June 1 and plans to prepare financial statements at the end of each month. During June, Maben (the owner) completed these transactions: a. Owner invested $50,000 cash along with equipment that had a $10,000 market value. b. Paid $1,600 cash for rent of office space for the month. c. Purchased $12,000 of additional equipment on credit (due within 30 days). d. Completed work for a client and immediately collected the $2,000 cash earned. e. Completed work for a client and sent a bill for $7,000 to be paid within 30 days. f. Purchased additional equipment for $8,000 cash. g. Paid an assistant $2,400 cash as wages for the month. h. Collected $5,000 cash on the amount owed by the client described in transaction e. i. Paid $12,000 cash to settle the liability created in transaction c. j. Owner withdrew $500 cash for personal use. Required Check Net income, $5,000 Create a table like the one in Exhibit 1.9, using the following headings for columns: Cash; Accounts Receivable; Equipment; Accounts Payable; Maben, Capital; Maben, Withdrawals; Revenues; and Expenses. Then use additions and subtractions to show the effects of the transactions on individual items of the accounting equation. Show new balances after each transaction. Exercise 1-13 Preparing an income statement On October 1, Sasha Shandi organized Best Answers a new consulting firm. On October 31, the companys records show the following items and amounts. Use this information to prepare an October income statement for the business. Cash . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . Office supplies . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . Office equipment . . . . . . . . . $ 2,000 13,000 4,250 36,000 28,000 7,500 74,000 Cash withdrawals by owner . . . . . . . Consulting fees earned . . . . . . . . . . . Rent expense . . . . . . . . . . . . . . . . . . Salaries expense . . . . . . . . . . . . . . . . Telephone expense . . . . . . . . . . . . . . Miscellaneous expenses . . . . . . . . . . . $ 3,360 15,000 2,550 6,000 660 680 P1 Check Net income, $5,110 Accounts payable . . . . . . . . . Owner investments . . . . . . . . Exercise 1-14 Preparing a statement of owners equity P1 Use the information in Exercise 1-13 to prepare an October statement of owners equity for Best Answers. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 33 Use the information in Exercise 1-13 (if completed, you can also use your solution to Exercise 1-14) to prepare an October 31 balance sheet for Best Answers. Use the information in Exercise 1-13 to prepare an October 31 statement of cash flows for Best Answers. Also assume the following: a. The owners initial investment consists of $38,000 cash and $36,000 in land. b. The $28,000 equipment purchase is paid in cash. c. The accounts payable balance of $7,500 consists of the $4,250 office supplies purchase and $3,250 in employee salaries yet to be paid. d. The rent, telephone, and miscellaneous expenses are paid in cash. e. Only $2,000 cash has been collected for the $15,000 consulting services provided. Indicate the section where each of the following would appear on the statement of cash flows. A. Cash flows from operating activity B. Cash flows from investing activity C. Cash flows from financing activity 1. Cash paid for wages 5. Cash paid on an account payable 2. Cash withdrawal by owner 6. Cash invested by owner 3. Cash purchase of equipment 7. Cash received from clients 4. Cash paid for advertising 8. Cash paid for rent Geneva Group reports net income of $20,000 for 2005. At the beginning of 2005, Geneva Group had $100,000 in assets. By the end of 2005, assets had grown to $150,000. What is Geneva Groups 2005 return on assets? How would you assess its performance if competitors average a 10% return on assets? Exercise 1-15 Preparing a balance sheet P1 Exercise 1-16 Preparing a statement of cash flows P1 Check Net increase in cash, $2,000 Exercise 1-17 Identifying sections of the statement of cash flows P1 Exercise 1-18 Analysis of return on assets A3 Match each transaction or event to one of the following activities of an organization: financing activities (F), investing activities (I), or operating activities (O). a. An owner contributes resources to the business. b. An organization purchases equipment. c. An organization advertises a new product. d. The organization borrows money from a bank. e. An organization sells some of its land. Exercise 1-19B Identifying business activities C6 Problem Set B located at the end of Problem Set A is provided for each problem to reinforce the learning process. Problem Set C (with solutions for instructors) is provided on this books Website. The following financial statement information is from five separate companies: Company A December 31, 2004: Assets . . . . . . . . . . . . . . . . . . . . Liabilities . . . . . . . . . . . . . . . . . . December 31, 2005: Assets . . . . . . . . . . . . . . . . . . . . Liabilities . . . . . . . . . . . . . . . . . . During year 2005: Owner investments . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . Owner cash withdrawals . . . . . . . Company B Company C Company D Company E PROBLEM SET A Problem 1-1A Computing missing information using accounting knowledge $45,000 23,500 48,000 ? 5,000 7,500 2,500 $35,000 22,500 41,000 27,500 1,500 ? 3,000 $29,000 14,000 ? 19,000 7,750 9,000 3,875 $80,000 38,000 125,000 64,000 ? 12,000 0 $123,000 ? 112,500 75,000 4,500 18,000 9,000 A1 A2 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 34 Chapter 1 Required Accounting in Business Check (1b) $31,500 (2c) $2,500 (3) $46,875 1. Answer the following questions about Company A: a. What is the equity amount on December 31, 2004? b. What is the equity amount on December 31, 2005? c. What is the amount of liabilities on December 31, 2005? 2. Answer the following questions about Company B: a. What is the equity amount on December 31, 2004? b. What is the equity amount on December 31, 2005? c. What is net income for year 2005? 3. Calculate the amount of assets for Company C on December 31, 2005. 4. Calculate the amount of owner investments for Company D during year 2005. 5. Calculate the amount of liabilities for Company E on December 31, 2004. Problem 1-2A Identifying effects of transactions on financial statements A1 A2 Identify how each of the following separate transactions affects financial statements. For the balance sheet, identify how each transaction affects total assets, total liabilities, and total equity. For the income statement, identify how each transaction affects net income. For the statement of cash flows, identify how each transaction affects cash flows from operating activities, cash flows from financing activities, and cash flows from investing activities. For increases, place a in the column or columns. For decreases, place a in the column or columns. If both an increase and a decrease occur, place a in the column or columns. The first transaction is completed as an example. Income Statement Total Equity Net Income Balance Sheet Total Assets Total Liab. Statement of Cash Flows Operating Activities Financing Activities Investing Activities Transaction 1 2 3 4 5 6 7 8 9 10 Owner invests cash in business Receives cash for services provided Pays cash for employee wages Incurs legal costs on credit Borrows cash by signing long-term note payable Owner withdraws cash Buys land by signing note payable Provides services on credit Buys office equipment for cash Collects cash on receivable from (8) Problem 1-3A Preparing an income statement The following is selected financial information for Valdez Energy Company for the year ended December 31, 2005: revenues, $65,000; expenses, $50,000; net income, $15,000. Required P1 Prepare the 2005 calendar-year income statement for Valdez Energy Company. Problem 1-4A Preparing a balance sheet The following is selected financial information for Amico as of December 31, 2005: liabilities, $34,000; equity, $56,000; assets, $90,000. Required P1 Prepare the balance sheet for Amico as of December 31, 2005. