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1.2 Discussion: Course Preparation Material and Connect

Getting Started

This discussion forum encourages you to explore the abundance of supplemental resources linked directly into this course or provided to you through external sources, such as Connect. These resources are designed to help ensure you will have every opportunity to succeed regardless of your past experience with accounting, finance, or Excel.

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Upon successful completion of this discussion, you will be able to:

  • Access the assignments and student resources, supplemental materials, and learning technology support items.
  • Evaluate what resources would be most beneficial to success in the course.

Resources

  • Website: Connect

Background Information

Students come into this course with widely varying levels of comfort and experience with accounting, finance, and Excel. This course seeks to strike a balance. Those who are already proficient with the fundamentals will have an opportunity to stretch themselves further and prepare for more complex topics in the future. Those who need more assistance are provided with an extensive library of helpful aids to ensure they too can achieve their learning goals. These resources are offered merely as helpful guides, with no points attached, to enable you to do your best.

This assignment helps you identify resources that will aid you in achieving the learning goals of the course. You will explore both the course and Connect. Then you will share three resources you uncovered that you feel will be particularly valuable to you and your classmates. After you have made your post, be sure to check back to see what resources others have found, as they may be helpful to you as well.

Instructions

  1. You will earn 10 points upon successful completion of the following tasks:
  2. Access your eBook and Connect assignments through Connect in the table of contents.
    1. Select Connect in the Table of Contents.
    2. Select McGraw Hill Deep Integration.
    3. Select Go to my Connect Section.
  3. If you need Connect registration assistance, contact McGraw-Hill Tech Support at 800-331-5094 or at www.mhhe.com/support. Direct any issues with Connect to Connect Tech Support first and then your instructor if there is no resolution.
  4. Once you have entered your Connect course, be sure to select the “Library” tab in your Connect course where you can find several helpful learning technology support items.
  5. Explore the other Assignments in this course, reading each of the assignment instructions for upcoming assignments.
  6. As you read, take note of the resources, supplemental materials, or learning technology support items linked to each assignment.
    1. As you read, test a few of the resources, supplemental materials, or learning technology support items to see how they work and how they may help you prepare for your assignments as you make progress through the course.
  7. Navigate to the threaded discussion and respond to the following:
    1. List three resources, supplemental materials, or learning technology support items you discovered, either elsewhere in the course or in Connect that you feel will be particularly valuable to you as you make progress through the course.
    2. For each of the three resources, supplemental materials, or learning technology support items that you list, give a short description and explain why you think it will be useful. Provide a click path and screenshot(s) as appropriate to identify where each of the three resources, supplemental materials, or learning technology support items is located so that classmates can find them.
  8. This is a Complete/Incomplete assignment. Fulfilling the post requirements as outlined in 7(a) and 7(b) above, listing and explaining three helpful course resources, will result in full credit being awarded.
  9. Make your post by the end of the fourth day of the workshop.

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1.3 Discussion: Collaboration Forum

Getting Started

This forum is a general collaboration forum that serves as a venue to discuss, interact with, communicate about, and genuinely engage the subject matter of the workshop in order to increase each other’s understanding. Importantly, it provides you with a chance to ask questions about the reading, problems, and anything in general, and so represents another opportunity to get assistance with the course concepts and your assignments.

Upon successful completion of this discussion, you will be able to:

  • Receive timely advice and assistance with assignments to help achieve learning objectives.

Resources

  • Textbook: Analysis for Financial Management
  • Textbook: Principles of Accounting: Volume 1, Financial Accounting
  • Video: Collaboration Forum Introduction

Background Information

The purpose of this collaboration forum is for students to work together (collaborate) in an effort to better understand assignments. While this forum is not a place to provide all your answers (it is NOT designed to facilitate cheating), it is intended for you to help each other if someone is struggling with a particular problem. Participate early and often. Ask your question in this forum by providing needed problem details for reference, then move on to work another problem. Later, come back and see if anyone has provided help for you or if you can provide assistance to a classmate.

Instructions

  1. There are no points awarded for this activity. However, you will benefit from completing the exercise, as it will provide helpful academic learning opportunities that correlate with the textbook reading, as well as additional activities that support the topics of both your current and future workshop sessions.
  2. Watch the Collaboration Forums Introduction video:
  3. Respond by making at least one comment or post that addresses one of the following:
    1. Ask a question about this workshop’s assignments.
    2. Provide an attempted solution or at least a reference to relevant material in the textbook.
    3. Share insights, new understandings, or “ah ha” moments resulting from your reading or work on assignments.
    4. Deepen the discussion by raising the application or the implications of a concept presented in the textbook or devotional materials.
    5. Post a proposed solution to a question raised by another student and then dialogue about it in this forum, attempting to reach a solution.
  4. Your postings should:
    1. Clearly state the problem number and problem details as well as the questions that you have.
    2. Provide clear questions and proposed answers with evidence of critical thinking by incorporating material from the assigned reading.
    3. Add greater depth to the discussion by introducing new ideas or observations.
    4. Provide clarification to classmates’ questions and provide insight into the discussion

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1.4 Discussion: Pay Terms Debate (Initial Post)

Getting Started

To stay in business, a company must manage its cash. Cash is the financial lifeblood of any organization. Cash will inevitably flow in and out of the organization, and understanding where cash comes from and where it goes is important. Poor cash flow is the quickest path to bankruptcy, while strong cash flow can be a significant competitive advantage. Therefore, all of a company’s stakeholders are interested in its cash flow. 

Upon successful completion of this discussion, you will be able to:

  • Evaluate the ethical and financial implications of real-world payment practices.

Resources

  • Textbook: Analysis for Financial Management
  • Textbook: Principles of Accounting: Volume 1, Financial Accounting
  • Website: Connect
  • File: Higgins Chapter 1 Slides
  • File: Financial Accounting Chapter 1
  • File: Financial Accounting Chapter 2
  • Video: Cash Flow and Working Capital

Background Information

In this assignment, you will learn more about cash, which is the most liquid asset of any organization, business, or individual. The concept of cash in itself is not complicated. However, keep in mind a company can be very good at producing accounting profits but poor at generating or managing cash effectively. For example, if a company sells its product by allowing credit but fails to collect payment from its customers, the revenue claimed is ultimately null and void. Simply put, a business that fails to generate cash through its operations will not be able to pay its bills. Investors and creditors will take note and stop providing funding, intensifying the problem.

As a customer, businesses must closely manage their cash flow with their suppliers. Accounts payable, the money owed to suppliers, can be a valuable source of cash. When a company lengthens its pay terms with its suppliers, it is equivalent to taking out a short-term loan. By withholding payments, the company will have more cash on hand, and accounts payable will increase. This cash is then available to fund the company’s project and product ideas. However, this same action has the reverse effect on a supplier. Longer pay terms means the supplier will have less cash on hand, its accounts receivable will increase, and it will have less funding to pursue its own projects.

Many a small business has died after their bank becomes concerned about operating cash flows and calls in their credit line. Even large, stable businesses must carefully manage their cash to ensure sufficient liquid resources to pay wages, cover expenses, and fund their projects. The discussion in this assignment revolves around the risks associated with managing cash and the implications of a company’s pay term decisions. 

Instructions

  1. Review the rubric to make sure you understand the criteria for earning your grade.
  2. In your textbook, Analysis for Financial Management, read Chapter 1, “Interpreting Financial Statements,” paying particular attention to the review of the cash flow cycle at the beginning of the chapter.
  3. In your textbook, Principles of Accounting, read Chapters 1 and 2, “Role of Accounting in Society” and “Introduction to Financial Statements.”
  4. Review the Financial Accounting Chapter 1 and Financial Accounting Chapter 2 PowerPoints to help you further understand the chapter concepts.
  5. Review Higgins Chapter 1 Slides.
  6. Watch the video “Cash Flow and Working Capital
  7. Respond to the following prompts:
    1. From the customer’s perspective, what are the financial implications of lengthening supplier pay terms? What are the financial implications from a supplier’s perspective?
    2. What are the ethical implications of lengthening supplier pay terms? Is this a legitimate business strategy? Why or why not?
    3. Support your position with at least one biblical principle with a specific Bible verse that you feel is relevant to the situation. Explain how and why it applies.
  8. Your post should be based on the chapters, as well as other resources that can contribute to the discussion. Use OCLS to search for relevant scholarly sources you can use to support your position.
  9. This initial post should be 200–400 words in length and include at least one academic source that is properly cited. Use APA format and include a reference list. Your post is due by the end of the workshop.
    1. For questions on APA style, go to OCLS APA Writing Styles Guides.
  10. A single post asserting your position is all that is required for this assignment. However, be prepared to defend your position in the following workshop. 

