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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.

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

You will earn 10 points upon successful completion of the following tasks:
Access your eBook and Connect assignments through Connect in the table of contents.
Select Connect in the Table of Contents.
Select McGraw Hill Deep Integration.
Select Go to my Connect Section.
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.
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.
Explore the other Assignments in this course, reading each of the assignment instructions for upcoming assignments.
As you read, take note of the resources, supplemental materials, or learning technology support items linked to each assignment.
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.
Navigate to the threaded discussion and respond to the following:
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.
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.
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.
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

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.
Watch the Collaboration Forums Introduction video:
Respond by making at least one comment or post that addresses one of the following:
Ask a question about this workshop’s assignments.
Provide an attempted solution or at least a reference to relevant material in the textbook.
Share insights, new understandings, or “ah ha” moments resulting from your reading or work on assignments.
Deepen the discussion by raising the application or the implications of a concept presented in the textbook or devotional materials.
Post a proposed solution to a question raised by another student and then dialogue about it in this forum, attempting to reach a solution.
Your postings should:
Clearly state the problem number and problem details as well as the questions that you have.
Provide clear questions and proposed answers with evidence of critical thinking by incorporating material from the assigned reading.
Add greater depth to the discussion by introducing new ideas or observations.
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

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

Review the rubric to make sure you understand the criteria for earning your grade.
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.
In your textbook, Principles of Accounting, read Chapters 1 and 2, “Role of Accounting in Society” and “Introduction to Financial Statements.”
Review the Financial Accounting Chapter 1 and Financial Accounting Chapter 2 PowerPoints to help you further understand the chapter concepts.
Review Higgins Chapter 1 Slides.
Watch the video “Cash Flow and Working Capital”
Respond to the following prompts:
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?
What are the ethical implications of lengthening supplier pay terms? Is this a legitimate business strategy? Why or why not?
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.
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.
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.
For questions on APA style, go to OCLS APA Writing Styles Guides.
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

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

Review the Higgins Chapter 1 Slides.
In your textbook, Analysis for Financial Management, read Chapter 1, “Interpreting Financial Statements.”
Review the Financial Accounting Chapter 1 PowerPoint to help you further understand the chapter.
In your textbook, Principles of Accounting, read Chapter 2 “Introduction to Financial Statements.”
Review the Financial Accounting Chapter 2 PowerPoint to help you further understand the chapter.
Study the Workshop One Practice Problems Workbook to help you better understand the processes used to build financial statements.
Using the Excel Assignment 1.5 Worksheet, complete all eight of the following problems:
Income Statement: Problems 1 and 3
Balance Sheet: Problems 2 and 4
Cash Flow: Problems 5, 6, 7, and 8
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.
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:

Resources

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

Review Higgins Chapter 1 Slides and the Financial Accounting Chapter 2 PowerPoints.
Using Assignment 1.6 Worksheet, prepare the following financial statements for the mini-case “Financial Statements for Sunset Boards, Inc.”
Income Statement for 2018 and 2019
Balance Sheet for 2018 and 2019
Cash Flow Statement for 2019
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.

When you have completed your assignment, save a copy for yourself and submit a copy to your instructor by the end of the workshop.

FinancialReporting mcgraw hill connect

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.

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.

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

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.

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)

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).

Interpreting Financial Statements

Chapter One

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

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

Figure 1.1 The Cash Flow–Production Cycle

Ch. 1 4

Higgins, Analysis for Financial Management, 12e
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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
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

Principles demonstrated in the Cash Flow–Production Cycle
1. Financial statements are an important window on reality.
2. Profits do not equal cash flow.
Ch. 1 6
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

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
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

TABLE 1.1 Worldwide Sports Financial Transactions 2017 ($ thousands)
Ch. 1 8

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
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

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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Higgins, Analysis for Financial Management, 12e

FIGURE 1.2 Ties among Financial Statements
Ch. 1 11

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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Higgins, Analysis for Financial Management, 12e

TABLE 1.2 Hasbro Balance Sheets ($ millions)
Ch. 1 13

TABLE 1.3 Hasbro Income Statements ($ millions)
Ch. 1 14

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.
Ch. 1 15
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Higgins, Analysis for Financial Management, 12e

The Income Statement
Basic relation: Revenues – Expenses = Net Income
Distinction between operating and nonoperating expenses
Ch. 1 16

Higgins, Analysis for Financial Management, 12e

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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Higgins, Analysis for Financial Management, 12e

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
Ch. 1 18
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Higgins, Analysis for Financial Management, 12e

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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Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

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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Higgins, Analysis for Financial Management, 12e

Sources & Uses of Cash
Sources Uses
Decreases in assets Increases in assets
Increases in liabilities & equity Decreases in liabilities & equity

Ch. 1 22
These can be determined by placing two balance sheets side by side.
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Higgins, Analysis for Financial Management, 12e

Examples from Hasbro’s Balance Sheet
Why is an increase in cash a use?
Ch. 1 23

Higgins, Analysis for Financial Management, 12e

TABLE 1.4 Hasbro, Sources and Uses Statement, 2016 ($ millions)
Ch. 1 24

You try it. Identify the sources and uses.
Ch. 1 25

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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Higgins, Analysis for Financial Management, 12e

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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Higgins, Analysis for Financial Management, 12e

TABLE 1.5 Hasbro, Cash Flow Statement, 2016 ($ millions)
Ch. 1 28

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.
Ch. 1 29
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Higgins, Analysis for Financial Management, 12e

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
Ch. 1 30
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Higgins, Analysis for Financial Management, 12e

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?
Ch. 1 31
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Higgins, Analysis for Financial Management, 12e

$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
Ch. 1 32

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)?
Ch. 1 33
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Higgins, Analysis for Financial Management, 12e

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.
Ch. 1 34
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Higgins, Analysis for Financial Management, 12e

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?
Ch. 1 35
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Higgins, Analysis for Financial Management, 12e

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
Ch. 1 36
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Higgins, Analysis for Financial Management, 12e

36
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 Proprietorship Partnership Corporation
Number of Owners Single individual Two or more individuals One of more owners
Ease of Formation Easier to form Harder to form Difficult to form
Ability to Raise Capital Difficult to raise capital Harder to raise capital Easier to raise capital
Liability Risk Unlimited liability Unlimited liability Limited liability
Taxation Consideration Single taxation Single taxation Double 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)

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.

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

Net income can be expressed in general form as:
Net Income

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

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.

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

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.

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.

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.