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 35 The following is selected financial information of Trimark for the year ended December 31, 2005: Cash used by investing activities . . . . . . . . Net increase in cash . . . . . . . . . . . . . . . . Cash used by financing activities . . . . . . . . Cash from operating activities . . . . . . . . . Cash, December 31, 2004 . . . . . . . . . . . . $(3,000) 200 (3,800) 7,000 3,300 Problem 1-5A Preparing a statement of cash flows P1 Required Prepare the 2005 calendar-year statement of cash flows for Trimark. The following is selected financial information for Boardwalk for the year ended December 31, 2005: B. Walk, Capital, Dec. 31, 2005 . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . $15,000 9,000 B. Walk, Withdrawals . . . . . . . . . . . . . . B.Walk, Capital, Dec. 31, 2004 . . . . . . . . $2,000 8,000 Problem 1-6A Preparing a statement of owners equity P1 Required Prepare the 2005 calendar-year statement of owners equity for Boardwalk. J. D. Simpson started The Simpson Co., a new business that began operations on May 1. Simpson Co. completed the following transactions during that first month: May 1 1 3 5 8 12 15 20 22 25 26 27 28 30 30 31 J. D. Simpson, the owner, invested $60,000 cash in the business. Rented a furnished office and paid $3,200 cash for Mays rent. Purchased $1,680 of office equipment on credit. Paid $800 cash for this months cleaning services. Provided consulting services for a client and immediately collected $4,600 cash. Provided $3,000 of consulting services for a client on credit. Paid $850 cash for an assistants salary for the first half of this month. Received $3,000 cash payment for the services provided on May 12. Provided $2,800 of consulting services on credit. Received $2,800 cash payment for the services provided on May 22. Paid $1,680 cash for the office equipment purchased on May 3. Purchased $60 of advertising in this months (May) local paper on credit; cash payment is due June 1. Paid $850 cash for an assistants salary for the second half of this month. Paid $200 cash for this months telephone bill. Paid $480 cash for this months utilities. J. D. Simpson withdrew $1,200 cash for personal use. Problem 1-7A Analyzing transactions and preparing financial statements C5 A2 P1 e cel mhhe.com/larson x Required 1. Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts Receivable; Office Equipment; Accounts Payable; J. D. Simpson, Capital; J. D. Simpson, Withdrawals; Revenues; and Expenses. 2. Show effects of the transactions on the accounts of the accounting equation by recording increases and decreases in the appropriate columns. Do not determine new account balances after each transaction. Determine the final total for each account and verify that the equation is in balance. 3. Prepare an income statement for May, a statement of owners equity for May, a May 31 balance sheet, and a statement of cash flows for May. Check (2) Ending balances: Cash, $61,140; Expenses, $6,440 (3) Net income, $3,960; Total assets, $62,820 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 36 Chapter 1 Accounting in Business Problem 1-8A Analyzing transactions and preparing financial statements Curtis Hamilton started a new business and completed these transactions during December: Dec. 1 2 3 5 6 8 15 18 20 24 28 29 30 31 Curtis Hamilton transferred $56,000 cash from a personal savings account to a checking account in the name of Hamilton Electric as its initial capital. Rented office space and paid $800 cash for the December rent. Purchased $14,000 of electrical equipment by paying $3,200 cash and agreeing to pay the $10,800 balance in 30 days. Purchased office supplies by paying $900 cash. Completed electrical work and immediately collected $1,000 cash for the work. Purchased $3,800 of office equipment on credit. Completed electrical work on credit in the amount of $4,000. Purchased $500 of office supplies on credit. Paid $3,800 cash for the office equipment purchased on December 8. Billed a client $600 for electrical work completed; the balance is due in 30 days. Received $4,000 cash for the work completed on December 15. Paid the assistants salary of $1,200 cash for this month. Paid $440 cash for this months utility bill. C. Hamilton withdrew $700 cash for personal use. C5 A2 P1 e cel mhhe.com/larson x Required 1. Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts Check (2) Ending balances: Cash, $49,960, Accounts Payable, $11,300 (3) Net income, $3,160: Total assets, $69,760 Receivable; Office Supplies; Office Equipment; Electrical Equipment; Accounts Payable; C. Hamilton, Capital; C. Hamilton, Withdrawals; Revenues; and Expenses. 2. Use additions and subtractions to show the effects of each transaction on the accounts in the accounting equation. Show new balances after each transaction. 3. Use the increases and decreases in the columns of the table from part 2 to prepare an income statement, a statement of owners equity, and a statement of cash flows for the month. Also prepare a balance sheet as of the end of the month. Analysis Component 4. Assume that the owner investment transaction on December 1 was $40,000 cash instead of $56,000 and that Hamilton Electric obtained the $16,000 difference by borrowing it from a bank. Explain the effect of this change on total assets, total liabilities, and total equity. Problem 1-9A Analyzing effects of transactions C5 P1 A1 A2 Miranda Right started Right Consulting, a new business, and completed the following transactions during its first year of operations: a. M. Right invests $60,000 cash and office equipment valued at $30,000 in the business. b. Purchased a $300,000 building to use as an office. Right paid $50,000 in cash and signed a note payable promising to pay the $250,000 balance over the next ten years. c. Purchased office equipment for $6,000 cash. d. Purchased $4,000 of office supplies and $1,000 of office equipment on credit. e. Paid a local newspaper $1,000 cash for printing an announcement of the offices opening. f. Completed a financial plan for a client and billed that client $4,000 for the service. g. Designed a financial plan for another client and immediately collected an $8,000 cash fee. h. M. Right withdrew $1,800 cash from the company bank account for personal use. i. Received a $3,000 partial cash payment from the client described in transaction f. j. Made a $500 cash payment on the equipment purchased in transaction d. k. Paid $2,500 cash for the office secretarys wages. Required 1. Create a table like the one in Exhibit 1.9, using the following headings for the columns: Cash; Check (2) Ending balances: Cash, $9,200; Expenses, $3,500 (3) Net income, $8,500 Accounts Receivable; Office Supplies; Office Equipment; Building; Accounts Payable; Notes Payable; M. Right, Capital; M. Right, Withdrawals; Revenues; and Expenses. 