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1.5 Assignment: Spreadsheet Exercises

Getting Started

This assignment will give you an opportunity to practice building balance sheets and income statements. You will also complete some basic cash flow calculations. These exercises will help prepare you for deeper analysis and interpretation later in the course.

Upon successful completion of this assignment, you will be able to:

  • Understand the terminology and structure of basic financial statements.
  • Use given financial data to construct basic financial statements.
  • Demonstrate the impact of various managerial decisions on financial statements. 
  • Interpret financial statements to form conclusions about the financial health of an organization.

Resources

  • Textbook: Analysis for Financial Management
  • Textbook: Principles of Accounting: Volume 1, Financial Accounting
  • Website: Connect
  • File: Higgins Chapter 1 Slides
  • File: Financial Accounting Chapter 1
  • File: Financial Accounting Chapter 2
  • File: Assignment 1.5 Worksheet
  • File: Financial Statement Practice Problems Workbook

Background Information

An organization’s financial statements reflect history. They show the results of past decisions made by the organization’s leaders. We can review those financial statements to help understand the decisions the organization has made and how it operates. Perhaps more importantly, with a good understanding of financial statements, we can gauge the financial strengths and weaknesses of the organization. This understanding is critical information for making decisions about the future. Whether you are a leader in an organization, a potential investor, or simply an employee, it is crucial you know how to read and interpret financial statements.

For this assignment, you will complete a series of short exercises designed to help you practice preparing financial statements and to demonstrate your understanding of basic accounting terminology and procedures.

Instructions

  1. Review the rubric to make sure you understand the criteria for earning your grade.
  2. Review the Higgins Chapter 1 Slides.
  3. In your textbook, Analysis for Financial Management, read Chapter 1, “Interpreting Financial Statements.”
    1. Review the Financial Accounting Chapter 1 PowerPoint to help you further understand the chapter.
  4. In your textbook, Principles of Accounting, read Chapter 2 “Introduction to Financial Statements.”
    1. Review the Financial Accounting Chapter 2 PowerPoint to help you further understand the chapter.
  5. Study the Workshop One Practice Problems Workbook to help you better understand the processes used to build financial statements.
  6. Using the Excel Assignment 1.5 Worksheet, complete all eight of the following problems:
    1. Income Statement: Problems 1 and 3
    2. Balance Sheet: Problems 2 and 4
    3. Cash Flow: Problems 5, 6, 7, and 8
  7. Be sure your Excel spreadsheet is prepared in a professional manner, with answers clearly indicated and all your calculations shown. Full credit will not be given if your process for arriving at the answer is not fully displayed, including any intermediate steps.
  8. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor by the end of the workshop.

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1.6 Assignment: Mini Case Study

Getting Started

Making informed financial decisions begins with understanding how to use the information available. During this workshop you have become more acquainted with financial statements and how they can be used to support managerial decisions. This mini case presents a common real-life situation: evaluating the strength of an organization to assess whether it is ready for growth. 

Upon successful completion of this assignment, you will be able to:

  • Use given financial data to construct basic financial statements.
  • Interpret financial statements to form conclusions about the financial health of an organization.

Resources

  • Textbook: Analysis for Financial Management
  • Textbook: Principles of Accounting: Volume 1, Financial Accounting
  • Website: Connect
  • File: Higgins Chapter 1 Slides
  • File: Financial Accounting Chapter 2
  • File: Assignment 1.6 Worksheet

Background Information

In this workshop, you have learned about the vital nature of cash flow to a company’s survival, much less success. To the surprise and dismay of many business leaders, success and growth often lead to cash flow problems. This is the problem faced by Tad Marks of Sunset Boards. The company is profitable, and demand for its products is quickly growing. As a result, Tad Marks is considering expanding the business and has brought you in as a financial analyst to weigh in on the decision. As a consultant, you will first construct income statements, balance sheets, and a cash flow statement for a company and then attempt to apply your understanding to evaluate the company’s growth plans.

Instructions

  1. Review the rubric to make sure you understand the criteria for earning your grade.
  2. Review Higgins Chapter 1 Slides and the Financial Accounting Chapter 2 PowerPoints.
  3. Using Assignment 1.6 Worksheet, prepare the following financial statements for the mini-case “Financial Statements for Sunset Boards, Inc.”
    1. Income Statement for 2018 and 2019
    2. Balance Sheet for 2018 and 2019
    3. Cash Flow Statement for 2019
  4. Tad Marks, the company’s founder, is considering expanding the business, which will require a substantial investment.  Evaluate the financial statements you have developed and Sunset Board’s cash flow. In your Excel document or a separate Word document, write a paragraph explaining whether you feel expansion would be a wise choice and why.
  5. When you have completed your assignment, save a copy for yourself and submit a copy to your instructor by the end of the workshop.

Chapter 1 ROLE OF ACCOUNTING IN SOCIETY

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

Chapter Outline

1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting

1.2 Identify Users of Accounting Information and How They Apply Information

1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities

1.4 Explain Why Accounting Is Important to Business Stakeholders

1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education

Module 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting

Accounting is the process of organizing, analyzing, and communicating financial information that is used for decision-making. 

“Accounting is the language of business.”

“Accounting is the language of life.”

Understanding financial and managerial accounting is valuable and necessary for practically any career you will pursue.

Teacher Notes: While accounting is traditionally thought of from a business context, accounting is used in all facets of an individual’s life. Notice that the definition does not say “business decision-making.” Rather, it simply says “decision-making.” While this course is obviously focused on accounting as the language of business, many of the concepts learned will be applicable directly or abstractly to one’s personal financial decision-making.

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Distinguish between Financial and Managerial Accounting

Financial accounting measures the financial performance of an organization using standard conventions (rules) to prepare and distribute financial reports.

The purpose is to communicate information for decision-making by both internal and external users.

External users: owners (stockholders), lenders, and governmental entities such as the Securities and Exchange Commission (SEC) and the Internal Revenue Service (IRS)

Managerial accounting uses both financial and nonfinancial information as a basis for making decisions within an organization.

The purpose is to equip decision makers with information to assist in setting and evaluating business goals by determining what information is needed and how to analyze and communicate this information.

Information tends to be used internally, for purposes such as budgeting, pricing, and determining production costs.

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Module 1.2 Identify Users of Accounting Information and How They Apply Information

Users of accounting information are generally divided into two categories: internal and external. 

Internal users are those within an organization who use financial information to make day-to-day decisions. They include managers and other employees who use financial information to confirm past results and help make adjustments for future activities.

External users are those outside of the organization who use the financial information to make decisions or to evaluate an entity’s performance. They include investors, financial analysts, loan officers, governmental auditors, such as IRS agents, and an assortment of other stakeholders.

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Financial information is primarily communicated through financial statements.

Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows and Disclosures

Financial accounting information is mostly historical in nature, although companies and other entities also incorporate estimates into their accounting processes.

Financial information is prepared using a comprehensive, prescribed set of conventions, called generally accepted accounting principles (GAAP). They are set by the Financial Accounting Standards Board (FASB).

Part of an accountant’s responsibility is to quantify activities and events, which are then summarized and reported. Virtually every activity and event that occurs in a business has an associated cost or value and is known as a transaction.

Common computerized accounting systems include QuickBooks, which is designed for small organizations, and SAP, which is designed for large and/or multinational organizations.

Characteristics of Financial Accounting Information

Teacher Notes: Financial statements will serve as a “report card” for a business. Regarding “transactions,” use an example of a multi-national company, such as GE, that has operations in nearly 100 countries and has over 70 subsidiaries. This means they likely have millions of transactions each day (explain that buying a box of pens is a transaction, and so is selling the company’s product), and that through accounting, these millions of transactions that occur each day will be summarized and reported in a manner that allows users to feel confident in using that information—this is the miracle of accounting.

