978-1118582558 Chapter 1

1

CHAPTER 1

FINANCIAL ACCOUNTING IN AN

ECONOMIC CONTEXT

ISSUES FOR DISCUSSION

ID1–1

Security analysts and stockholders: These users would use financial statements to try to estimate the

future earnings and cash flow potential of the company, which would be used to project a value for the

company’s stock.

Bank loan officers: These users would use the financial statements to determine the ability of a

company to repay loans to the bank.

A company’s customers and suppliers: These users would use financial statements to determine

whether to extend credit to the company (suppliers) or whether to rely upon the company to be a

ID1–2

The board of directors serves various functions for a company. One is to represent and protect the

interests of the stockholders who are not on the board. Another is to provide oversight and input to

management. The managers are involved in running the business on a day to day basis whereas the

board is more focused on the bigger, long term picture. A weak board may not ask probing questions

ID1–3

The function of the audit committee is to provide a channel whereby the auditors report their findings

and concerns, if any, to the board of directors. Typically there are outside members of the board that

ID1–4

Banks make loans to customers and depend on those customers to repay the loans (called the

“principal”) plus interest for the banks to earn a profit. If customers are not able to pay the interest,

the banks cannot make a profit; further, if the customers are not able to repay the principal the banks

ID1–5

Sales for Home Depot increased during the time period because of the slow rebound of the economy

after the worst of the “Great Recession”. As conditions improved, home owners and to a lesser extent

home builders purchased more materials from Home Depot to improve and construct houses. Profits

ID1–6

Creditors would impose these types of restrictions on United Continental so that the creditors would be

protected for their loans. These types of restrictions are fairly common and act as a trip wire to warn

ID1–7

Companies would usually engage in this type of behavior to try to improve their stock price. By

showing higher revenues or lower expenses investors are more likely to reward the company with a

ID1–8

This is the normal statement that an auditor would make about a company

whose books it had audited and found no significant problems. This would be

part of what is called a “non–qualified opinion”. If there was a particular item

ID1–9

Corporate governance describes the relationship among the stakeholders of a company, mainly : the

shareholders, the Board of Directors, management and the company’s auditors. Corporate governance

ID1–10

Management is charged with the responsibility to benefit the shareholders’ investment in the

ID1–11

Financial analysts are charged with the task of following companies in specified industries and

evaluating the past financial performance of those companies, as well as providing guidance for

expectations for future financial performance. Until financial reporting is consistent across global

forth between the two systems.

ID1–12

Accounting guidelines that are established based on a number of general principles have the advantage

ID1–13

Managerial accounting is the accounting system that generates information that is used exclusively by

the managers of the company. Financial accounting refers to the financial statements that are

5

ID1-14

a. Google is primarily a service business, providing internet search functions and selling targeted online

advertising. However, due to a recent acquisition of part of Motorola’s cell phone business, the

company also is a manufacturing company.

b. The firm of Ernst & Young audits the financial statements of Google. The audit report states what years

and financial statements were audited and therefore being commented upon by the auditor. The

d. The amounts shown below are in millions:

2012 2011 .

Total liabilities $22,083 $14,429

e. Cash from operating activities was $11,081,000,000 in 2010, in 2011 it was $14,565,000,000 and in

2012 it was $16,619,000,000.

f. Google increased its profitability (in both raw dollars) but as a percentage of revenue the company was