2. Use additions and subtractions to show the effects of these transactions on individual items of the accounting equation. Show new balances after each transaction. 3. Once you have completed the table, determine the companys net income. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 37 Coca-Cola and PepsiCo both produce and market beverages that are direct competitors. Key financial figures (in $ millions) for these businesses over the past year follow: Key Figures Sales Net income Average invested (assets) Coca-Cola $400 50 625 PepsiCo $250.0 37.5 312.5 Problem 1-10A Computing and interpreting return on assets A3 Required 1. Compute return on assets for (a) Coca-Cola and (b) PepsiCo. 2. Which company is more successful in its total amount of sales to consumers? 3. Which company is more successful in returning net income from its amount invested? Analysis Component 4. Write a one-paragraph memorandum explaining which company you would invest your money in Check (1a) 8%; (1b) 12% and why. (Limit your explanation to the information provided.) Zia manufactures, markets, and sells cellular telephones. The average total assets for Zia is $250,000. In its most recent year, Zia reported net income of $55,000 on revenues of $455,000. Required 1. What is Zias return on assets? 2. Does return on assets seem satisfactory for Zia given that its competitors average a 12% return Problem 1-11A Determining expenses, liabilities, equity and return on assets A1 A3 on assets? 3. What are total expenses for Zia in its most recent year? 4. What is the average total amount of liabilities plus equity for Zia? Check (3) $400,000 (4) $250,000 All business decisions involve aspects of risk and return. Required Problem 1-12AA Identifying risk and return A4 Identify both the risk and the return in each of the following activities: 1. Investing $1,000 in a 4% savings account. 2. Placing a $1,000 bet on your favorite sports team. 3. Investing $10,000 in Yahoo! stock. 4. Taking out a $10,000 college loan to earn an accounting degree. A startup company often engages in the following transactions in its first year of operations. Classify these transactions in one of the three major categories of an organizations business activities. A. Financing B. Investing C. Operating 1. Owner investing land in business. 5. Purchasing equipment. 2. Purchasing a building. 6. Selling and distributing products. 3. Purchasing land. 7. Paying for advertising. 4. Borrowing cash from a bank. 8. Paying employee wages. Problem 1-13AB Describing organizational activities C6 An organization undertakes various activities in pursuit of business success. Identify an organizations three major business activities, and describe each activity. Problem 1-14AB Describing organizational activities C6 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 38 Chapter 1 Accounting in Business PROBLEM SET B Problem 1-1B Computing missing information using accounting knowledge The following financial statement information is from five separate companies: Company V December 31, 2004: Assets . . . . . . . . . . . . . . . . . . . . Liabilities . . . . . . . . . . . . . . . . . . December 31, 2005: Assets . . . . . . . . . . . . . . . . . . . . Liabilities . . . . . . . . . . . During year 2005: Owner investments . . . . Net income . . . . . . . . . Owner cash withdrawals ....... ....... ....... ....... Company W Company X Company Y Company Z A1 A2 $45,000 30,000 49,000 26,000 6,000 ? 4,500 $70,000 50,000 90,000 ? 10,000 30,000 2,000 $121,500 58,500 136,500 55,500 ? 16,500 0 $82,500 61,500 ? 72,000 38,100 24,000 18,000 $124,000 ? 160,000 52,000 40,000 32,000 6,000 Required 1. Answer the following questions about Company V: a. What is the amount of equity on December 31, 2004? b. What is the amount of equity on December 31, 2005? c. What is net income for year 2005? 2. Answer the following questions about Company W: a. What is the amount of equity on December 31, 2004? b. What is the amount of equity on December 31, 2005? c. What is the amount of liabilities on December 31, 2005? 3. Calculate the amount of owner investments for Company X during 2005. 4. Calculate the amount of assets for Company Y on December 31, 2005. 5. Calculate the amount of liabilities for Company Z on December 31, 2004. Check (1b) $23,000 (2c) $32,000 (4) $137,100 Problem 1-2B Identifying effects of transactions on financial statements A1 A2 Identify how each of the following separate transactions affects financial statements. For the balance sheet, identify how each transaction affects total assets, total liabilities, and total equity. For the income statement, identify how each transaction affects net income. For the statement of cash flows, identify how each transaction affects cash flows from operating activities, cash flows from financing activities, and cash flows from investing activities. For increases, place a in the column or columns. For decreases, place a in the column or columns. If both an increase and a decrease occur, place in the column or columns. The first transaction is completed as an example. Income Statement Total Equity Net Income Balance Sheet Total Assets Total Liab. Statement of Cash Flows Operating Activities Financing Activities Investing Activities Transaction 1 2 3 4 5 6 7 8 9 10 Owner invests cash in business Buys building by signing note payable Pays cash for salaries incurred Provides services for cash Pays cash for rent incurred Incurs utilities costs on credit Buys store equipment for cash Owner withdraws cash Provides services on credit Collects cash on receivable from (9) LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 39 Selected financial information for Online Co. for the year ended December 31, 2005, follows: Revenues . . . . . . . $58,000 Expenses . . . . . . . $30,000 Net income . . . . . . . $28,000 Problem 1-3B Preparing an income statement P1 Required Use the information provided to prepare the 2005 calendar-year income statement for Online Co. The following is selected financial information for RWB Company as of December 31, 2005: Liabilities . . . . . . . $74,000 Equity . . . . . . . $40,000 Assets . . . . . . . $114,000 Problem 1-4B Preparing a balance sheet P1 Required Use the information provided to prepare the balance sheet for RWB as of December 31, 2005. Selected financial information of BuyRight Co. for the year ended December 31, 2005, follows: Cash from investing activities . . . . . . . Net increase in cash . . . . . . . . . . . . . Cash from financing activities . . . . . . . Cash used by operating activities . . . . Cash, December 31, 2004 . . . . . . . . . . . . . . $2,600 1,400 2,800 (4,000) 1,300 Problem 1-5B Preparing a statement of cash flows P1 Required Use this information to prepare the 2005 calendar-year statement of cash flows for BuyRight. The following is selected financial information of ComEx for the year ended December 31, 2005: C. Tex, Capital, Dec. 31, 2005 . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . $47,000 6,000 C. Tex, Withdrawals . . . . . . . . . . . . . . C. Tex, Capital, Dec. 31, 2004 . . . . . . . $ 8,000 49,000 Problem 1-6B Preparing a statement of owners equity P1 Required Prepare the 2005 calendar-year statement of owners equity for ComEx. Ken Stone launched a new business, Kens Maintenance Co., that began operations on June 1. The following transactions were completed by the company during that first month: June 1 2 4 6 8 14 16 20 21 24 25 26 28 29 30 30 K. Stone invested $120,000 cash in the business. Rented a furnished office and paid $4,500 cash for Junes rent. Purchased $2,400 of equipment on credit. Paid $1,125 cash for the next weeks advertising of the opening of the business. Completed maintenance services for a customer and immediately collected $750 cash. Completed $6,300 of maintenance services for First Union Center on credit. Paid $900 cash for an assistants salary for the first half of the month. Received $6,300 cash payment for services completed for First Union Center on June 14. Completed $3,500 of maintenance services for Skyway Co. on credit. Completed $825 of maintenance services for Comfort Motel on credit. Received $3,500 cash payment from Skyway Co. for the work completed on June 21. Made payment of $2,400 cash for the equipment purchased on June 4. Paid $900 cash for an assistants salary for the second half of this month. K. Stone withdrew $2,000 cash for personal use. Paid $120 cash for this months telephone bill. Paid $525 cash for this months utilities. Problem 1-7B Analyzing transactions and preparing financial statements C5 A2 P1 Required 1. Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts Receivable; Equipment; Accounts Payable; K. Stone, Capital; K. Stone, Withdrawals; Revenues; and Expenses. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 40 Check (2) Ending balances: Cash, $118,080; Expenses, $8,070 (3) Net income, $3,305; Total assets, $121,305 Chapter 1 Accounting in Business 2. Show the effects of the transactions on the accounts of the accounting equation by recording in- creases and decreases in the appropriate columns. Do not determine new account balances after each transaction. Determine the final total for each account and verify that the equation is in balance. 3. Prepare a June income statement, a June statement of owners equity, a June 30 balance sheet, and a June statement of cash flows. Problem 1-8B Analyzing transactions and preparing financial statements Swender Excavating Co., owned by Patrick Swender, began operations in July and completed these transactions during that first month: July 1 P. Swender invested $60,000 cash in the business as its initial capital. 2 Rented office space and paid $500 cash for the July rent. 3 Purchased excavating equipment for $4,000 by paying $800 cash and agreeing to pay the $3,200 balance in 30 days. 6 Purchased office supplies for $500 cash. 8 Completed work for a customer and immediately collected $2,200 cash for the work. 10 Purchased $3,800 of office equipment on credit. 15 Completed work for a customer on credit in the amount of $2,400. 17 Purchased $1,920 of office supplies on credit. 23 Paid $3,800 cash for the office equipment purchased on July 10. 25 Billed a customer $5,000 for work completed; the balance is due in 30 days. 28 Received $2,400 cash for the work completed on July 15. 30 Paid an assistants salary of $1,260 cash for this month. 31 Paid $260 cash for this months utility bill. 31 P. Swender withdrew $1,200 cash for personal use. Required 1. Arrange the following asset, liability, and equity titles in a table like Exhibit 1.9: Cash; Accounts C5 A2 P1 Check (2) Ending balances: Cash, $56,280; Accounts Payable, $5,120 (3) Net income, $7,580: Total assets, $71,500 Receivable; Office Supplies; Office Equipment; Excavating Equipment; Accounts Payable; P. Swender, Capital; P. Swender, Withdrawals; Revenues; and Expenses. 2. Use additions and subtractions to show the effects of each transaction on the accounts in the accounting equation. Show new balances after each transaction. 3. Use the increases and decreases in the columns of the table from part 2 to prepare an income statement, a statement of owners equity, and a statement of cash flows for the month. Also prepare a balance sheet as of the end of the month. Analysis Component 4. Assume that Swenders $4,000 purchase of excavating equipment on July 3 was financed from an additional personal investment of another $4,000 cash in the business (instead of the purchase conditions described in the transaction). Explain the effect of this change on total assets, total liabilities, and equity. Problem 1-9B Analyzing effects of transactions C5 P1 A1 A2 Tiana Moore started a new business, Tianas Solutions, that completed the following transactions during its first year of operations: a. T. Moore invests $95,000 cash and office equipment valued at $20,000 in the business. b. Purchased a $120,000 building to use as an office. Moore paid $20,000 in cash and signed a note payable promising to pay the $100,000 balance over the next ten years. c. Purchased office equipment for $20,000 cash. d. Purchased $1,400 of office supplies and $3,000 of office equipment on credit. e. Paid a local newspaper $400 cash for printing an announcement of the offices opening. f. Completed a financial plan for a client and billed that client $1,800 for the service. g. Designed a financial plan for another client and immediately collected a $2,000 cash fee. h. T. Moore withdrew $5,000 cash from the company bank account for personal use. i. Received $1,800 cash from the client described in transaction f. j. Made a $2,000 cash payment on the equipment purchased in transaction d. k. Paid $2,000 cash for the office secretarys wages. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Required Accounting in Business 41 1. Create a table like the one in Exhibit 1.9, using the following headings for the columns: Cash; Accounts Receivable; Office Supplies; Office Equipment; Building; Accounts Payable; Notes Payable; T. Moore, Capital; T. Moore, Withdrawals; Revenues; and Expenses. 2. Use additions and subtractions to show the effects of these transactions on individual items of the accounting equation. Show new balances after each transaction. 3. Once you have completed the table, determine the companys net income. AT&T and GTE produce and market telecommunications products and are competitors. Key financial figures (in $ millions) for these businesses over the past year follow: Key Figures Sales . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . Average invested (assets) . . . AT&T $79,609 139 87,261 GTE $19,957 2,538 37,019 Check (2) Ending balances: Cash, $49,400; Expenses, $2,400 (3) Net income, $1,400 Problem 1-10B Computing and interpreting return on assets A3 Required 1. Compute return on assets for (a) AT&T and (b) GTE. 2. Which company is more successful in the total amount of sales to consumers? 