Transaction Under Cash Basis Accounting Under Accrual Basis Accounting
$200 sale for cash Recorded in financial statements at time of sale Recorded in financial statements at time of sale
$200 sale on account Not recorded in financial statements until cash is received Recorded in financial statements at time of sale
$160 purchase for cash Recorded in financial statements at time of purchase Recorded in financial statements at time of purchase
$160 purchase on account Not recorded in financial statements until cash is paid Recorded in financial statements at time of purchase

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

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 Structure Term for Owner’s Investment Term for Owner’s Distributions Terminology for Equity
Sole proprietorship Capital Withdrawal Owner’s capital
Partnership Capital Withdrawal Partner’s capital
Corporation Common stock Dividend Retained 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 Organization Transactions 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

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)

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)

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

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.

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

#1

, had product sales of $817,000 and rental sales of $121,000 for

. 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 $

,000 for his management of the business. The company purchased $80,000 of new equipment during the year.

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.

for this firm?

Pay close attention to the formulas and formatting of the inputs.

($)

Viola’s Medical Supplies, Inc.
Income Statement

– 0

Wages Expense –
Utilities Expense –

–

Management Salaries –
Depreciation expense – 0

$ –

Interest expense –

$ – 0

–

$ – 0

Assignment 1.5 Exercises

Problem 1: Building an

Income Statement

5 Points

Viola’s Medical Supplies, Inc.

2019

Depreciation

Complete the full Income Statement for Viola’s Medical Supplies. What is the

Net Income

Use the Template Provided Below to Create Your Solution

–

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:

For Year Ended Dec 31st, 2019

Product Sales Revenue

– 0

Rental Sales Revenue

Total Revenue

$ –

Expenses:

Costs of Goods Sold

$ – 0

Warehouse Expense

EBIT

EBT

Taxes (0%)

Net income

This is the Student Template file, provided in the assignment instructions October 2019

#2

Assignment 1.5 Exercises

5 Points

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.

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 $43

for this firm?

Input area:

($)

Output area:

Spooner Company
Balance Sheet
January 31st, 2020

Cash $ – 0 Accounts Payable $ – 0
Inventory – Wages Payable –

$ – 0

Net Fixed Assets –

–

Owner’s Equity $ – 0

$ – 0

–

This is the Student Template file, provided in the assignment instructions October 2019

Problem 2: Building a	Balance Sheet
As of	January 31st,		202	Spooner Company		Equipment	2,000
Complete the full Balance Sheet for Spooner Company. What is the	Owner’s Equity
		Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.
			Accounts Payable
			Wages Payable
						Cash
			Inventory
	Net		Fixed Assets
Bank Loan ($)
		Current Assets			Current Liabilities
			Total Current Assets			Total Current Liabilities
Long-Term Debt
			Total Assets					Total Liabilities and Equity

#3

Assignment 1.5 Exercises

Cash

Depreciation

Interest expense

Sales

Inventory

Wages Payable

This is the Student Template file, provided in the assignment instructions October 2019

Problem 3: Building an Income Sheet		10 Points
	The following financial data has been provided for Twanger Building Supply, Inc.:
	Cost of goods sold		$ 983,095
	141,860
	277,5	30
	60,335
	Selling & Administrative Expenses		193,340
	Accounts payable		100,715
	Net fixed assets		1,224,405
	1,928,620
		Accounts receivable		100,520
	Short-term Notes payable		114,275
	Long-term debt		618,035
	193,530
		Intangible Assets		223,450
	21,	78
			Common Stock		1,750
	Additional Paid-In Capital		291,680
			Retained Earnings		735,530
	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.

#4

Assignment 1.5 Exercises

10 Points

The following financial data has been provided for Twanger Building Supply, Inc.:

Cost of goods sold $ 983,095
Cash 141,860
Depreciation 277,530
Interest expense 60,335
Selling & Administrative Expenses 193,340
Accounts payable 100,715
Net fixed assets 1,224,405
Sales 1,928,620
Accounts receivable 100,520
Short-term Notes payable 114,275
Long-term debt 618,035
Inventory 193,530
Intangible Assets 223,450
Wages Payable 21,780
Common Stock 1,750
Additional Paid-In Capital 291,680
Retained Earnings 735,530
Tax Rate (average) 30%

All data is for the year ended Dec 31st, 2019.

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

Problem 4: Building a Balance Sheet

Complete the full Balance Sheet for Twanger Building Supply. What is the total Owner’s Equity for this firm?

#5

Assignment 1.5 Exercises

5 Points

‘s Assets, Liabilities, and Equity is given below (in $ millions):

2019

Current Assets

Fixed Assets

Current Liabilities

1,863

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.
2018 2019

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

, 2019 ($ millions)

$ – 0

–

This is the Student Template file, provided in the assignment instructions October 2019

Problem 5: Sources and Uses
Summary data for		Hummer Corp.
				2018
$ 2,866	$ 3,228
1,855		1,863
	1,065	1,618
			Long Term Debt	1,992	1,610
			Shareholders’ Equity	1,664
All data is for the fiscal year ending Dec 31st.
Complete a	Sources and Uses Statement
	Balance Sheet ($ millions)
			Change
		December 31st
Sources:
Increase in Current Liabilties
Increase in Shareholder’s Equity
Total Sources
Uses:
Increase in Current Assets
Increase in Fixed Assets
Decrease in Long-Term Debt
Total Uses

#6

Assignment 1.5 Exercises

5 Points

2018 2019 Change

Cash

Accounts receivable $ –

$ 43,100

Total Current Assets

$ 15,800 $ –

,600

Equipment

$ 5,200 $ –

$ –

$ 10,700

$ 48,000

)

$ –

$ 47,200

$ 125,400

Total Liabilities and Equity $ 273,500 $ 395,200 $ 121,700

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

Problem 6: Sources and Uses
A Balance Sheet for Whistler Corp. is given below:
		Whistler Corporation
Balance Sheets
For Years Ended December 31st
	$ 47,500		$ 76,700		$ 29,200
	$		43,100
	Inventories	$	49,000	$	36,500	$	(12,500)
$	96,500	$	156,300	$	59,800
	Land		$		15,800
	Buildings	$	103	$	164,600	$	61,000
$ 52,400	$ 53,300	$ 900
	Patents		$		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
Total current liabilities	$	36,600	$ (1		1,400
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
Total shareholders’ equity	$	224,600	$	99,200
Complete a Sources and Uses Statement for Whistler Corp.

