2. User Insight: Form of business discussed
Chapter 1, P 4. (Continued)
20
1.
2.
3.
4.
Chapter 1, P 5.
When deciding whether to make a loan to a company, a banker evaluates the
The income statement shows net income of $3,000 earned by the company
company’s ability to pay interest charges and repay the loan at the appropriate
The company appears to be very profitable because it has earned $3,000 of
The income statement is most closely associated with the goal of profitability
User Insight: Company’s performance evaluated
User Insight: Liquidity and profitability
User Insight: Role of CPA
User Insight: Relationship of financial statements
$5,320 $ 8,600 $2,460 (m)
$2,700 (e) $26,000 (j) $1,900
Revenue
Set A
Income Statement
Chapter 1, P 6.
1. Financial statements completed
Set C
Set B
The income statement must be prepared first because the amount of net income is
Balance Sheet
2. User Insight: Income statement discussed
Total assets
$ 79,200
27,000
$ 52,200
$35,300
$ 57,700 Accounts payable $ 3,600
Balance Sheet
Cash
Assets
Income before income taxes
For the Year Ended December 31, 2011
Liabilities
Retained earnings, December 31, 2010
Real Deal, Inc.
December 31, 2011
Real Deal, Inc.
Statement of Retained Earnings
Net income
Chapter 1, P 7.
1. Financial statements prepared
Income taxes expense
Total expenses
Revenue
Real Deal, Inc.
Income Statement
For the Year Ended December 31, 2011
23
The statement of cash flows is very useful in assessing whether a company’s oper-
2. User Insight: Useful statement identified
Chapter 1, P 7. (Continued)
$165,200
$86,000
$—
$ 1,800 Accounts payable $19,400
For the Year Ended January 31, 2011
LiabilitiesAssets
Revenue
Advertising service revenue
Expenses
Creative Ads, Inc.
Income Statement
For the Year Ended January 31, 2011
Salaries expense
Chapter 1, P 8.
1. Financial statements prepared
Cash
Balance Sheet
Creative Ads, Inc.
Statement of Retained Earnings
Retained earnings, January 31, 2010
Creative Ads, Inc.
January 31, 2011
25
2. User Insight: Financial challenges identified
The company is challenged both in terms of profitability and liquidity. Profitability is
3. User Insight: Financial challenges identified
Chapter 1, P 8. (Continued)
$1,100 $ 6,900 (g) $210
$2,700 $11,400 $340
$6,400 (d) $27,600 $880 (q)
The income statement must be prepared first because the amount of net income is
Set C
Balance Sheet
Set A
Set B
2. User Insight: Income statement discussed
1. Financial statements completed
Total assets
Beginning balance
Statement of Retained Earnings
Chapter 1, P 9.
Revenue
Income Statement
$415,000
$230,000
$106,800
35,700
$ 71,100
$ 15,700
$ 57,500 Accounts payable $ 3,500
Revenue
Commission sales revenue
Expenses
Bradford Realty, Inc.
Income Statemen
t
For the Year Ended October 30, 2011
Chapter 1, P 10.
1. Financial statements prepared
Bradford Realty, Inc.
Statement of Retained Earnings
Commissions expense
Income before income taxes
Income taxes expense
Net income
For the Year Ended October 31, 2011
Liabilities
Cash
Assets
October 31, 2011
Retained earnings, October 31, 2010
Bradford Realty, Inc.
Balance Sheet
28
2. User Insight: Ability to pay bills evaluated
3. User Insight: Ability to pay bills evaluated
Chapter 1, P 10. (Continued)
29
The three basic activities Costco will engage in to achieve its goals are financing
Chapter 1, C 1.
future operations. The people in an organization are not assets of the business be-
cause they are not owned by the business. Businesses pay their employees on a
activities (obtaining adequate funds or capital to operate its business), investing
Costco’s management is the group of people who have overall responsibility for op-
erating the business and for meeting the company’s profitability and liquidity goals.