3. Which company is more successful in returning net income from its amount invested? Analysis Component 4. Write a one-paragraph memorandum explaining which company you would invest your money in Check (1a) 0.16%; (1b) 6.9% and why. (Limit your explanation to the information provided.) Aspen Company manufactures, markets, and sells snowmobile equipment. The average total assets for Aspen Company is $2,000,000. In its most recent year, Aspen reported net income of $100,000 on revenues of $1,200,000. Required 1. What is Aspen Companys return on assets? 2. Does return on assets seem satisfactory for Aspen given that its competitors average a 9.5% re- Problem 1-11B Determining expenses, liabilities, equity, and return on assets A1 A3 turn on assets? 3. What are the total expenses for Aspen Company in its most recent year? 4. What is the average total amount of liabilities plus equity for Aspen Company? Check (3) $1,100,000 (4) $2,000,000 All business decisions involve aspects of risk and return. Required Problem 1-12BA Identifying risk and return A4 Identify both the risk and the return in each of the following activities: 1. 2. 3. 4. Stashing $1,000 under your mattress. Placing a $500 bet on a horse running in the Kentucky Derby. Investing $10,000 in Nike stock. Investing $10,000 in U.S. Savings Bonds. A startup company often engages in the following activities during its first year of operations. Classify each of the following activities into one of the three major activities of an organization: A. Financing B. Investing C. Operating 1. Providing client services. 5. Supervising workers. 2. Obtaining a bank loan. 6. Owner investing money in business. 3. Purchasing machinery. 7. Renting office space. 4. Researching products. 8. Paying utilities expenses. Problem 1-13BB Describing organizational activities C6 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 42 Chapter 1 Accounting in Business Problem 1-14BB Describing organizational activities C6 Identify in outline format the three major business activities of an organization. For each of these activities, identify at least two specific transactions or events normally undertaken by the businesss owners or managers. PROBLEM SET C e.com/larso hh m n Problem Set C is available at the books Website to further reinforce and assess your learning. This serial problem starts in this chapter and continues throughout most chapters of the book. It is most readily solved if you use the Working Papers that accompany this book. SERIAL PROBLEM Success Systems On October 1, 2004, Kay Breeze launched a computer services company, Success Systems, that is organized as a sole proprietorship and provides consulting services, computer system installations, and custom program development. Breeze adopts the calendar year for reporting purposes and expects to prepare the companys first set of financial statements on December 31, 2004. Required Create a table like the one in Exhibit 1.9 using the following headings for columns: Cash; Accounts Receivable; Computer Supplies; Office Equipment; Accounts Payable; K. Breeze, Capital; K. Breeze, Withdrawals; Revenues; and Expenses. Then use additions and subtractions to show the effects of the October transactions for Success Systems on the individual items of the accounting equation. Show new balances after each transaction. Oct. 1 3 6 8 10 12 15 17 20 22 28 31 31 Kay Breeze invested $55,000 cash, a $20,000 computer system, and $8,000 of office equipment in the business. Purchased $1,420 of computer supplies on credit from Cain Office Products. Billed Easy Leasing $4,800 for services performed in installing a new Web server. Paid $1,420 cash for the computer supplies purchased from Cain Office Products on October 3. Hired Sherry Adams as a part-time assistant for $125 per day, as needed. Billed Easy Leasing another $1,400 for services performed. Received $4,800 cash from Easy Leasing on its account. Paid $805 cash to repair computer equipment damaged when moving it. Paid $1,940 cash for an advertisement in the local newspaper. Received $1,400 cash from Easy Leasing on its account. Billed Clark Company $5,208 for services performed. Paid $875 cash for Sherry Adamss wages for seven days of work. Breeze withdrew $3,600 cash for personal use. Check Ending balances: Cash, $52,560; Revenues, $11,408; Expenses, $3,620 Beyond the Numbers (BTN) is a special problem section aimed to refine communication, conceptual, analysis, and research skills. It includes many activities helpful in developing an active learning environment. BEYOND THE NUMBERS REPORTING IN ACTION A1 A3 A4 BTN 1-1 Key financial figures for Krispy Kremes fiscal year ended February 2, 2003, follow: Key Figure Liabilities Net income Revenues Equity In Thousands $410,487 33,478 491,549 LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Required Accounting in Business 43 1. What is the total amount of assets invested in Krispy Kreme? 2. What is Krispy Kremes return on assets? Its assets at February 3, 2002, equal $255,376 (in thou- Check (2) 10.1% sands). 3. How much are total expenses for Krispy Kreme? 4. Does Krispy Kremes return on assets seem satisfactory if competitors average a 3% return? Roll On 5. Access Krispy Kremes financial statements (Form 10-K) for fiscal years ending after February 2, 2003, from its Website (KrispyKreme.com) or from the SEC Website (www.SEC.gov). Compute its return on assets for those fiscal years. Compare the February 2, 2003, fiscal year-end return on assets to any subsequent years returns you are able to compute, and interpret the results. BTN 1-2 Key comparative figures ($ thousands) for both Krispy Kreme and Tastykake follow: Key Figure Liabilities Equity Net income Revenues (sales) Krispy Kreme $410,487 33,478 491,549 Tastykake $116,560 2,000* 162,263 COMPARATIVE ANALYSIS A1 A3 A4 * Restructuring charges are removed from income. Required 1. What is the total amount of assets invested in (a) Krispy Kreme and (b) Tastykake? 2. What is the return on assets for (a) Krispy Kreme and (b) Tastykake? Krispy Kremes beginningCheck (2b) 1.7% year assets equal $255,376 (in thousands) and Tastykakes beginning-year assets equal $116,137 (in thousands). 3. How much are expenses for (a) Krispy Kreme and (b) Tastykake? 4. Is return on assets satisfactory for (a) Krispy Kreme and (b) Tastykake? (Assume competitors average a 3% return.) 5. What can you conclude about Krispy Kreme and Tastykake from these computations? BTN 1-3 Juanita Cruz works in a public accounting firm and hopes to eventually be a partner. The management of Allnet Company invites Cruz to prepare a bid to audit Allnets financial statements. In discussing the audit fee, Allnets management suggests a fee range in which the amount depends on the reported profit of Allnet. The higher its profit, the higher will be the audit fee paid to Cruzs firm. Required 1. 2. 3. 4. ETHICS CHALLENGE C4 C5 Identify the parties potentially affected by this audit and the fee plan proposed. What are the ethical factors in this situation? Explain. Would you recommend that Cruz accept this audit fee arrangement? Why or why not? Describe some ethical considerations guiding your recommendation. BTN 1-4 Refer to this chapters opening feature about The Chocolate Farm. Assume that the Macmillans wish to expand The Chocolate Farm to include a store devoted to selling food decorations related to the main business. They meet with a loan officer of a Denver bank to discuss a loan. Required 1. Prepare a half-page report outlining the information you would request from the Macmillans if COMMUNICATING IN PRACTICE A1 C2 you were the loan officer. 