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Managerial accounting is not prepared using a comprehensive, prescribed set of conventions like those required by financial accounting—there is no rule or standard-setting body.

Managerial accountants provide managerial accounting information that is intended to serve the needs of internal users.

Managerial accounting information is rarely shared with those outside of the organization. The information often includes strategic or competitive decisions; managerial accounting information is often closely protected.

Management accounting information as a term encompasses many activities within an organization. Accountants must be adaptable and flexible in their ability to generate the necessary information for management decision-making and have both broad and detailed knowledge.

Management accounting information uses both financial and nonfinancial information. This is important because there are situations in which a purely financial analysis might lead to one decision, while considering nonfinancial information might lead to a different decision.

Characteristics of Managerial Accounting Information

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Figure 1.3

Comparing Reports between Financial and Managerial Accounting. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Teacher Notes: Financial and managerial accounting differ in who, what, why, and when they report information. This chart provides the similarities and differences in reporting.

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Module 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities

Three categories of organizations:

For-profit businesses: the primary purpose is to earn a profit by selling goods and services. 

Manufacturing: use raw materials, or component parts, to produce a final product that is sold to another manufacturer or consumers

Retail: buy goods that are already produced and sell them to other businesses or consumers

Service: do not sell tangible products to customers, but rather provide intangible benefits (services) to customers

Governmental entities: provide services to the general public (taxpayers). Governmental agencies exist at the federal, state, and local levels. These entities are funded through the issuance of taxes and other fees.

Not-for-profit entities: the primary purpose or mission is to serve a particular interest or need in the community. A not-for-profit entity tends to depend on donations and grants.

Teacher Notes: We can classify organizations into three categories: for profit, governmental, and not for profit. All of these entities use both financial and managerial accounting. What are examples of each type of for-profit business? What are examples of governments or government agencies?

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Figure 1.5

Manufacturing, Retail, and Service. An auto manufacturing plant, a car sales lot, and a taxi represent three types of businesses: manufacturing, retail, and service. (credit left: modification of “Maquiladora” by “Guldhammer”/Wikimedia Commons, CC0; credit center: modification of “Mercedes Benz Parked” by unknown/Pixabay, CC0; credit right: modification of “Taxi Overtaking Bus” by “Kai Pilger”/Pixabay, CC0)

Automobiles can be a component of manufacturing, retail, or service organizations.

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Your Turn: Categorizing Restaurants

So far, you’ve learned about three types of for-profit businesses: manufacturing, retail, and service. Previously, you saw how some firms such as Dell serve as both manufacturer and retailer.

Now, think of the last restaurant where you ate. Of the three business types (manufacturer, retailer, or service provider), how would you categorize the restaurant? Is it a manufacturer? A retailer? A service provider? Can you think of examples of how a restaurant has characteristics of all three types of businesses?

Module 1.4 Explain Why Accounting Is Important to Business Stakeholders

Stakeholder refers to a person or group who relies on financial information to make decisions. Examples of stakeholders are:

Stockholders: owner of stock in a business. Owners are called stockholders because in exchange for cash, they are given an ownership interest (stock) in the business. Owners are concerned with the success, and other factors, of the company they own. If the company’s value increases, then the stockholder’s stock (ownership) value increases.

Creditors and lenders: must assess the risk of not being repaid

Rarely do businesses pay for goods and services they purchase at the time the goods or services are delivered; rather the good or service provider extends credit to the purchasing business who will pay at a later date.

Companies also borrow money from banks when needed to finance certain aspects of their operations and typically pay this money back over time along with interest on those borrowed funds.

Teacher Notes: Some companies are “publicly traded,” meaning their stock can be bought and sold on stock exchanges such as the New York Stock Exchange or the Tokyo Exchange. There is something called an initial public offering, which is when a company, such as Lyft, offers stock directly to the public—in other words, interested buyers. Secondary trading is when the current owners of a stock sell that stock to another interested party. For example, if you purchased Lyft stock during the IPO but later decided to sell the stock, you could sell it to anyone who wanted to buy the stock. Other companies are “privately held,” and ownership in those companies is typically limited and can only be purchased directly from the current owners of the private company.

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Governmental and regulatory agencies

Publicly traded companies are required to file financial and other informational reports with the Securities and Exchange Commission (SEC), a federal regulatory agency that regulates corporations with shares listed and traded on security exchanges through required periodic filings.

The SEC is responsible for establishing guidelines for the accounting profession called accounting standards or generally accepted accounting principles (GAAP).

Although the SEC also had the responsibility of issuing standards for the auditing profession, they relinquished this responsibility to the Financial Accounting Standards Board (FASB).

Customers: those who purchase products and services from a business

Can be another business, often referred to as a B2B (business to business) transaction, such as Nabisco selling products to grocery stores

End-user customer, such as a shopper in a grocery store

Managers and other employees

Employees have a strong interest in the financial performance of the organizations; employees want to know their jobs will be secure; an organization that is financially successful is able to reward employees for commitment to the organization through bonuses and increased pay.

Managers and others in the organization have the responsibility to make day-to-day and long-term (strategic) decisions for the organization. Understanding financial information is vital to making good organizational decisions. Not all decisions, however, are based on strictly financial information. 

More Examples of Stakeholders

Profitable operations

Generating income from the day-to-day activities of the business

Borrowing

Also known as debt funding

Issuing (selling) stock

Also known as equity funding

Most organizations raise or generate funding in some combination of these methods. A company that is unable to eventually earn profits from their business activities will not likely survive. Why?

Ways in Which an Organization Can Raise Funding (Capital)

Teacher Notes: When if first began operations, Amazon did not have positive income for over 9 years. They were supported primarily by venture capital funding, whereas many small businesses can only remain in operations for a few months without generating positive income. A primary reason small businesses fail is lack of capital in the early stages of the business.

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Your Turn: Daily Decisions

Many academic studies have been conducted on the topic of consumer behavior and decision-making. It is a fascinating topic of study that attempts to learn what type of advertising works best, the best place to locate a business, and many other business-related activities.

One such study, conducted by researchers at Cornell University, concluded that people make more than 200 food-related decisions per day (Wansink, B., & Sobal, J. [2007]. Mindless Eating: The 200 Daily Food Decisions We Overlook. Environment & Behavior, 39[1], 106–123.).

This is astonishing considering the number of decisions found in this particular study related only to decisions involving food. Imagine how many day-to-day decisions involve other issues that are important to us, such as what to wear and how to get from point A to point B. For this exercise, provide and discuss some of the food-related decisions that you recently made.

Teacher Notes: Once this discussion has been carried out, ask students to each list ten decisions that a business (you may want to pick a particular business such as Home Depot or CVS) makes each day. This should generate some overlap, but a reasonable number of differences. Emphasize that this list, put together from the entire class, is not exhaustive, and is only a fraction of the daily decisions made by the organization. Many of the students will focus merely on the local store, which is what they are familiar with, but help them to see that a local store is just one piece of the whole organization and, thus, there are many more decisions than they may have previously thought. Add that many, if not all, of these decisions involve accounting in that the decision will be made based on the effect on “the numbers” and/or the impact on meeting strategic goals—which would be measured and evaluated more so from a managerial accounting standpoint.

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Module 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education

Characteristics of accounting professionals:

Personal attributes

Goal oriented

Problem solver

Organized and analytical

Good interpersonal skills

Pays attention to detail

Good time-management skills

Outgoing

Education

Entry-level positions: usually require a minimum of a bachelor’s degree

Advanced positions: may consider factors such as years of experience, professional development, certifications, and advanced degrees, such as a master’s or doctorate

Related careers

An accounting degree is a valuable tool for other professions such as financial analysts, personal financial planners, and business executives.