#7

Assignment 1.5 Exercises

5 Points

are provided below (in $ millions):

Bongo Company

Bongo Company
Balance Sheet ($ millions)

December 31st

2018 2019 Change
Cash

Cost of Goods Sold

Total Current Assets

Depreciation 202

1,065

Intangible Assets

202

Total Assets

Net Income

Accounts Payable

103

Total Current Liabilities

Long Term Debt

Common Stock

240 30

Retained Earnings

431

Shareholders’ Equity

Total Liabilities and Equity 5,897 6,379 482

Use the Template Provided Below to Create Your Solution – Pay close attention to the formulas and formatting of the inputs.

Bongo Company

For Year Ended December 31st, 2019

Net Income

–

This is the Student Template file, provided in the assignment instructions October 2019

Problem 7: Cash Flow Statement
Balance Sheets and an Income Statement for			Bongo Company
Income Statement ($ millions)
		For Year Ended December 31st, 2019
$ 1,270	$ 1,869	$ 599		Net Sales	$ 6,526
	Accounts Receivable	1,584	1,716	132	2,900
Other Current Assets	872	814	(58)	Selling and Admin Expenses	2,359
3,726	4,399	673
	EBIT (Operating Income)
Property, Plant, & Equipment	1,275	1,360
1,136	1,062	(74)		Interest Expense	126
	Less: Accumulated Depreciation		240	442		Other Non-Operating Expenses
	Total Fixed Assets	2,171	1,980	(191)		EBT (Taxable Income)	861
	5,897		6,379		482		Income Taxes	276
585
313	416
Other Short-Term Debt	831	1,246	415		Dividends Paid	154
1,144	1,662	518		Addition to Retained Earnings		431
2,590	2,093	(497)
210
1,953	2,384
2,163	2,624	461
Create a Cash Flow Statement for Bongo Company. Be careful of the direction of the cash flows (source or use).
Input / Output area:
Statement of Cash Flows ($ millions)
Cash Flows from Operating Activities
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

#8

Assignment 1.5 Exercises

5 Points

Whistler Corporation Whistler Corporation
December 31st For Year Ended December 31st, 2019

2018 2019 Change

Cash $ 47,500 $ 76,700 $ 29,200 Net Sales

Accounts Receivable – 43,100 43,100 Cost of Goods Sold

Inventories 49,000 36,500 (12,500) Depreciation 1,400
Total Current Assets 96,500 156,300 59,800 EBIT (Operating Income)

Land 15,800 15,800 – Interest Expense 2,000
Buildings

164,600 61,000 Other Non-Operating Expenses

Equipment

EBT (Taxable Income)

Patents 5,200 5,200 –
Less: Accumulated Depreciation

1,400 Income Taxes

Total Fixed Assets 177,000 238,900 61,900 Net Income

Total Assets 273,500 395,200 121,700 Dividends Paid

Addition to Retained Earnings 47,200
Accounts Payable 48,000 25,900 (22,100)

– 10,700 10,700

Total Current Liabilities 48,000 36,600

Long Term Debt 100,100 134,000 33,900
Common Stock 125,400 177,400 52,000
Retained Earnings – 47,200 47,200
Shareholders’ Equity 125,400 224,600 99,200
Total Liabilities and Equity 273,500 395,200 121,700

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

Problem 8: Cash Flow Statement
Balance Sheets and an Income Statement for Whistler Corporation are provided below (in $ thousands):
Balance Sheet ($ thousands)	Income Statement ($ thousands)
$ 165,300
46,200
117,700
103,600	5,600
63,200	65,500	2,300	110,100
10,800	12,200	40,900
69,200
22,000
Income Taxes Payable
(11,400)
Create a Cash Flow Statement for Whistler Corporation.

Example 1

maintains and sells vintage recording equipment, which are still popular with some artists

, the company earned $82

from sales, plus another $

from service contracts. The cost of the equipment they sold during the year was $54

. They also paid $

in wages to their retail sales associates and technicians. The lease on their retail space was $

for the year, and they had $

in utilities and other expenses. Management salaries totaled $

for the year, and depreciation on their office and retail equipment was

. They paid $8,000 of interest on an outstanding credit line, which is currently extended to $85,000. The company’s tax rate is 21%.

for this firm?

																	Workshop One Practice Exercises
Example 1: Building an	Income Statement
	Tiger Enterprises	.				2019	8,000	523,000	5,000	4	50,000	38,000	1	4,000	85,000	11,000
Complete the full Income Statement for Tiger Enterprises. What is the				Net Income
			Use the space below to create your solution. If you get stuck, or when you are ready to check your answer, go to the next worksheet tab for the solution.
					This is the practice problem file, provided in the assignment instructions October 2019

Ex # 1 Solution

Workshop One Practice Exercises
Example 1: Building an Income Statement
Tiger Enterprises maintains and sells vintage recording equipment, which are still popular with some artists. In 2019, the company earned $828,000 from sales, plus another $523,000 from service contracts. The cost of the equipment they sold during the year was $545,000. They also paid $450,000 in wages to their retail sales associates and technicians. The lease on their retail space was $38,000 for the year, and they had $14,000 in utilities and other expenses. Management salaries totaled $85,000 for the year, and depreciation on their office and retail equipment was 11,000. They paid $8,000 of interest on an outstanding credit line, which is currently extended to $85,000. The company’s tax rate is 21%.

Complete the full Income Statement for Tiger Enterprises. What is the Net Income for this firm?

Expenses = Net Income

Tiger Enterprises

Income Statement

(Revenue), then Operating Expenses (leading to

), then Interest (leading to

), and last Taxes (leading to Net Income).

523,000

“

450,000

38,000

14,000

85,000

expense

11,000

, but not on the Income Statement.

EBIT

8,000

EBT

after all other expenses have been paid.