2. Indicate whether the information you request and your loan decision are affected by the form of business organization for the proposed Chocolate Farm store. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 44 Chapter 1 Accounting in Business TAKING IT TO THE NET A3 BTN 1-5 Visit the EDGAR database at (www.SEC.gov). Access the Form 10-K report of World Wrestling Entertainment (ticker WWE) filed on July 26, 2002. Required 1. On page 16 of the 10-K report you will find comparative income statements of WWE for the years 19982002. How would you describe the revenue trend for WWE over this five-year period? 2. Has the WWE been profitable (see net income) over this five-year period? TEAMWORK IN ACTION C1 BTN 1-6 Teamwork is important in todays business world. Successful teams schedule convenient meetings, maintain regular communications, and cooperate with and support their members. This assignment aims to establish support/learning teams, initiate discussions, and set meeting times. Required 1. Form teams and open a team discussion to determine a regular time and place for your team to meet between each scheduled class meeting. Notify your instructor via a memorandum or e-mail message as to when and where your team will hold regularly scheduled meetings. 2. Develop a list of telephone numbers and/or e-mail addresses of your teammates. Books Website provides free and easy access to all articles for every Business Week Activity. BUSINESS WEEK ACTIVITY C1 BTN 1-7 Business Week publishes a ranking of the top 1,000 companies based on several performance measures. This issue is called the Business Week Global 1000. Obtain the July 14, 2003, publication of this issuethis books Website maintains free access to this article. Required 1. What are the top 10 companies on the basis of market value? 2. Are any of the top 10 companies in the same industry? 3. How many of the top 10 based on market capitalization are not U.S. companies? ENTREPRENEURIAL DECISION A1 A2 BTN 1-8 Refer to this chapters opening feature about The Chocolate Farm. Assume the Macmillans decide to open a small retail store to supplement their chocolate operations. Required 1. The Macmillans obtain a $50,000 bank loan and contribute $30,000 of their own assets to sup- Check (2) 25% port the opening of the new store. a. What is the new stores total amount of liabilities plus equity? b. What is the new stores total amount of assets? 2. If the Macmillans earn $20,000 of income in the first year the retail store operates, compute the stores return on assets (assume average assets equal $80,000). Assess its performance if competitors average a 10% return. BTN 1-9 You are to interview a local business owner. (This can be a friend or relative.) Opening lines of communication with members of the business community can provide personal benefits of business networking. If you do not know the owner, you should call ahead to introduce yourself and explain your position as a student and your assignment requirements. You should request a thirty minute appointment for a face-to-face or phone interview to discuss the form of organization and operations of the business. Be prepared to make a good impression. Required 1. Identify and describe the main operating activities and the form of organization for this business. 2. Determine and explain why the owner(s) chose this particular form of organization. 3. Identify any special advantages and/or disadvantages the owner(s) experiences in operating with HITTING THE ROAD C2 this form of business organization. LarsonWildChiappetta: Fundamental Accounting Principles, Seventeenth Edition 1. Accounting in Business Text The McGrawHill Companies, 2004 Chapter 1 Accounting in Business 45 BTN 1-10 Grupo Bimbo (GrupoBimbo.com) is a leader in the baking industry and also competes with both Krispy Kreme and Tastykake. Key financial figures for Grupo Bimbo follow: Key Figure* Average assets . . . . . . . . . Net income . . . . . . . . . . . Revenues . . . . . . . . . . . . . Return on assets . . . . . . . . Pesos in Millions 27,750 1,003 41,373 3.6% GLOBAL DECISION A1 A3 A4 * Figures prepared in accordance with Generally Accepted Accounting Principles in Mexico. Required 1. Identify any concerns you have in comparing Grupo Bimbos income, revenue, liabilities, and equity figures to those of Krispy Kreme and Tastykake (in BTN 1-2) for purposes of making business decisions. 2. Identify any concerns you have in comparing Grupo Bimbos return on assets ratio to those of Krispy Kreme and Tastykake (in BTN 1-2) for purposes of making business decisions.

Find millions of documents on Course Hero - Study Guides, Lecture Notes, Reference Materials, Practice Exams and more. Course Hero has millions of course specific materials providing students with the best way to expand their education.

Below is a small sample set of documents:

University of Phoenix - ACCOUNTING - ADJ/235
ETHICS IN CRIME & JUSTICE Copyright 2005 Thomson / Wadsworth2 gDetermining Moral BehaviorEthical Systems Deontological and Teleological Ethical Systems Ethical Formalism Utilitarianism Other Ethical Systems Religion Natural Law The Ethics of Virtue The
Ucla Venezuela - MBA - 698
1 LOYOLA MARYMOUNT UNIVERSITY College of Business AdministrationCOURSE OUTLINE FALL 2004COURSE: MBAJ 698-01 Governance PROFESSOR: SS Accounting Ethics & Corporate OFFICE: Hilton # H311Dr. Steven M. Mintz, CPATELEPHONE: 338-8791 smintz@lmu.eduE-MAIL A
Texas San Antonio - BADM - 2350
Study Guide for Exam #2, Fall, 2008, American Heritage I 1. Alien and Sedition Acts of 1789 2. Virginia and Kentucky Resolutions 3. Revolution of 1800 4. Louisiana Purchase 5. Jeffersons views of African Americans 6. Embargo Act 7. Supreme Court decision,
University of Toronto - CSC - 108
import os.path, math def clean_up(s): ' Return a version of string str in which all letters have been converted to lowercase and punctuation characters have been stripped from both ends. Inner punctuation is left untouched. ' punctuation = '!"',;:.-?)([]<
Maryland - ECON - 306
ECON306Chapter201:07THE THEME OF MICROECOMICS Microeconomics is about limits. Microeconomics is also about ways to make the most of these limits. More precisely, it is about the allocation of scarce resources. o For example, how consumers can best alloc
Maryland - ECON - 306
CHAPTER 1 ECON306 Microeconomics Deals with the behavior of individual economic units (including consumers, workers, investors, owners of land, business firms, or any individual that plays a role in the functioning of our economy). It explains how and why
Maryland - ECON - 306
CHAPTER 3 ECON306 Theory of Consumer Behavior The explanation of how consumers allocate incomes to the purchase of different goods & services. Best understood in 3 distinct steps: o Consumer preferences- 1st step to find a way to describe why people prefe
Maryland - ECON - 306