Figure 1.8

Career Paths. There are many career paths open to students of accounting. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

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Auditing

Taxation

Financial accounting

Consulting

Accounting information services

Cost and managerial accounting

Financial planning

Entrepreneurship

Major Categories of Accounting Functions

Teacher Notes: With little or no accounting knowledge at this point, it is challenging to explain these various positions and how accounting plays a part in these positions. A brief description of each is likely sufficient. Consider mentioning how individuals in these positions would use accounting information as you proceed through the various chapters, or review these positions at the end of the semester, as this may be more meaningful to students.

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Figure 1.10

Accountant Employer Types. Accountants may find employment within a variety of types of entities. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Teacher Notes: Every type of business organization uses accountants.

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Certified Public Accountant (CPA)

Certified Management Accountant (CMA)

Certified Internal Auditor (CIA)

Certified Fraud Examiner (CFE)

Chartered Financial Analyst (CFA)

Certified Financial Planner (CFP)

Potential Certifications for Accountants

Teacher Notes: In the chapter, there is more detail about each of these certifications, such as whether or not a test is involved, how long it takes to receive this type of certification, if work experience is required, etc. In the Appendix, there are links to CPA exam sites (NASAB), as well as additional information and links regarding the CPA exam.

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Summary

Accounting is the process of organizing, analyzing, and communicating financial information that is used for decision-making.

Accounting is often called the “language of business.”

Financial accounting measures performance using financial reports and communicates results to those outside of the organization who may have an interest in the company’s performance, such as investors and creditors.

Managerial accounting uses both financial and nonfinancial information to aid in decision-making.

The primary goal of accounting is to provide accurate, timely information to decision makers.

Accountants use common conventions to prepare and convey financial information.

Financial accounting is historical in nature, but a series of historical events can be useful in establishing predictions.

Financial accounting is intended for use by both internal and external users.

Managerial accounting is primarily intended for internal users.

Accountants play a vital role in many types of organizations.

Organizations can be placed into three categories: for profit, governmental, and not for profit

For-profit businesses can be further categorized into manufacturing, retail (or merchandising), and service.

Summary (continued)

Stakeholders are persons or groups that rely on financial information to make decisions.

Stakeholders include stockholders, creditors, governmental and regulatory agencies, customers, and managers and other employees.

The Securities and Exchange Commission (SEC) is responsible for establishing accounting standards for companies whose stocks are traded publicly on a national or regional stock exchange, such as the New York Stock Exchange (NYSE).

It is important for accountants to be well versed in written and verbal communication and possess other nonaccounting skill sets.

A bachelor’s degree is typically required for entry-level work in the accounting profession.

Advanced degrees and/or professional certifications are beneficial for advancement within the accounting profession.

Career paths within the accounting profession include auditing, taxation, financial accounting, consulting, accounting information systems, cost and managerial accounting, financial planning, and entrepreneurship.

Accountants have opportunities to work for many types of organizations, including public accounting firms, corporations, governmental entities, and not-for-profit entities.

Common professional certifications include Certified Public Accountant (CPA), Certified Management Accountant (CMA), Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE), Chartered Financial Analyst (CFA), and Certified Financial Planner (CFP).

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This file is copyright 2019, Rice University. All Rights Reserved.

Interpreting Financial Statements

Chapter One

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Copyright © 2019 by McGraw-Hill Education. All rights reserved.

1

Key Points

Accounting is the scorecard of business.

Managers who understand accounting can diagnose ills and prescribe remedies.

Chapter 1 reviews accounting concepts that are essential for financial management.

Ch. 1 2

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Higgins, Analysis for Financial Management, 12e

2

The Cash Flow Cycle

Finance and operations are integrally connected.

Company operations and strategy affect financing.

Financial decisions affect company operations.

The cash flow–production cycle demonstrates this.

Where is production (operations) in this cycle?

Ch. 1 3

Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Higgins, Analysis for Financial Management, 12e

3

Figure 1.1 The Cash Flow–Production Cycle

Ch. 1 4

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Questions about the Cash Flow–Production Cycle

What is depreciation, and how does it affect the cycle?

Did we miss accounts payable? If so, where does it fit in?

Where does the initial cash come from?

Where is the operating (working capital) cycle?

Are profits and cash flow the same?

Does depreciation have anything to do with this?

Ch. 1 5

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Principles demonstrated in the Cash Flow–Production Cycle

1. Financial statements are an important window on reality.

2. Profits do not equal cash flow.

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The Balance Sheet

The balance sheet is a financial snapshot.

Assets = Liabilities + Shareholders’ Equity

What do these three items measure?

What is double-entry bookkeeping?

What happens to the balance sheet when a company:

pays $1 million in wages?

borrows $100,000 from a bank?

Receives a $10,000 payment from a customer?

Ch. 1 7

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TABLE 1.1 Worldwide Sports Financial Transactions 2017 ($ thousands)

Ch. 1 8

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Questions about Table 1.1

How much did WWS sell?

What was the value of WWS merchandise purchases?

How much did WWS borrow, and what rate of interest did they pay?

Are assets equal to the sum of liabilities and owners’ equity?

Ch. 1 9

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From snapshots to videos

If the balance sheet is a snapshot, the income statement and cash flow statement are videos.

The income statement shows how revenues and expenses determine changes in owners’ equity over a period of time.

The cash flow statement provides details of the change in cash balances over time.

Ch. 1 10

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FIGURE 1.2 Ties among Financial Statements

Ch. 1 11

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Hasbro is used as an example throughout the text.

Toy and game products

Monopoly, Nerf, Play-Doh, Mr. Potato Head, etc.

Headquartered in Pawtucket, Rhode Island

Annual sales of $5 billion

Listed on Nasdaq

Member of S&P 500

Ch. 1 12

Introduction to Hasbro, Inc.

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TABLE 1.2 Hasbro Balance Sheets ($ millions)

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TABLE 1.3 Hasbro Income Statements ($ millions)

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Other Key Balance Sheet Points

Current assets and liabilities

“Current” means it is expected to turn into cash within one year.

Shareholders’ equity

Don’t worry too much about the different categories of equity (common stock, paid-in capital, retained earnings, treasury stock).

Net income (less any dividends paid) goes into retained earnings.

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The Income Statement

Basic relation: Revenues – Expenses = Net Income

Distinction between operating and nonoperating expenses

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Measuring Earnings

Accrual accounting and the matching principle

Depreciation

Straight-line vs. accelerated

Taxes

2 sets of books: one to report financial condition of company to investors and the second to compute taxes

Research and marketing

Expense it all! (Why?)

Ch. 1 17

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Tax Arithmetic

Provision for income taxes on income statement

+ increase in prepaid income taxes on asset side of balance sheet

− increase in income taxes payable and deferred income taxes on liabilities side of balance sheet

= Taxes paid

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Example of Taxes Paid: TARGET

From Target’s income statement, 2016

Provision for Income Taxes = $1,296 million

From Target’s balance sheet, 2015 to 2016

Increase in Taxes Payable = $38 (2015=823; 2016=861)

(No Deferred Taxes or Prepaid Taxes are listed)

Taxes Target paid

1,296 − 38 = $1,258 million

Ch. 1 19

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Ch. 1 20

You try it.

Calculate Home Depot’s taxes paid in year ended Jan 2017.

Excerpt from Balance Sheet

Excerpt from Income Statement

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Taxes paid=Prov. for taxes (4,534) – increase in payable (-9) – increase in deferred (-83) = $4,626 million (they had no prepaid inc. taxes)

20

Sources & Uses Statements

The income statement does not accurately show the movement of cash.

It includes items that are not cash flows.

It only lists cash flows pertaining to sales during the period.

For cash flows, we need something else.

Where does a company get its cash, and where does it spend its cash?

Ch. 1 21

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Sources & Uses of Cash

SourcesUses
Decreases in assetsIncreases in assets
Increases in liabilities & equityDecreases in liabilities & equity

Ch. 1 22

These can be determined by placing two balance sheets side by side.

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Examples from Hasbro’s Balance Sheet

Why is an increase in cash a use?

Ch. 1 23

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TABLE 1.4 Hasbro, Sources and Uses Statement, 2016 ($ millions)

Ch. 1 24

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You try it. Identify the sources and uses.