This is the practice problem file, provided in the assignment instructions October 2019

				Check below for a detailed solution to this problem.
Remember the basic format of the Income Statement: Revenue		–
		Output area:
These word problems can be difficult to follow. Start by organizing your information. Just make a list of the data given.
You can then sort the information into the correct order:
First		Sales	EBIT	EBT
For Year Ended Dec 31st, 2019
Product Sales Revenue	$ 828,000	Note the two types of Sales here. Both forms of revenue (individually or combined) create the “top line” of the income statement.
Service Contract Revenue	It is not unusual for a company to have multiple forms of Revenue.
Total Revenue	$ 1,351,000
Expenses:
Costs of Goods Sold	$ 545,000	The terminology can be confusing for some students. It takes some getting used to terms like “				Cost of Goods Sold
						Wages Expense	For this segment of the Income Statement, you are looking for Operating Expenses: Those costs that are related to the production of the company’s goods and services.
Lease Expense
Utilities Expense	Take note one of the items listed in the narrative above, the credit line, was intentionally left off this Income Statement.
				Management Salaries	These problems will often have distractors meant to test your understanding (trip you up).
				Depreciation	The amount of the company’s credit line would show up on the	Balance Sheet
Total Expenses	1,143,000	Only the interest payment shows as an expense on the Income Statement.
$ 208,000	EBIT (Earnings Before Interest and Taxes) is = Revenue – Operating Expenses. It is sometimes called “Op Profit” or “Operating Income”.
		Interest expense
$ 200,000	EBIT – Interest = EBT (Earnings Before Taxes), which is sometimes called “Taxable Income”. This is the amount that taxes are based off of.
Taxes (21%)			42,000	Taxes are applied to				EBT (Taxable Income)
Net income	$ 1							58,000	Net Income is the “bottom line” after all expenses are subtracted from Revenue. It could be called “Net Profit”.

Example 2

Workshop One Practice Exercises

owes its suppliers $55,000 and owes its employees $14,000 in future wages. The company also has an outstanding short-term credit line due of $

. The company currently has $48,000 in cash on hand and is storing $

of inventory. Its customers owe $

for past purchases made on credit.

worth $

, net of accumulated depreciation, is supporting the operation. The company also has an outstanding long-term loan of $

. Sales for the year was $847,000.

for this firm?

Use the space below to create your solution. If you get stuck, or when you are ready to check your answer, go to the next worksheet tab for the solution.

This is the practice problem file, provided in the assignment instructions October 2019

Example 2: Building a Balance Sheet
As of	January 31st, 2020	Coyote Company	25,000	154,	700	82,000	Equipment	275,000	154,000
Complete the full Balance Sheet for Coyote Company. What is the	Owner’s Equity

Ex # 2 Solution

Workshop One Practice Exercises
Example 2: Building a Balance Sheet
As of January 31st, 2020, Coyote Company owes its suppliers $55,000 and owes its employees $14,000 in future wages. The company also has an outstanding short-term credit line due of $25,000. The company currently has $48,000 in cash on hand and is storing $154,700 of inventory. Its customers owe $82,000 for past purchases made on credit. Equipment worth $275,000, net of accumulated depreciation, is supporting the operation. The company also has an outstanding long-term loan of $154,000. Sales for the year was $847,000.

Complete the full Balance Sheet for Coyote Company. What is the Owner’s Equity for this firm?
Check below for a detailed solution to this problem.

Output area:

Coyote Company

Balance Sheet

” in accounting terminology.

January 31st, 2020

“.

Accounts Payable

82,000

14,000

154,700

25,000

Net Fixed Assets 275,000

154,000

Owner’s Equity

477,700

This is the practice problem file, provided in the assignment instructions October 2019

Again to decipher this word problem, begin by organizing your information, identifying assets and liabilities.

Remember the basic structure of a Balance Sheet: Assets (left side) = Liabilities + Equity (right side)

The terminology used here requires you to interpret the meaning of the information above.

For example, the value of the equipment, net of depreciation, is called “

Net

Fixed Assets

As another example, the money owed to suppliers is called “

Accounts Payable

Current Assets:

Current Liabilities:

Cash

$ 48,000

$ 55,000

Remember the most liquid assets, like Cash, belong at the top of the Balance Sheet

Accounts Receivable

Wages Payable

Inventory

Credit Line

Total Current Assets

$ 202,700

Total Current Liabilities

$ 80,000

Long-Term Debt

Long-Term assets are sometimes shown net of depreciation, like here. In other cases, depreciation is split out separately.

$ 243,700

Note this figure is not given! To find equity, you need to recognize Assets = Liabilities + Equity. Check out the formula here.

Knowing this must be the case, you can complete the rest of the Balance Sheet, first, then figure out what Equity must be.

Total Assets

477,700

Total Liabilities and Equity

The Balance Sheet must balance!

Take note again one of the items listed in the narrative above, Sales, was intentionally left off this template as a distraction item.

Sales would affect the income statement and cash flow, but would not appear on the Balance Sheet.

Your work may not be so “pretty”, but try to organize the information in a clear, professional manner.

Being able to communicate complex financial information clearly is an important skill! You will get better with practice.

Example 3

Workshop One Practice Exercises

is given below:

2019

Cash

58,000

Total Current Assets

Equipment

Accounts Payable

Wages Payable

700

50,000

Total Liabilities and Equity $ 1,013,700 $ 1,187,500 $ 173,800

Use the space below to create your solution. If you get stuck, or when you are ready to check your answer, go to the next worksheet tab for the solution.

This is the practice problem file, provided in the assignment instructions October 2019

Example 3: Building a	Sources and Uses Statement
A Balance Sheet for	Cobra Corp.
					Cobra Corporation
Balance Sheets
For Years Ended			December 31st
					2018				Change
		$	1	28,500					$	76,700				$		(51,800)
Accounts receivable				43,200					84,500					41,	300
			Inventories					86,900					28,900
		229,700				24		8,100					1			8,	400
158,000					256,400		98,400
		Buildings and Land		528,000			589,000			61,000
		Goodwill and Intangible Assets				98,000					94,000				(4,000)
Total Long-Term Assets				784,000			939,400				155,400
Total assets				$			1,013,700				$				1,187,500			$	173,800
		$ 83,500					$			96,300		$				12,800
		21,000					21,700
Income taxes payable				5,300					11,900						6,600
Total current liabilities				109,800			129,900				20,100
Long term debt				573,000					623,000
Total liabilities		682,800		752,900		70,100
Common stock				100,000					150,000
Retained earnings				230,900					284,600							53,700
Total shareholders’ equity				330,900			434,600				103,700
Complete a Sources and Uses Statement for Cobra Corp.