The functions management must perform to fulfill its responsibility are obtaining
financial resources so the company can continue operating (financial management);
Assets are economic resources owned by a business that are expected to benefit
Chapter 1, C 2.
30
Chapter 1, C 3.
Generally accepted accounting principles (GAAP) encompass the conventions, rules,
rules, and procedures necessary to define accepted practice at a particular time. When
Financial Accounting Standards Board (FASB): The most important body that issues
rules on accounting practice
American Institute of Certified Public Accountants (AICPA): Influences accounting
practice through its senior technical committees
Chapter 1, C 4.
Liquidity was more important than profitability to Lechters’ short-term survival because
31
1.
2.
$3,545,710
1,653,094
Chapter 1, C 5.
Student A’s assumption that an increase in total assets is equal to net income
is false. It is true that net income results in an increase in assets, but so do
many other transactions. For example, investments by owners and loans from
banks also increase assets. Also, assets can be reduced by transactions that
do not affect net income—for example, repayment of a loan.
ference in retained earnings from one year to the next (there are no dividends).
Less RIM, retained earnings, March 1, 2008
RIM, retained earnings, February 28, 2009
Net income for 2009 was $1,892,616.
*
32
1.
2.
3.
4.
5.
6.
7.
CVS was audited by KPMG LLP. The auditor’s report is important because it tells
whether the company’s financial statements and accompanying information are
Cash flows from operating activities increased from 2008 to 2009. Cash flows
No, the company’s cash and cash equivalents decreased by $266 million. This
Total revenues of CVS for the year ended December 31, 2009, were $98,729
Yes, the company earned $3,696 million. This was an increase from net earnings
The names CVS gives its four basic financial statements are as follows:
Consolidated Statements of Operations (Income Statement)
Chapter 1, C 6.
The accounting equation for CVS on December 31, 2009, is as follows:
million.
(in millions)
1.
2.
3.
4.
In 2009, CVS had profit margin of 3.74 percent ($3,696 ÷ $98,729), and Southwest
cash and cash equivalents of $1,114 million. CVS’s cash decreased by $266 million
compared to the $254 million decrease by Southwest. CVS had cash flows from
CVS has net income (earnings) of $3,696 million, which is about 37 times more
Neither assets nor revenues are better than the other to measure the size of a
Chapter 1, C 7.
With sales of $98,729 million and total assets of $61,641 million, CVS is much
CVS has cash and cash equivalents of $1,086 million compared to Southwest’s
4.3 times the total assets of Southwest.
1.
2.
4.
5.
6.
The alternative courses of action are to report or not to report the $200 in cash.
The courses of action are to disclose the investment or not to disclose the in-
vestment. A CPA must avoid even the appearance of a conflict of interest. To be
The ethical situations are presented for discussion purposes. Students are likely to
have many different viewpoints.
of action are to do the work and not report it, to do the work and report it, or to
to report them to the home office. It might also be possible to discuss them
The alternative courses of action are to disclose or not to disclose the employ-
The alternative courses of action are to ignore the inappropriate expenses or
This is a common problem faced by young accountants. The alternative courses
Chapter 1, C 8.
$2,700 $1,000
$3,520 $ 525
Murphy Lawn Services, Inc.
Balance Sheet
Cash
Assets
Liabilities
Cash Loan payable
Balance Sheet
June 1, 2011
Chapter 1, C 9.
1. Balance sheets prepared
Murphy Lawn Services, Inc.
August 31, 2011
Accounts payable
Assets Liabilities
36
Date:
To:
From:
Re:
2. Memorandum prepared
Chapter 1, C 9. (Continued)
Beth Murphy
(Student’s name)
Today’s date
Assessment of Performance
Memorandum
I have reviewed the balance sheets for Murphy Lawn Services, Inc., at June 1, 2011,
and August 31, 2011.
With regard to your business goal of liquidity, you have increased your cash from
$2,700 to $3,520, an increase of $820. At the same time, your liabilities increased
only $325, from $1,000 to $1,325. Also, you have total assets of $4,645.
37