Chapter 4 ECON306 Individual Demand Price-Consumption Curve- traces the utility maximizing combinations of food and clothing associated with every possible price of food Individual Demand Curve- relates the quantity of a good that single consumer will buy
Maryland - BMGT - 484
Chapter1 Venturecapitalistsinvestorswhoinvestcashinnewandemergingbusinesses Thedotcombubblehititspeakin2000 Burnratestherateatwhichcompaniesspendtheiravailablecash Dotcomsthenamegiventothegrowingbatchofnew,investmentdrivenWebsites launchesinthemidtolate90
Maryland - BMGT - 484
Lecture 21 Social Media- an umbrella term used to describe many different tools- each used for various needs and levels of interpersonal connectivity (collaboration and interaction) Social Media Channels: Current Uses of Social Media: Social Media as part
Maryland - BMGT - 484
TheLongTailalargenumberofproductswithlowsalesvolumecancollectivelymakeupa sizablemarket Internet:aninterconnectednetworkofthousandsofnetworksandmillionsofcomputers (referredtoashosts) WWWisoneoftheinternetsmostpopularservices,providingaccesstoover8billion
Maryland - BMGT - 484
Lecture10 Howtocreateasuccessfulsite Buyawebaddress>findahome>buildyoursite>getpaid>getsponsors>getknown> trackyourtraffic Usabilitythemeasureofthequalityofausersexperiencewheninteractingwithaproductorsystem Easeoflearning,efficiencyofuse,memorability,err
Maryland - BMGT - 498B
Study Guide of Design in Marketing Exam October 12, 2009 70 Questions Functionality Proximity: tend to group related items together, often degree of separation refers to how much ARENT related Ockhams Razor: Simplest deisgn should be selected Interested i
Maryland - BMGT - 498B
Study Guide for final BMGT 498B - Fall 2009 1) Be prepared to give me 20 words that you could use instead of the word 'GREAT' in marketing communications that would have a similar meaning while instilling trustworthiness towards the company in the consume
Maryland - BMGT - 498B
BMGT498B EXAM 2 OUTLINE 1. CUSTOMER CENTERED DESIGNED WEBSITES Stickiness: the likelihood that an individual will come to a site, stay on the site for a long time, and come back often Usability: the measure of the quality of a users experience when intera
Maryland - BMGT - 498B
HarmsStudyGuidefor498B Functionalitybasisofdesign;Greatdesigncanbefoundinobjects,places,andideasthatfusefunctionality andaesthetics DesignsHierarchyofNeeds(bottomtotop):functionalityreliabilityusabilityproficiency creativity Reliability:consistencyofprodu
Maryland - BMGT - 380
Business Law Exam 2CHAPTER 9 CONTRACTSK = contract Four Elements of a Contract 1. Agreement a. Offer: a proposal by one person to another that is intended to create legal relations on acceptance by the person to whom it is made b. Acceptance: the actual
Maryland - BMGT - 110
Chapter20 Moneyanythingthatpeoplegenerallyacceptaspaymentforgoodsandservices Barterthetradingofgoodsandservicesforothergoodsandservicesdirectly Moneysupplytheamountofmoneythefederalreservebankmakesavailableforpeople tobuygoodsandservices M1moneythatcanbe
Maryland - BMGT - 110
CHAPTER 1 Business is any activity that seeks to provide goods and services to others while operating at a profit. Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses. An Entrepreneur is a person
Maryland - BMGT - 110
CHAPTER 2 Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption along various competing groups and individuals Macroeconomics is the part of economics that looks at the operati
Maryland - BMGT - 110
Chapter 5 Outline Sole proprietorship is a business that is owned, and usually managed, by one person. It is the most common form of business ownership. Advantages include: ease of starting and ending the business, being your own boss, pride of ownership
Maryland - BMGT - 110
Chapter 6 Outline Entrepreneurship is accepting the risk of starting and running a business Entrepreneurial team is a group of experienced people from different areas of business who join together to form a managerial team with the skills needed to devel
Maryland - BMGT - 110
Chapter 7 Outline Management is the process used to accomplish organizational goals through planning, organizing, leading and controlling people and other organizational resources Planning is a management function that includes anticipating trends and de
Maryland - BMGT - 110
Chapter 8 Outline Economies of scale is the situation in which companies can reduce their production costs if they can purchase raw materials in bulk; the average cost of goods goes down as production levels increase Hierarchy is a system in which one pe
Maryland - BMGT - 110
Chapter 9 Outline Production- the creation of finished goods and services using the factors of production: land, labor, capital, entrepreneurship, and knowledge Production management- The term used to describe all the activities managers do to help their
Maryland - BMGT - 110
Chapter10 Intrinsicrewardthepersonalsatisfactionyoufeelwhenyouperformwellandcomplete goals Extrinsicrewardsomethinggiventoyoubysomeoneelseasrecognitionforgoodwork; extrinsicrewardsincludepayincreases,praise,andpromotions Scientificmanagementstudyingworke
Maryland - BMGT - 110
Chapter11 HumanresourcemanagementTheprocessofdetermininghumanresourceneedsand thenrecruiting,selecting,developing,motivating,evaluating,compensating,and schedulingemployeestoachieveorganizationalgoals Jobanalysisastudyofwhatisdonebyemployeeswhoholdvariou
Maryland - BMGT - 110
Chapter12 Unionanemployeeorganizationthathasthemaingoalofrepresentingmembersin employeemanagementbargainingoverjobrelatedissues Craftunionanorganizationofskilledspecialistsinaparticularcraftortrade Knightsoflaborthefirstnationallaborunion;formedin1969 Am
Maryland - BMGT - 110
Chapter13MarketingTheprocessofplanningandexecutingtheconception,pricing,promotion,and distributionofgoodsandservicestofacilitateexchangesthatsatisfyindividualandorganizational objectives MarketingconceptAthreepartbusinessphilosophy:1)customerorientation,
Maryland - BMGT - 110
Chapter14 Valuegoodqualityatafairprice.Whenconsumerscalculatethevalueofaproduct,they lookatthebenefitsandthensubtractthecosttoseeifthebenefitsexceedthecost Totalproductoffereverythingthatconsumersevaluatewhendecidingwhethertobuy something,alsocalledavalu
Maryland - BMGT - 110
Chapter 15 Outline Marketing intermediaries- organizations that assist in moving goods and services from producers to industrial and consumer users Channel of distribution- a whole set of marketing intermediaries, such as wholesalers and retailers that j
Maryland - BMGT - 110
Chapter16 PromotionAneffortbymarketerstoinformandremindpeopleinthetargetmarketabout productsandtopersuadethemtoparticipateinanexchange Promotionmixthecombinationofpromotionaltoolsanorganizationuses Integratedmarketingcommunication(IMC)atechniquethatcomb
Maryland - BMGT - 110
Chapter17 Accountingtherecording,classifying,summarizing,andinterpretingoffinancialevents andtransactionstoprovidemanagementandotherinterestedpartiestheinformationthey needtomakegooddecisions Managerialaccountingaccountingusedtoprovideinformationandanaly
Maryland - BMGT - 110
Chapter18 Financethefunctioninabusinessthatacquiresfundsforthefirmandmanagesthose fundswithinthefirm Financialmanagementthejobofmanagingafirmsresourcessoitcanmeetitsgoals andobjectives Financialmanagersmanagerswhomakerecommendationstotopexecutivesregardi