Ex # 3 Solution

Workshop One Practice Exercises
Example 3: Building a Sources and Uses Statement
A Balance Sheet for Cobra Corp. is given below:
Cobra Corporation
Balance Sheets
For Years Ended December 31st

2018 2019 Change
Cash $ 128,500

$ (51,800)
Accounts receivable 43,200 84,500 41,300
Inventories 58,000 86,900 28,900
Total Current Assets 229,700 248,100

Equipment 158,000 256,400 98,400
Buildings and Land 528,000 589,000 61,000
Goodwill and Intangible Assets 98,000 94,000 (4,000)
Total Long-Term Assets 784,000 939,400 155,400

Total assets $ 1,013,700 $ 1,187,500 $ 173,800

Accounts Payable $ 83,500

$ 12,800
Wages Payable 21,000 21,700 700
Income taxes payable 5,300 11,900 6,600
Total current liabilities 109,800 129,900 20,100

Long term debt 573,000 623,000 50,000
Total liabilities 682,800 752,900 70,100

Common stock 100,000 150,000 50,000
Retained earnings 230,900 284,600 53,700
Total shareholders’ equity 330,900 434,600 103,700

Total Liabilities and Equity $ 1,013,700 $ 1,187,500 $ 173,800

Complete a Sources and Uses Statement for Cobra Corp.
Check below for a detailed solution to this problem.

Cobra Corp.
Sources and Uses Statement

4,000

12,800

700

Payable

6,600

50,000

53,700

41,300

28,900

98,400

61,000

229,600

This is the practice problem file, provided in the assignment instructions October 2019

$ 76,700				18,400	$ 96,300
December 31st, 2019
Sources:	Remember the basic rules:
Decrease in Cash	$ 51,800	(1) An increase in any Asset or a decrease in any Liability or Equity is a USE of cash (like buying something or taking out a loan).
Decrease in Intangible Assets	(2) A decrease in any Asset or an increase in any Liability or Equity is a SOURCE of cash (like selling something or paying off a loan).
Increase in Accounts Payable
Increase in Wages Payable
Increase in		Income Taxes
Increase in Long-Term Debt
Increase in		Common Stock
Increase in		Retained Earnings
Total Sources		2	29,600	Sources and Uses Statements aren’t used commonly in real-world practice.
However, they are an important first step towards putting together a Statement of Cash Flows.
They can also be insightful.
Uses:
Increase in Accounts Receivable	This Sources and Uses Statement reveals a simple story for this company.
Increase in Inventory	The company borrowed a significant amount of money, plus raised additional new equity from its shareholders.
Increase in Equipment	Nevertheless, its cash declined. Why?
Increase in Buildings and Land	Because it spent heavily on new equipment, buildings, and land.
Total Uses
If this Statement is created properly, the Sources and Uses will equal!

Example 4

Workshop One Practice Exercises

Cobra Corporation Cobra Corporation
December 31st

2018 2019 Change
Cash $ 128,500 $ 76,700 $ 76,700 $ (51,800)

Accounts Receivable 43,200 84,500 84,500 41,300 Cost of Goods Sold

Inventories 58,000 86,900 86,900 28,900

Total Current Assets 229,700 248,100 18,400 Wages Expense

Depreciation

Equipment

256,400

Buildings and Land

589,000

Goodwill and Intangible Assets 98,000 94,000 94,000 (4,000)

42,000

98,700

784,000 939,400 155,400 EBT (Taxable Income)

Total Assets 1,013,700 1,187,500 173,800 Income Taxes

Net Income

Accounts Payable $ 83,500 $ 96,300 $ 96,300 12,800
Wages Payable 21,000 21,700 21,700 700

24,900

5,300 11,900 11,900 6,600

53,700

Total Current Liabilities 109,800 129,900 20,100

573,000 623,000 623,000 50,000

Common Stock 100,000 150,000 150,000 50,000
Retained Earnings 230,900 284,600 284,600 53,700

330,900 434,600 103,700

Total Liabilities and Equity 1,013,700 1,187,500 173,800

Use the space below to create your solution. If you get stuck, or when you are ready to check your answer, go to the next worksheet tab for the solution.

This is the practice problem file, provided in the assignment instructions October 2019

Example 4: Building a Statement of Cash Flows
Balance Sheets and an Income Statement for Cobra Corporation are provided below (in $ thousands):
	Balance Sheet ($ thousands)
		Income Statement ($ thousands)
			For Year Ended December 31st, 2019
		Net Sales		$ 2,153,000
1,230,400
Selling and Administrative Costs		183,000
316,000
			98,700
178,000		317,100		139,100	EBIT (Operating Income)	3		2	4,900
550,000		669,000		119,000
		Interest Expense		67,500
Less:		Accumulated Depreciation		140,700	Other Non-Operating Expenses		15,900
	Total Fixed Assets		241,500
162,900
78,600
Dividends Paid
Income Taxes Payable				Addition to Retained Earnings
	Long Term Debt
	Shareholders’ Equity
Create a Cash Flow Statement for Cobra Corporation.

Ex # 4 Solution

Workshop One Practice Exercises
Example 4: Building a Statement of Cash Flows
Balance Sheets and an Income Statement for Cobra Corporation are provided below (in $ thousands):
Cobra Corporation Cobra Corporation
Balance Sheet ($ thousands) Income Statement ($ thousands)
December 31st For Year Ended December 31st, 2019

2018 2019 Change
Cash $ 128,500 $ 76,700 $ 76,700 $ (51,800) Net Sales $ 2,153,000
Accounts Receivable 43,200 84,500 84,500 41,300 Cost of Goods Sold 1,230,400
Inventories 58,000 86,900 86,900 28,900 Selling and Administrative Costs 183,000
Total Current Assets 229,700 248,100 18,400 Wages Expense 316,000
Depreciation 98,700
Equipment 178,000 256,400 317,100 139,100 EBIT (Operating Income)

Buildings and Land 550,000 589,000 669,000 119,000
Goodwill and Intangible Assets 98,000 94,000 94,000 (4,000) Interest Expense 67,500

42,000 140,700 98,700 Other Non-Operating Expenses 15,900
Total Fixed Assets 784,000 939,400 155,400 EBT (Taxable Income) 241,500

Total Assets 1,013,700 1,187,500 173,800 Income Taxes 162,900
Net Income 78,600
Accounts Payable $ 83,500 $ 96,300 $ 96,300 12,800
Wages Payable 21,000 21,700 21,700 700 Dividends Paid 24,900
Income Taxes Payable 5,300 11,900 11,900 6,600 Addition to Retained Earnings 53,700
Total Current Liabilities 109,800 129,900 20,100

Long Term Debt 573,000 623,000 623,000 50,000

Common Stock 100,000 150,000 150,000 50,000
Retained Earnings 230,900 284,600 284,600 53,700
Shareholders’ Equity 330,900 434,600 103,700

Total Liabilities and Equity 1,013,700 1,187,500 173,800

Create a Cash Flow Statement for Cobra Corporation.
Check below for a detailed solution to this problem.