Ch. 1 25

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Sources: Cash 20, Inv. 10, AP 10, LTD 25, Stock 5, PIC 25, RE 30, TOTAL=125

Uses: AR 20, NFA 90, STD 15, TOTAL=125

25

Statement of Cash Flows

Expansion and rearrangement of sources and uses

Divides cash flows into 3 categories

Operations

Investing

Financing

Typically reports additional categories, such as dividends, repurchases, capital expenditures

Highlights the solvency of the firm

Ch. 1 26

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Cash Flow and Net Income

Which is the better measure of performance?

Net income includes estimates, allocations, and approximations.

Cash flow from operations is actual cash.

Low or negative cash flow does not necessarily imply poor performance.

Cash flow statements can record items such as AR and employee stock options differently from sources and uses.

Ch. 1 27

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TABLE 1.5 Hasbro, Cash Flow Statement, 2016 ($ millions)

Ch. 1 28

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Market Value vs. Book Value

The financial statements are a mix of historical amounts and mark-to-market amounts.

Book values are historical.

Market values are forward-looking.

Intangible assets not appearing in the financial statements include patents, brand reputation, superior technology, human capital of workforce, etc.

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Fair Value Accounting

Some quirks revealed by financial crisis of 2008

Drop in market value of debt

Fair value accounting required firms to record this change as a gain, because they were able to repurchase the debt at a lower price than they originally issued (sold it).

Effect reversed when market rebounded

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Calculating market value of equity

On Dec. 31, 2016, Hasbro’s book value of equity was $1,863 million (see Table 1.2).

What was Hasbro’s market value of equity on Dec. 31, 2016?

Hasbro’s stock price was $77.79.

Hasbro had 124.5 million shares outstanding.

Is book value or market value a better indicator of Hasbro’s worth to investors? Why?

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$77.79 × 124.5 million = $9,685 million

31

TABLE 1.6 The Book Value of Equity is a Poor Surrogate for the Market Value of Equity, December 31, 2016

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Goodwill

Intangible on the balance sheet

Goodwill is the difference between acquisition price and the fair value of the asset acquired.

Fair value corresponds to either the book value or the replacement value of the target, whichever is more appropriate.

For Hasbro, how important is goodwill (see Table 1.2)?

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Economic Income and Accounting Income

Realized vs. unrealized income

Marketable securities are marked to market, but not others.

Imputed costs: economic income recognizes the cost of equity as well as the cost of debt, while accounting income does not.

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Adjusted earnings

Reported by over 70% of companies in the S&P 500

Common adjustments

Restructuring charges

Litigation expenses

Acquisitions

SEC regulates use of adjusted earnings

Are adjusted earnings informative for investors or simply an effort by managers to hide problems?

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International Financial Reporting Standards

2005, Europe adopts IFRS

120+ countries have adopted

What about Japan and U.S.?

Effect of Enron and WorldCom accounting scandals?

Principles vs. rules

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Change in

20152016Account

Assets

Cash and cash equivalents977$ 1,282$ 306$ Use

Accounts receivable, less reserve for possible losses1,218 1,320 102 Use

Inventories384 388 3 Use

Gross property, plant, and equipment601 651 50 Use

Liabilities and Shareholders’ Equity

Accounts payable241 320 79 Source

Long-term debt1,547 1,199 (348) Use

Total shareholders’ equity1,664 1,863 199 Source

December 31

20162017SourcesUses

Cash & Securities7555

Inventory8070

Accounts receivable7090

Total current assets225215

Net fixed assets720810

Total assets9451025

Accounts payable7585

Short-term debt205190

Total current liabilities280275

Long-term debt325350

Common stock5055

Paid-in capital150175

Retained earnings140170

Total shareholders equity340400

Total liabilities and equity9451025

TOTAL

Albany Enterprises

Year-end Balance Sheets ($ millions)

Chapter 2 INTRODUCTION TO FINANCIAL STATEMENTS

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

Chapter Outline

2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate

2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses

2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet

Module 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash

In business—and accounting in particular—it is necessary to distinguish the business entity from the individual owner(s). Accountants should only record business transactions in business records. This separation is also reflected in the legal structure of the business.

Types of Business Structures

Table 2.1

Sole ProprietorshipPartnershipCorporation
Number of OwnersSingle individualTwo or more individualsOne of more owners
Ease of FormationEasier to formHarder to formDifficult to form
Ability to Raise CapitalDifficult to raise capitalHarder to raise capitalEasier to raise capital
Liability RiskUnlimited liabilityUnlimited liabilityLimited liability
Taxation ConsiderationSingle taxationSingle taxationDouble taxation

Teacher Notes: The personal transactions of the owners, employees, and other parties connected to the business should not be recorded in the organization’s records.

3

All businesses, regardless of legal structure, generate financial statements:

Income Statement

Statement of Owner’s Equity

Balance Sheet

Statement of Cash Flows

Purpose of financial statements: 

Stakeholders, such as investors, creditors, regulators, and employees are interested in the performance of an organization for various reasons, but the common goal of using the financial statements is to understand the information each contains that is useful for making financial decisions.

Financial Statements

Teacher Notes: Each of these statements will be discussed in detail in the upcoming slides.

4

Figure 2.5

Baking requires an understanding of the different ingredients, how the ingredients are used, and how the ingredients will impact the final product (a). If used correctly, the final product will be beautiful and, more importantly, delicious, like the cake shown in (b). In a similar manner, the study of accounting requires an understanding of how the accounting elements relate to the final product—the financial statements. (credit (a): modification of “U.S. Navy Culinary Specialist Seaman Robert Fritschie mixes cake batter aboard the amphibious command ship USS Blue Ridge (LCC 19) Aug. 7, 2013, while underway in the Solomon Sea 130807-N-NN332-044” by MC3 Jarred Harral/Wikimedia Commons, Public Domain; credit (b): modification of “Easter Cake with Colorful Topping” by Kaboompics .com/Pexels, CC0)

5

The income statement shows the organization’s financial performance for a given period of time.

Revenue: the value of goods and services the organization sold or provided to customers

Expenses: a cost associated with providing goods or services to customers

Net Income (Net Loss): determined by comparing revenues and expenses

Income Statement

Modified for PPT.

6

EA9. Prepare an income statement using the following information for DL Enterprises for the month of July 2018.

Sample Exercise

7

Net income can be expressed in general form as:

Net Income

8

PA1. The following information is taken from the records of Baklava Bakery for the year 2019.

Calculate net income or net loss for January.

Calculate net income or net loss for February.

Calculate net income or net loss for March.

For each situation, comment on how a stakeholder might view the firm’s performance. (Hint: Think about the source of the income or loss.)

Sample Problem

9

Your Turn: Coffee Shop Products

Think about the coffee shop in your area. Identify items the coffee shop sells that would be classified as revenues. Remember, revenues for the coffee shop are related to its primary purpose: selling coffee and related items. Or, better yet, make a trip to the local coffee shop and get a first-hand experience.

Your Turn: Coffee Shop Expenses

While thinking about or visiting the coffee shop in your area, look around (or visualize) and identify items or activities that are the expenses of the coffee shop. Remember, expenses for the coffee shop are related to resources consumed while generating revenue from selling coffee and related items. Do not forget about any expenses that might not be so obvious—as a general rule, every activity in a business has an associated cost.

Revenues and expenses occur from the doing what the business is in business to do. For example, Chris is in the landscaping business, so revenues would be from performing landscape services and expenses would be the costs associated with generating those revenues.

Chris’s business, as well as any other business, is likely to periodically have gains and losses in addition to revenues and expenses. Here is how gains and losses affect the income statement:

Gains result from selling ancillary business items for more than the items are worth, such as buildings, land, or equipment that help support the business’s operations.

Losses result from selling ancillary business items for less than the items are worth.

It is obvious that gains have the same effect on Net Income as revenues; they increase net income. Losses have the same effect as expenses; they decrease net income.

Gains and Losses

Modified for PPT.

12

13

EA1. For each independent situation below, calculate the missing values.

Sample Exercise

14

The statement of owner’s equity, the second financial statement created by accountants, shows how the equity (or value) of the organization has changed over time. Similar to the income statement, the statement of owner’s equity is for a specific period of time. Equity is the value of an item that remains after considering what is owed for that item.