Maryland - BMGT - 110
Chapter19 Initialpublicoffering(IPO)thefirstpublicofferingofacorporationsstock Investmentbankersspecialistswhoassistintheissueandsaleofnewsecurities Institutionalinvestorslargeorganizationssuchaspensionfunds,mutualfunds, insurancecompanies,andbanksthatin
Maryland - BMGT - 110
Business is all activities involved in providing goods and services, for profit, to satisfy customer needs Profit is the amount remaining after all expenses have been deducted from the revenues of a business Revenue is the total amount that a business act
Maryland - BMGT - 110
Motivation:ModernTheories TheoryXmanagerbelievesthatemployeesdonotreallywanttoworkandthatitistheir jobtostructureworkandenergizetheemployee TheoryYmanagementbelievesthat,giventherightconditions,mostpeoplewillwantto dowellatworkandthatthereisapoolofunusedc
Maryland - BMGT - 110
ACCOUNTINGANDFINANCE Financeandaccountinghavetodowithmonetaryresources o Financetendstofocusonacquiringandmanagingfunds,whileaccountingrecords andanalyzesfinancialevents,interpretingthisinformationformanagement o Accountinghasbeencalledthelanguageofbusine
Maryland - COMM - 107
CHAPTER 1 CommunicationA conscious or unconscious, intentional or unintentional process, in which feelings and ideas are expressed as verbal and/or nonverbal messages that are sent, received and comprehended. The process of communicating can be accidenta
Maryland - COMM - 107
CHAPTER 2 Foundations of Verbal LanguageLanguage is a system of human communication based on speech sounds used as arbitrary symbols. Studying language involves the study of meaning, meaning based on words, the way words are placed together, and the back
Maryland - COMM - 107
CHAPTER 3 Nonverbal CommunicationNonverbal communication is composed of all those messages that people exchange beyond the words themselves such as body talk. Nonverbal acts have 3 key characteristics: They are sensitive to the relationship between the s
Maryland - COMM - 107
C HAPTER 4 L isteningHea r ing is a biological activity that involves reception of a message through sensory channels; i t is a part of listening. Listening is a process that involves reception, attention, perception, the assignment of meaning, and the l
Maryland - COMM - 107
C HAPTER 5 I n t rapersonal CommunicationI n t rapersonal communication is the act of internally communicating with yourself. The basis for communication with others is the ability to communicate with oneself. The 3 parts of intrapersonal communication i
Maryland - COMM - 107
CHAPTER 6 The Concepts of Intrapersonal CommunicationIntrapersonal Communication can be defined as communication that is based on communicators recognition of each others uniqueness and the development of messages that reflect that recognition. There are
Maryland - COMM - 107
Chapter 7 Outline Conversation is an interaction with at least one other person. Almost all of us possess basic conversational skills Small talk is an exchange of information with someone on the surface level. The information exchange centers on biograph
Maryland - COMM - 107
C hapter 8 OutlineAn i nte rview i s a purposeful conversation between two or more persons that follows a basic question-and-answer format. In terviewing is more formal than most other conversations because the participants usually share a preset purpose
Maryland - COMM - 107
Chapter 9 OutlineA group traditionally has been defined as an assemblage of persons who communicate, in order to fulfill a common purpose and achieve a goal. Small groups usually consist of three to twelve persons; large groups normally have more than a
Maryland - COMM - 107
Chapter 10 OutlineParticipants are those members of a group who interact to bring about the actions of a group Leaders are those who guide the group. Leadership refers to those who influence the group to accomplish its goal Individualism is putting onese
Maryland - COMM - 107
Brett Carmen Comm 107 Study Guide-Final Chapter 11 Public communication- transaction between a speaker and an audience Preparing a speech: 1. decide on/ accept topic 2. formulate statement of central idea (SCI) 3. collect research that develops SCI 4. Pre
Maryland - HIST - 157
1. Comparing/Contrastingthreemajorreforms: movementsforagriculturalreform(includingpopulism) o FarmersbeganfacinghardtimesaftertheCivilwar o Railroadopenedupnewopportunitiesforfarmers.Theywerenowabletocultivate landthatbeforetheywereunabletouseforfarming
Maryland - HIST - 157
Supply-side economics- said that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. It was a proposition to cut taxes. Increased ta
Maryland - HIST - 157
Supply-side economics- said that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. It was a proposition to cut taxes. Increased ta
Maryland - HIST - 157
ESSAY#2 Intro: ExplainhowbeforetheGreatDepressionthefedgovernmentplayedalimitedroleinthedailylivesof mostAmericans: Priortothegreatdepression,thegovernmentoperatedunderlaissezfairecapitalism wherethegovernmentstoodbackandlettheeconomyfixitself Governmentn
Maryland - PLSC - 203
StudyGuideTest1 Lecture1 10,000yearsagoagriculturebegan Agriculturegatheringseedandplantingitonthegroundtoproducefood.Agriculture population. Whydidhumanpopulationgrowth? Foodproduction Improvedtransportation Improvedhousingandpublichygiene Betterhealth 7
Maryland - PLSC - 203
Geneticerosion=lossofcropbiodiversity/variability.Affectsallplantgermplasm. Germplasm=allgeneticresourcesthatcanbeusedtoimprovecropplants. Wildrelatives(highestdomestication/genevariation)highdiversity Landracestypeofvarietythatfarmersindevelopingcountrie
Maryland - ANTH - 220
Anthropology- the study of humanity- our physical characteristics as animals, and our non-biological characteristics collectively referred to as culture. Traditionally, the subject is broken down into for sub disciplines: biological (physical) anthropolog
Maryland - ANTH - 220
Human Adaptation Adaptation- the biological or behavioral responses of organisms to the environment Adaptability- measured by an organisms capability to make positive anatomical or physiological changes after short or long term exposure to stressful envir
Maryland - ANTH - 220
What is Anthropology? The word anthropology itself tells the basic story-from the Greek anthropos ("human") and logia ("study")-it is the study of humankind, from its beginnings millions of years ago to the present day.Anthropology's four main subfields:
Maryland - SPAN - 207
SPANISH REVIEW VOCAB LIST 2 1. La Cosecha 3. Sembrar 5. Las Monedas 7. La Gota 9. La Tormenta 11. Rudo 13. El Aguacero 15. El Correo 17. La Oficina De Correos 19. El Sello 21. El Buzn 23. El Cartero 25. Enfadarse 27. Ladrn 29. La Fe 31. La Caridad 33. El
Maryland - SPAN - 207
SPANISH FINAL EXAM VOCAB 1. Cognado 3. Concordancia 5. Mayscula 7. Minscula 9. Emigrar 11. Migrar 13. Inmigrar 15. Condado 17. Territorio 19. Frontera 21. Barrera 23. Amenazar 25. Despedir 27. Rechazar 29. Riesgo 31. Desafo 33. Bolsillo 35. Hurfano 37. En
Maryland - CMLT - 280
PERSONA A young nurse, Alma, is put in charge of Elisabeth Vogler: an actress who is seemingly healthy in all respects, but will not talk. As they spend time together, Alma speaks to Elisabeth constantly, never receiving any answer. Alma eventually confes