Cobra Corporation .
For Year Ended December 31st, 2019

Net Income

98,700

12,800

700

6,600

4,000

50,000

(51,800)

128,500

76,700

(51,800)

This is the practice problem file, provided in the assignment instructions October 2019

324,900	Less: Accumulated Depreciation
Input / Output area:	Unlike the previous problems, you are first given the Balance Sheet and Income Statement. You need these statements to complete the Cash Flow Statement.
In your mini-case assignment, however, you will have to first complete the Balance Sheet and Income Statements yourself.
	Statement of Cash Flows ($ millions)		Take this one section, one step at a time:
	Operating:		(1) Start with Net Income, add back Depreciation.
	(2) Add impact of changes to Current Assets
	Cash Flows from Operating Activities		(3) Add impact of changes to Liabilities
$ 78,600		Be very careful of direction! Sources of cash are positive, uses are negative!
	Add Back Depreciation		Investing:		(4) Add impact of any changes to long-term assets, including tangible and intangible
(Increase) Decrease in Accounts Receivable	(41,300)		Financing:		(5) Add impact of any changes to long-term debt
	(Increase) Decrease in Inventories	(28,900)		(6) Add impact of any changes to equity, such as if new equity (stock) has been issued.
	Increase (Decrease) in Accounts Payable		(7) Subtract dividends paid.
	Increase (Decrease) in Wages Payable		Check:		(8) Check your answer. The change in cash should match what is shown on the Balance Sheet!
Increase (Decrease) in Income Taxes Payable
	Cash Flow from Operations	127,200
	Cash Flows from Investing Activities
(Increase) Decrease in Equipment	(139,100)	Note one important difference in the Balance Sheet above: Accumulated depreciation is shown separately, rather than the assets being listed as “Net”.
(Increase) Decrease in Buildings and Land	(119,000)	This is required in order to complete a Statement of Cash Flows, since depreciation is not a cash flow.
(Increase) Decrease in Intangible Assets	If we mixed depreciation in with the long-term asset values, we wouldn’t be able to tell how much they actually changed.
	Cash Flow from Investing	(254,100)	For instance, we wouldn’t be able to tell the difference between the company selling an asset and simply taking depreciation against an asset.
	Cash Flows from Financing Activities
	Increase (Decrease) in Long-Term Debt
	Increase (Decrease) in Common Stock	Please note! Retained Earnings does not show up on a Statement of Cash Flows.
	Subtract Dividends Paid	(24,900)	Retained Earnings represents an accumulation of profits the company has reinvested rather than returning to shareholders as dividends.
	Cash Flow from Financing	75,100	Dividends is a cash flow (companies literally write a check to shareholders), but retained earnings is not. It has no impact on net cash flow.
	Net Increase (Decrease) in Cash
	Cash at Beginning of Year
	Cash at End of Year
	Net Change in Cash		Check your answer! The change in cash caculated should match what is shown on the Balance Sheet above.
As we saw with the Statement of Cash Flows, this company is:
	(1) Generating good, positive operating cash flows…
(2) but spending heavily on new equipment, buildings, and land….
(3) and is raising money from lenders and stockholders to finance its spending spree!

Example 5

Workshop One Practice Exercises

is provided below:

2018 2019
Cash

18,400

Interest expense 8,100 8,400
Management Salaries

58,000

Accumulated Depreciation

Sales

Wages Expense

7,400

Inventory 96,300

– 5,000

Use the space below to create your solution. If you get stuck, or when you are ready to check your answer, go to the next worksheet tab for the solution.

This is the practice problem file, provided in the assignment instructions October 2019

Example 5: Comprehensive – Building Financial Statements
A table of collected financial data for				Falcon Corporation
Cost of goods sold		$	301,600		$	315,800
	62,000			86,700
Depreciation expense			17,600
	54,500
Accounts payable		16,500		16,800
Fixed assets (without depreciation)			174,000			178,630
	49,000	6			7,400
597,350		624,650
	123,350			128,900
Other non-operating expenses			7,800
Long-term debt			86,300			74,680
Accrued Wages Payable			12,000			12,400
	101,200
New equity issued (Common Stock)
Tax rate (average on all Taxable Income)		17%
Dividend Payout Ratio (of Net Income)		70%
(1) Create Income Statements for both 2018 and 2019
(1) Create Balance Sheets for both 2018 and 2019
(3) Create a Statement of Cash Flows for 2019.

Ex # 5 Solution

Workshop One Practice Exercises
Example 5: Comprehensive – Building Financial Statements
A table of collected financial data for Falcon Corporation is provided below:

2018 2019
Cost of goods sold $ 301,600 $ 315,800
Cash 62,000 86,700
Depreciation expense 17,600 18,400
Interest expense 8,100 8,400
Management Salaries 54,500 58,000
Accounts payable 16,500 16,800
Fixed assets (without depreciation) 174,000 178,630
Accumulated Depreciation 49,000

Sales 597,350 624,650
Wages Expense 123,350 128,900
Other non-operating expenses 7,400 7,800
Long-term debt 86,300 74,680
Accrued Wages Payable 12,000 12,400
Inventory 96,300 101,200
New equity issued (Common Stock) – 5,000

Tax rate (average on all Taxable Income) 17%
Dividend Payout Ratio (of Net Income) 70%

(1) Create Income Statements for both 2018 and 2019
(1) Create Balance Sheets for both 2018 and 2019
(3) Create a Statement of Cash Flows for 2019.
Check below for a detailed solution to this problem.

Output area:

Falcon Corporation

Income Statement ($ thousands)

Net Sales

Once you have identified the information that belongs on the Balance Sheet, you can place them in order.