Beginning Balance is $0 because this is the first month of business.

Net Income is added to the beginning balance; the first part of how the financial statements interrelate.

Statement of Owner’s Equity

Modified for PPT.

Teacher Notes: Equity explanation using something students can easily understand:

House value = $400,000

Mortgage owed = $250,000

Equity = $150,000

The same concept applies to companies; equity represents the value, or net worth, of the company.

15

Investments by owners: represent an exchange of cash or other assets for which the investor is given an ownership interest in the organization.

Distributions to owners: periodic rewards issued to the owners in the form of cash or other assets. Distributions to owners represent some of the value (equity) of the organization.

Possible Changes to Owner’s Equity Other than Net Income

Assets: resources used to generate revenue

Liabilities: amounts owed to others (called creditors)

Equity: refers to book value or net worth, this amount is the ending balance of the Statement of Owner’s Equity

Figure 2.2

“Balance Sheet for Chris’ Landscaping.” Modified for PPT. (attribution: Copyright, Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Balance sheet: a statement that lists what the organization owns (assets), what it owes (liabilities), and what it is worth (equity) on a specific date.

17

The income statement, statement of owner’s equity, and the balance sheet are interrelated. Each statement provides unique information, but the statements are connected.

Modified for PPT.

18

Statement of cash flows is a statement that lists the cash inflows and cash outflows for the business for a period of time.

There are two “bases” of accounting. A basis indicates when revenues and expenses will be recorded.

Cash basis accounting: transactions (i.e., a sale or a purchase) are not recorded in the financial statements until there is an exchange of cash. This type of accounting is permitted for nonprofit entities and small businesses that elect to use this type of accounting.

Accrual basis accounting: transactions are generally recorded in the financial statement when the transactions occur, and not when paid; although in some situations, the two events could happen on the same day.

Statement of Cash Flows

Teacher Notes: Cash flow specifics and presentation will be covered when we have more information to put on the statement of cash flows. To “record” a transaction means to list the transaction in the accounting system so that it will appear on the appropriate financial statements.

19

Transactions by Cash Basis versus Accrual Basis of Accounting

Table 2.2 Businesses often sell items for cash as well as on account, where payment terms are extended for a period of time (for example, thirty to forty-five days). Likewise, businesses often purchase items from suppliers (also called vendors) for cash or, more likely, on account. Under the cash basis of accounting, these transactions would not be recorded until the cash is exchanged. In contrast, under accrual accounting the transactions are recorded when the transaction occurs, regardless of when the cash is received or paid.

TransactionUnder Cash Basis AccountingUnder Accrual Basis Accounting
$200 sale for cashRecorded in financial statements at time of saleRecorded in financial statements at time of sale
$200 sale on accountNot recorded in financial statements until cash is receivedRecorded in financial statements at time of sale
$160 purchase for cashRecorded in financial statements at time of purchaseRecorded in financial statements at time of purchase
$160 purchase on accountNot recorded in financial statements until cash is paidRecorded in financial statements at time of purchase

20

Sample Exercise

EA7. Forest Company had the following transactions during the month of December. What is the December 31 cash balance?

21

Current versus noncurrent distinction

An asset that will be used or consumed in one year or less will be classified as a current asset. If the asset will be used or consumed over more than one year, it is classified as a noncurrent asset.

A liability that will be settled in one year or less (generally) is classified as a current liability, while a liability that is expected to be settled in more than one year is classified as a noncurrent liability.

Module 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent

Current Assets Noncurrent Assets

Cash Buildings, Land, Equipment

Accounts Receivable Notes Receivable

Inventory Patents

Current Liabilities Noncurrent Liabilities

Accounts Payable Notes Payable

Notes Payable

Current versus Noncurrent Examples

Teacher Notes: These are a few of the accounts that would fall under each of these headings.

23

Stakeholders use financial information to make decisions. Providing the amounts of the assets and liabilities answers the “what” question for stakeholders (that is, it tells stakeholders the value of assets), but it does not answer the “when” question for stakeholders.

For example, knowing that an organization has $1,000,000 worth of assets is valuable information, but knowing that $250,000 of those assets are current and will be used or consumed within one year is more valuable to stakeholders. Likewise, it is helpful to know the company owes $750,000 worth of liabilities, but knowing that $125,000 of those liabilities will be paid within one year is even more valuable. In short, the timing of events is of particular interest to stakeholders.

Why Current versus Noncurrent Distinction Matters

Think It Through: Borrowing

When money is borrowed by an individual or family from a bank or other lending institution, the loan is considered a personal or consumer loan. Typically, payments on these types of loans begin shortly after the funds are borrowed. Student loans are a special type of consumer borrowing that has a different structure for repayment of the debt. If you are not familiar with the special repayment arrangement for student loans, do a brief internet search to find out when student loan payments are expected to begin.

Now, assume a college student has two loans—one for a car and one for a student loan. Assume the person gets the flu, misses a week of work at his campus job, and does not get paid for the absence. Which loan would the person be most concerned about paying? Why?

Business Legal StructureTerm for Owner’s InvestmentTerm for Owner’s DistributionsTerminology for Equity
Sole proprietorshipCapitalWithdrawalOwner’s capital
PartnershipCapitalWithdrawalPartner’s capital
CorporationCommon stockDividendRetained earnings

Equity and Legal Structure

Teacher Notes: The essence of these transactions remains the same: organizations become more valuable when owners make investments in the business and the businesses earn a profit (net income). Organizations become less valuable when owners receive distributions (dividends) from the organization and the businesses incur a loss (net loss).

26

To help understand the balance sheet equation concept, assume a family purchased a home valued at $200,000 and made a down payment of $25,000 while financing the remaining balance with a $175,000 bank loan. The accounting equation would be:

Balance Sheet Equation

Figure F02_02_AcctEq_img

Teacher Notes: Obviously a business has many assets and many liabilities, but the basic concept exhibited here will hold as we move forward to see how the balance sheet equation works for business entities.

27

Your Turn: The Accounting Equation

On a sheet of paper, use three columns to create your own accounting equation. In the first column, list all of the things you own (assets). In the second column, list any amounts owed (liabilities). In the third column, using the accounting equation, calculate, you guessed it, the net amount of the asset (equity). When finished, total the columns to determine your net worth. Hint: do not forget to subtract the liability from the value of the asset.

Here is something else to consider: is it possible to have negative equity? It sure is . . . ask any college student who has taken out loans. At first glance there is no asset directly associated with the amount of the loan. But is that, in fact, the case? You might ask yourself why make an investment in a college education—what is the benefit (asset) to going to college? The answer lies in the difference in lifetime earnings with a college degree versus without a college degree. This is influenced by many things, including the supply and demand of jobs and employees. It is also influenced by the earnings for the type of college degree pursued. (Where do you think accounting ranks?)

Figure 2.4

Graphical Representation of the Accounting Equation. Both assets and liabilities are categorized as current and noncurrent. Also highlighted are the various activities that affect the equity (or net worth) of the business. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Notice that assets have the + sign (increases) on the right side of the columns, while liabilities and owner’s equity have the + sign (increases) on the left side of the columns.

Teacher Notes: This will be developed further in Chapter 3.

29

Transactions that Affect the Value (Equity) of the OrganizationTransactions that DO NOT Affect the Value (Equity) of the Organization
Revenues (increase equity)Exchanges of assets for assets
Expenses (decrease equity)Exchanges of liabilities for liabilities
Gains (increase equity)Acquisitions of assets by incurring liabilities
Losses (decrease equity)Settlements of liabilities by transferring assets
Investments by owners (increase equity)
Distributions to owners (decrease equity)
Changes in assets and liabilities can either increase or decrease the value (equity) of the organization depending on the net result of the transaction.

Elements of the financial statements: Those categories or accounts that accountants use to record transactions and prepare financial statements.