Cost of Goods Sold 301,600
Management Salaries 54,500
Wages Expense 123,350
Depreciation 17,600
EBIT (Operating Income)

Interest Expense 8,100
Other Non-Operating Expenses 7,400

EBT (Taxable Income)

Net Income

Addition to Retained Earnings

Falcon Corporation

Income Statement ($ thousands)
For Year Ended December 31st, 2019

Net Sales

Cost of Goods Sold 315,800

Management Salaries 58,000
Wages Expense 128,900
Depreciation 18,400
EBIT (Operating Income)

Interest Expense 8,400
Other Non-Operating Expenses 7,800
EBT (Taxable Income)

Income Taxes (17%)

Net Income

Dividends Paid (70%)

Addition to Retained Earnings

Falcon Corporation

Balance Sheet ($ thousands)
December 31st

2018 2019 Change

Cash

$ 76,700

Inventories 96,300

101,200 4,900

Total Current Assets

29,600

Fixed Assets 174,000 256,400 178,630

Less: Accumulated Depreciation 49,000 67,400 18,400
Total Fixed Assets

Total Assets

Accounts Payable

$ 96,300

Wages Payable 12,000

12,400 400

Total Current Liabilities 28,500

700

Long Term Debt 86,300

74,680

This is the practice problem file, provided in the assignment instructions October 2019

Shareholders’ Equity

Total Liabilities and Equity 283,300 299,130 15,830

Falcon Corporation

Statement of Cash Flows ($ millions)

For Year Ended December 31st, 2019

Take this one section, one step at a time:
Cash Flows from Operating Activities Operating: (1) Start with Net Income, add back Depreciation.
Net Income

(2) Add impact of changes to Current Assets

Add Back Depreciation 18,400 (3) Add impact of changes to Liabilities
(Increase) Decrease in Inventories

Be very careful of direction! Sources of cash are positive, uses are negative!

Increase (Decrease) in Accounts Payable 300 Investing: (4) Add impact of any changes to long-term assets, including tangible and intangible
Increase (Decrease) in Wages Payable 400 Financing: (5) Add impact of any changes to long-term debt
Cash Flow from Operations

(6) Add impact of any changes to equity, such as if new equity (stock) has been issued.

(7) Subtract dividends paid.
Cash Flows from Investing Activities Check: (8) Check your answer. The change in cash should match what is shown on the Balance Sheet!
Cash Flow from Investing (4,630)

Cash Flows from Financing Activities

Increase (Decrease) in Long-Term Debt (11,620)
Increase (Decrease) in Common Stock 5,000

Subtract Dividends Paid

Cash Flow from Financing

Net Increase (Decrease) in Cash 24,700
Cash at Beginning of Year 62,000
Cash at End of Year 86,700
Net Change in Cash 24,700 Check your answer! The change in cash caculated should match what is shown on the Balance Sheet above.

(1) Generating good, positive operating cash flows…

	67,400
Unlike the previous problems, you are simply given a raw list of financial data.
So the first step will be to identify which pieces of information belong on the Income Statement and the Balance Sheet.
You need to prepare the Income Statements and Balance Sheets first, before you can create the Statement of Cash Flows.
For Year Ended December 31st, 2018		Once you have identified the information that belongs on the Balance Sheet, you can place them in order.
$ 597,350
100,300
Not every company has non-operating expenses other than Interest. Often only interest appears here.
84,800	However, if there are expenses not related to operations, they belong on the Income Statement below EBIT and before EBT.
	Income Taxes (17%)	14,416	Calculate taxes here as 17% of EBT (Taxable Income)
70,384
	Dividends Paid (70%)	49,269	The problem statement above says that 70% of Net Income will be distributed as Dividends. We need this figure for later cash flow calculations.
21,115	The remainder of Net Income not distributed as dividends becomes Retained Earnings.
$ 624,650	Note rather than typing in the numbers given here, the spreadsheet simply refers back to the original cell where the information is given.
This is a good spreadsheet technique – It helps avoid typographical errors.
103,550
87,350
14,850	Again taxes are 17% of EBT
72,501
50,750	Again Dividends are 70% of Net Income
21,750	Retained Earnings is what is left over. We should see this number again on our Balance Sheet!
$ 62,000	$ 86,700	$		24,700	Similarly, first identify the information that belongs on the Balance Sheet, then place it into appropriate order.
$ 86,900
158,300	187,900
4,630
125,000	111,230	(13,770)
	283,300		299,130		15,830
$ 16,500	$ 16,800	$ 300
$ 11,900
29,200
$ 623,000		(11,620)	When we get to Shareholder’s Equity, you should realize you have a problem: Shareholder’s Equity wasn’t given?
However, we can find it, knowing that Assets = Liabilities + Equity.
168,500	195,250	26,750	<--- Note the formulas to the left. Equity = Assets - Liabilities
We can check our answer here.
The company had $21,750 of Retained Earnings plus $5000 of new Common Stock issued, which equals $26,750.
Check to make sure your Balance Sheet balances!
Now that you have created the Balance Sheet and Income Statement, you can complete the Cash Flow Statement.
$ 72,501
(4,900)
86,701
(Increase) Decrease in Fixed Assets		(4,630)
Note only the new Equity (not retained earnings) shows up on the Statement of Cash Flows.
(50,750)
(57,370)
Once again, this Statement of Cash Flows is revealing. This company is:
(2) but is spending very little on its fixed assets.
(3) Instead it is using the majority of its cash to pay dividends.
Perhaps the company has decided it can’t grow any more, so doesn’t see the need to retain its earnings to fund future projects?

Interpreting Financial Statements

Chapter One

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

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

Figure 1.1 The Cash Flow–Production Cycle

Ch. 1 4

Higgins, Analysis for Financial Management, 12e

TABLE 1.1 Worldwide Sports Financial Transactions 2017 ($ thousands)
Ch. 1 8

Higgins, Analysis for Financial Management, 12e

FIGURE 1.2 Ties among Financial Statements
Ch. 1 11

Higgins, Analysis for Financial Management, 12e

TABLE 1.2 Hasbro Balance Sheets ($ millions)
Ch. 1 13

TABLE 1.3 Hasbro Income Statements ($ millions)
Ch. 1 14

Higgins, Analysis for Financial Management, 12e

The Income Statement
Basic relation: Revenues – Expenses = Net Income
Distinction between operating and nonoperating expenses
Ch. 1 16

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

Sources & Uses of Cash
Sources Uses
Decreases in assets Increases in assets
Increases in liabilities & equity Decreases in liabilities & equity

Higgins, Analysis for Financial Management, 12e

Examples from Hasbro’s Balance Sheet
Why is an increase in cash a use?
Ch. 1 23

Higgins, Analysis for Financial Management, 12e

TABLE 1.4 Hasbro, Sources and Uses Statement, 2016 ($ millions)
Ch. 1 24

You try it. Identify the sources and uses.
Ch. 1 25

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

Higgins, Analysis for Financial Management, 12e

TABLE 1.5 Hasbro, Cash Flow Statement, 2016 ($ millions)
Ch. 1 28

Higgins, Analysis for Financial Management, 12e

$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
Ch. 1 32

Higgins, Analysis for Financial Management, 12e

Chapter 1 ROLE OF ACCOUNTING IN SOCIETY

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

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.
8

More Examples of Stakeholders

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)

Auditing
Taxation
Financial accounting
Consulting
Accounting information services
Cost and managerial accounting
Financial planning
Entrepreneurship
Major Categories of Accounting Functions

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.
19

Chapter 2 INTRODUCTION TO FINANCIAL STATEMENTS

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

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

Teacher Notes: Each of these statements will be discussed in detail in the upcoming slides.
4

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

Net income can be expressed in general form as:
Net Income

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

Sample Problem

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

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.

Statement of Cash Flows

Transactions by Cash Basis versus Accrual Basis of Accounting

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

Teacher Notes: These are a few of the accounts that would fall under each of these headings.
23

Equity and Legal Structure

Balance Sheet Equation

Teacher Notes: This will be developed further in Chapter 3.
29

Transactions that Affect the Value (Equity) of the Organization Transactions 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

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

Owner’s Equity Accounts

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

Sunset

Boards Case

Case Study: Financial Statements for Sunset Boards

–

				Assignment 1.6
Mini	–
Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company’s financial records are not well maintained.
2018	2019
The initial investment in Sunset Boards was provided by Tad and his friends and family. Because the initial investment was relatively small, and the company made surfboards only for its own store, the investors haven’t required detailed financial statements from Tad. But thanks to word of mouth among professional surfers, sales have picked up recently, and Tad is considering a major expansion. His plans include opening another surfboard store in Hawaii, as well as supplying his “sticks” (surfer lingo for boards) to other sellers.	Cost of goods sold	$ 196,619	$ 248,263
Cash	28,372	42,865
Depreciation	55,506	62,738
Interest expense	12,067	13,831
Selling & Administrative Expenses	38,668	50,469
Accounts payable	20,143	34,091
Tad’s expansion plans require a significant investment, which he plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Naturally, the new investors and creditors require more organized and detailed financial statements than Tad has previously prepared. At the urging of his investors, Tad has hired financial analyst Christina Wolfe to evaluate the performance of the company over the past year.	Fixed assets (without depreciation)	344,881	461,088
Accumulated Depreciation	85,506	148,244
Sales	385,724	470,172
Accounts receivable	20,104	26,078
Notes payable	22,855	24,955
Long-term debt	123,607	140,000
After rooting through old bank statements, sales receipts, tax returns, and other records, Christina has assembled the financial information shown in the table to the right. ======>	Inventory	38,706	52,057
New equity issued (Common Stock)	15,000
As Christina’s assistant, you are asked to prepare financial calculations and then use them to evaluate the wisdom of Tad’s expansion plans. The financial statements and calculations you must prepare include:	Tax rate (average on all Taxable Income)	30%
Dividend Payout Ratio (of Net Income)	40%
1) Prepare an Income Statement for both 2018 and 2019
2) Prepare a Balance Sheet for both 2018 and 2019	*All Data as of year end, December 31st
3) Create a Cash Flow Statement for 2019
4) Finally, using the above calculations as a foundation for your analysis, comment on the wisdom of Tad’s expansion plans. Should the company expand at this time? Why or why not? Provide a few sentences of discussion and your conclusion to demonstrate your ability to draw insights from these financial statements.
Create your Original Solution Below – Be sure to show all calculations, to carefully complete all parts of the assignment, and to clearly indicate answers (create additional worksheets to organize your work if necessary).
This is the Student Template, provided in the assignment instructions October 2019

Interpreting Financial Statements

Chapter One

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

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

Figure 1.1 The Cash Flow–Production Cycle

Ch. 1 4

Higgins, Analysis for Financial Management, 12e

TABLE 1.1 Worldwide Sports Financial Transactions 2017 ($ thousands)
Ch. 1 8

Higgins, Analysis for Financial Management, 12e

FIGURE 1.2 Ties among Financial Statements
Ch. 1 11

Higgins, Analysis for Financial Management, 12e

TABLE 1.2 Hasbro Balance Sheets ($ millions)
Ch. 1 13

TABLE 1.3 Hasbro Income Statements ($ millions)
Ch. 1 14

Higgins, Analysis for Financial Management, 12e

The Income Statement
Basic relation: Revenues – Expenses = Net Income
Distinction between operating and nonoperating expenses
Ch. 1 16

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

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

Higgins, Analysis for Financial Management, 12e

Sources & Uses of Cash
Sources Uses
Decreases in assets Increases in assets
Increases in liabilities & equity Decreases in liabilities & equity

Higgins, Analysis for Financial Management, 12e

Examples from Hasbro’s Balance Sheet
Why is an increase in cash a use?
Ch. 1 23

Higgins, Analysis for Financial Management, 12e

TABLE 1.4 Hasbro, Sources and Uses Statement, 2016 ($ millions)
Ch. 1 24

You try it. Identify the sources and uses.
Ch. 1 25

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

Higgins, Analysis for Financial Management, 12e

TABLE 1.5 Hasbro, Cash Flow Statement, 2016 ($ millions)
Ch. 1 28

Higgins, Analysis for Financial Management, 12e

$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
Ch. 1 32

Higgins, Analysis for Financial Management, 12e

Chapter 2 INTRODUCTION TO FINANCIAL STATEMENTS

Principles of Accounting, Volume 1: Financial Accounting

PowerPoint Image Slideshow

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

Teacher Notes: Each of these statements will be discussed in detail in the upcoming slides.
4

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

Net income can be expressed in general form as:
Net Income

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

Sample Problem

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

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.

Statement of Cash Flows

Transactions by Cash Basis versus Accrual Basis of Accounting

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

Teacher Notes: These are a few of the accounts that would fall under each of these headings.
23

Equity and Legal Structure

Balance Sheet Equation

Teacher Notes: This will be developed further in Chapter 3.
29

Transactions that Affect the Value (Equity) of the Organization Transactions 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

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

Owner’s Equity Accounts

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

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5 assignment wk1

Getting Started

Resources

Background Information

Instructions

1.3 Discussion: Collaboration Forum

1.4 Discussion: Pay Terms Debate (Initial Post)

1.5 Assignment: Spreadsheet Exercises

1.6 Assignment: Mini Case Study

#1

#2

#3

#4

#5

#6

#7

#8

Example 1

Ex # 1 Solution

Example 2

Ex # 2 Solution

Example 3

Ex # 3 Solution

Example 4

Ex # 4 Solution

Example 5

Ex # 5 Solution

Sunset Boards Case

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Sunset

Boards Case