Revenue: value of goods and services the organization sold or provided

Expenses: costs of providing the goods or services for which the organization earns revenue

Gains: similar to revenue, but relate to “incidental or peripheral” activities of the organization

Losses: similar to expenses, but related to “incidental or peripheral” activities of the organization

Assets: items the organization owns, controls, or has a claim to

Liabilities: amounts the organization owes to others (also called creditors)

Equity: net worth (or net assets) of the organization

Investment by owners: cash or other assets provided to the organization in exchange for an ownership interest

Distribution to owners: cash, other assets, or ownership interest (equity) provided to owners

Comprehensive income: defined as the “change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources” (SFAC No. 6, p. 21). While further discussion of comprehensive income is reserved for intermediate and advanced studies in accounting, it is worth noting that comprehensive income has four components, focusing on activities related to foreign currency, derivatives, investments, and pensions.

Module 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet

Figure 2.6

Trial Balance for Cheesy Chuck’s Classic Corn. Accountants record and summarize accounting information into accounts, which help to track, summarize, and prepare accounting information. This table is a variation of what accountants call a “trial balance.” A trial balance is a summary of accounts and aids accountants in creating financial statements. Modified for PPT. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

A trial balance is a listing of all accounts and their balances.

Income Statement Accounts

Balance Sheet Accounts

Owner’s Equity Accounts

32

Figure 2.7

Income Statement for Cheesy Chuck’s Classic Corn. The income statement for Cheesy Chuck’s shows the business had Net Income of $5,800 for the month ended June 30. This amount will be used to prepare the next financial statement, the statement of owner’s equity. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

33

Figure 2.8

Statement of Owner’s Equity for Cheesy Chuck’s Classic Corn. The statement of owner’s equity demonstrates how the net worth (also called equity) of the business changed over the period of time (the month of June in this case). Notice the amount of net income (or net loss) is brought from the income statement. In a similar manner, the ending equity balance (Capital for Cheesy Chuck’s because it is a sole proprietorship) is carried forward to the balance sheet. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

34

Figure 2.9

Balance Sheet for Cheesy Chuck’s Classic Corn. The balance sheet shows what the business owns (Assets), owes (Liabilities), and is worth (equity) on a given date. Notice the amount of Owner’s Equity (Capital for Cheesy Chuck’s) was brought forward from the statement of owner’s equity. Modified for PPT. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Obtained from Statement of Owner’s Equity

35

In addition to reviewing the financial statements in order to make decisions, owners and other stakeholders also utilize financial ratios to assess the financial health of the organization. There are various ratio categories and different ratios within each of those categories. One category of ratios is liquidity ratios.

Liquidity refers to the business’s ability to convert assets into cash in order to meet short-term cash needs. Examples of the most liquid assets include accounts receivable and inventory. These assets can be turned into cash more quickly than land or buildings, for example.

Working capital is current assets minus current liabilities; it is not a ratio, but it is used to assess the dollar amount of assets a business has available to meet its short-term liabilities.

The current ratio is closely related to working capital; it represents the current assets divided by current liabilities. The current ratio utilizes the same amounts as working capital (current assets and current liabilities) but presents the amount in ratio, rather than dollar, form.

Current Ratio = Current Assets ÷ Current Liabilities

Financial Ratios

Teacher Notes: A positive working capital amount is desirable and indicates the business has sufficient current assets to meet short-term obligations (liabilities) and still has financial flexibility. A negative amount is undesirable and indicates the business should pay particular attention to the composition of the current assets (that is, how liquid the current assets are) and to the timing of the current liabilities.

A current ratio of greater than one indicates that the firm has the ability to meet short-term obligations with a buffer, while a ratio of less than one indicates that the firm should pay close attention to the composition of its current assets as well as the timing of the current liabilities.

36

Summary

Financial statements provide financial information to stakeholders to help them in making decisions.

There are four financial statements: income statement, statement of owner’s equity, balance sheet, and statement of cash flows.

The income statement measures the financial performance of the organization for a period of time. The income statement lists revenues, expenses, gains, and losses, which make up net income (or net loss).

The statement of owner’s equity shows how the net worth of the organization changes for a period of time. In addition to showing net income or net loss, the statement of owner’s equity shows the investments by and distributions to owners.

The balance sheet shows the organization’s financial position on a given date. The balance sheet lists assets, liabilities, and owners’ equity.

The statement of cash flows shows the organization’s cash inflows and cash outflows for a given period of time. The statement of cash flows is necessary because financial statements are usually prepared using accrual accounting, which records transactions when they occur rather than waiting until cash is exchanged.

Summary (continued)

Three broad categories of legal business structures are sole proprietorship, partnership, and corporation, with each structure having advantages and disadvantages.

The accounting equation is Assets = Liabilities + Owner’s Equity. It is important to the study of accounting because it shows what the organization owns and the sources of (or claims against) those resources.

Owners’ equity can also be thought of as the net worth or value of the business. There are many factors that influence equity, including net income or net loss, investments by and distributions to owners, revenues, gains, losses, expenses, and comprehensive income.

There are ten financial statement elements: revenues, expenses, gains, losses, assets, liabilities, equity, investments by owners, distributions to owners, and comprehensive income.

There are standard conventions for the order of preparing financial statements (income statement, statement of owner’s equity, balance sheet, and statement of cash flows) and for the format (three-line heading and columnar structure).

Financial ratios, which are calculated using financial statement information, are often beneficial to aid in financial decision-making. Ratios allow for comparisons between businesses and determining trends between periods within the same business.

This file is copyright 2019, Rice University. All Rights Reserved.

$200,000 = $175,000 + $25,000

#1

Assignment 1.5 Exercises
Problem 1: Building an Income Statement5 Points
Viola’s Medical Supplies, Inc., had product sales of $817,000 and rental sales of $121,000 for 2019. The cost of the products sold was $389,000. In addition, the company incurred $143,000 in expense for its workers, $14,000 for utilities, and $83,000 to lease its warehouse space. Viola was paid $85,000 for his management of the business. The company purchased $80,000 of new equipment during the year. Depreciation of warehouse equipment was $51,000, and interest expense on the company’s credit line was $38,000. The company has an effective tax rate of 21 percent.
Complete the full Income Statement for Viola’s Medical Supplies. What is the Net Income for this firm?
Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.
Input area:
Product Sales ($)
Rental Sales ($)
Cost of Goods Sold ($)
Wages Expense ($)
Utilities Expense ($)
Warehouse Lease ($)
Management Salaries ($)
Depreciation expense ($)
Interest expense ($)
Tax rate (%)
Output area:
Viola’s Medical Supplies, Inc.
Income Statement
For Year Ended Dec 31st, 2019
Product Sales Revenue$ – 0
Rental Sales Revenue– 0
Total Revenue$ – 0
Expenses:
Costs of Goods Sold$ – 0
Wages Expense
Utilities Expense
Warehouse Expense
Management Salaries
Depreciation expense– 0
EBIT$ –
Interest expense
EBT$ – 0
Taxes (0%)
Net income$ – 0
This is the Student Template file, provided in the assignment instructions October 2019

#2

Assignment 1.5 Exercises
Problem 2: Building a Balance Sheet5 Points
As of January 31st, 2020, Spooner Company owes its suppliers $1070, and owes its employees $1420 in future wages. The company has $8400 in cash on hand and is storing $5470 of inventory. Equipment worth $27,000, net of accumulated depreciation, is supporting the operation. The company also has an outstanding loan to its local bank of $15,000. Sales in 2019 was $432,000.
Complete the full Balance Sheet for Spooner Company. What is the Owner’s Equity for this firm?
Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.
Input area:
Accounts Payable ($)
Wages Payable ($)
Cash ($)
Inventory ($)
Net Fixed Assets ($)
Bank Loan ($)
Output area:
Spooner Company
Balance Sheet
January 31st, 2020
Current Assets:Current Liabilities:
Cash$ – 0Accounts Payable$ – 0
InventoryWages Payable
Total Current Assets$ – 0Total Current Liabilities$ – 0
Net Fixed AssetsLong-Term Debt
Owner’s Equity$ – 0
Total Assets$ – 0Total Liabilities and Equity
This is the Student Template file, provided in the assignment instructions October 2019

#3

Assignment 1.5 Exercises
Problem 3: Building an Income Sheet10 Points
The following financial data has been provided for Twanger Building Supply, Inc.:
Cost of goods sold$ 983,095
Cash141,860
Depreciation277,530
Interest expense60,335
Selling & Administrative Expenses193,340
Accounts payable100,715
Net fixed assets1,224,405
Sales1,928,620
Accounts receivable100,520
Short-term Notes payable114,275
Long-term debt618,035
Inventory193,530
Intangible Assets223,450
Wages Payable21,780
Common Stock1,750
Additional Paid-In Capital291,680
Retained Earnings735,530
Tax Rate (average)30%
All data is for the year ended Dec 31st, 2019.
Complete the full Income Statement for Twanger Building Supply. What is the Net Income for this firm?
Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.
This is the Student Template file, provided in the assignment instructions October 2019

#4

Assignment 1.5 Exercises
Problem 4: Building a Balance Sheet10 Points
The following financial data has been provided for Twanger Building Supply, Inc.:
Cost of goods sold$ 983,095
Cash141,860
Depreciation277,530
Interest expense60,335
Selling & Administrative Expenses193,340
Accounts payable100,715
Net fixed assets1,224,405
Sales1,928,620
Accounts receivable100,520
Short-term Notes payable114,275
Long-term debt618,035
Inventory193,530
Intangible Assets223,450
Wages Payable21,780
Common Stock1,750
Additional Paid-In Capital291,680
Retained Earnings735,530
Tax Rate (average)30%
All data is for the year ended Dec 31st, 2019.
Complete the full Balance Sheet for Twanger Building Supply. What is the total Owner’s Equity for this firm?
Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.
This is the Student Template file, provided in the assignment instructions October 2019

#5

Assignment 1.5 Exercises
Problem 5: Sources and Uses5 Points
Summary data for Hummer Corp.’s Assets, Liabilities, and Equity is given below (in $ millions):
20182019
Current Assets$ 2,866$ 3,228
Fixed Assets1,8551,863
Current Liabilities1,0651,618
Long Term Debt1,9921,610
Shareholders’ Equity1,6641,863
All data is for the fiscal year ending Dec 31st.
Complete a Sources and Uses Statement for Hummer Corp.
Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.
Input area:
Hummer Corp.
Balance Sheet ($ millions)
20182019Change
Current Assets$ –
Fixed Assets
Total Assets
Current Liabilities
Long Term Debt
Shareholders’ Equity
Total Liabilities and Equity
Output area:
Hummer Corp.
Sources and Uses Statement
December 31st, 2019 ($ millions)
Sources:
Increase in Current Liabilties$ – 0
Increase in Shareholder’s Equity
Total Sources
Uses:
Increase in Current Assets
Increase in Fixed Assets
Decrease in Long-Term Debt
Total Uses
This is the Student Template file, provided in the assignment instructions October 2019

#6

Assignment 1.5 Exercises
Problem 6: Sources and Uses5 Points
A Balance Sheet for Whistler Corp. is given below:
Whistler Corporation
Balance Sheets
For Years Ended December 31st
20182019Change
Cash$ 47,500$ 76,700$ 29,200
Accounts receivable$ –$ 43,100$ 43,100
Inventories$ 49,000$ 36,500$ (12,500)
Total Current Assets$ 96,500$ 156,300$ 59,800
Land$ 15,800$ 15,800$ –
Buildings$ 103,600$ 164,600$ 61,000
Equipment$ 52,400$ 53,300$ 900
Patents$ 5,200$ 5,200$ –
Total Long-Term Assets$ 177,000$ 238,900$ 61,900
Total assets$ 273,500$ 395,200$ 121,700
Accounts payable to suppliers$ 48,000$ 25,900$ (22,100)
Income taxes payable$ –$ 10,700$ 10,700
Total current liabilities$ 48,000$ 36,600$ (11,400)
Long term debt$ 100,100$ 134,000$ 33,900
Total liabilities$ 148,100$ 170,600$ 22,500
Common stock$ 125,400$ 177,400$ 52,000
Retained earnings$ –$ 47,200$ 47,200
Total shareholders’ equity$ 125,400$ 224,600$ 99,200
Total Liabilities and Equity$ 273,500$ 395,200$ 121,700
Complete a Sources and Uses Statement for Whistler Corp.
Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.
This is the Student Template file, provided in the assignment instructions October 2019

#7

Assignment 1.5 Exercises
Problem 7: Cash Flow Statement5 Points
Balance Sheets and an Income Statement for Bongo Company are provided below (in $ millions):
Bongo CompanyBongo Company
Balance Sheet ($ millions)Income Statement ($ millions)
December 31stFor Year Ended December 31st, 2019
20182019Change
Cash$ 1,270$ 1,869$ 599Net Sales$ 6,526
Accounts Receivable1,5841,716132Cost of Goods Sold2,900
Other Current Assets872814(58)Selling and Admin Expenses2,359
Total Current Assets3,7264,399673Depreciation202
EBIT (Operating Income)1,065
Property, Plant, & Equipment1,2751,36085
Intangible Assets1,1361,062(74)Interest Expense126
Less: Accumulated Depreciation240442202Other Non-Operating Expenses78
Total Fixed Assets2,1711,980(191)EBT (Taxable Income)861
Total Assets5,8976,379482Income Taxes276
Net Income585
Accounts Payable313416103
Other Short-Term Debt8311,246415Dividends Paid154
Total Current Liabilities1,1441,662518Addition to Retained Earnings431
Long Term Debt2,5902,093(497)
Common Stock21024030
Retained Earnings1,9532,384431
Shareholders’ Equity2,1632,624461
Total Liabilities and Equity5,8976,379482
Create a Cash Flow Statement for Bongo Company. Be careful of the direction of the cash flows (source or use).
Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.
Input / Output area:
Bongo Company
Statement of Cash Flows ($ millions)
For Year Ended December 31st, 2019
Cash Flows from Operating Activities
Net Income
Add Back Depreciation
(Increase) Decrease in Accounts Receivable
(Increase) Decrease in Other Current Assets
Increase (Decrease) in Accounts Payable
Increase (Decrease) in Short-Term Debt
Cash Flow from Operations
Cash Flows from Investing Activities
(Increase) Decrease in Property, Plant, Equipment
(Increase) Decrease in Intangible Assets
Cash Flow from Investing
Cash Flows from Financing Activities
Increase (Decrease) in Long-Term Debt
Increase (Decrease) in Common Stock
Subtract Dividends Paid
Cash Flow from Financing
Net Increase (Decrease) in Cash
Cash at Beginning of Year
Cash at End of Year
Net Change in Cash
This is the Student Template file, provided in the assignment instructions October 2019

#8

Assignment 1.5 Exercises
Problem 8: Cash Flow Statement5 Points
Balance Sheets and an Income Statement for Whistler Corporation are provided below (in $ thousands):
Whistler CorporationWhistler Corporation
Balance Sheet ($ thousands)Income Statement ($ thousands)
December 31stFor Year Ended December 31st, 2019
20182019Change
Cash$ 47,500$ 76,700$ 29,200Net Sales$ 165,300
Accounts Receivable43,10043,100Cost of Goods Sold46,200
Inventories49,00036,500(12,500)Depreciation1,400
Total Current Assets96,500156,30059,800EBIT (Operating Income)117,700
Land15,80015,800Interest Expense2,000
Buildings103,600164,60061,000Other Non-Operating Expenses5,600
Equipment63,20065,5002,300EBT (Taxable Income)110,100
Patents5,2005,200
Less: Accumulated Depreciation10,80012,2001,400Income Taxes40,900
Total Fixed Assets177,000238,90061,900Net Income69,200
Total Assets273,500395,200121,700Dividends Paid22,000
Addition to Retained Earnings47,200
Accounts Payable48,00025,900(22,100)
Income Taxes Payable10,70010,700
Total Current Liabilities48,00036,600(11,400)
Long Term Debt100,100134,00033,900
Common Stock125,400177,40052,000
Retained Earnings47,20047,200
Shareholders’ Equity125,400224,60099,200
Total Liabilities and Equity273,500395,200121,700
Create a Cash Flow Statement for Whistler Corporation.
Create your Original Solution Below – Be sure to show all calculations and clearly indicate answers.
This is the Student Template file, provided in the assignment instructions October 2019

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