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CHAPTER 1 ACCOUNTING AS A FORM OF COMMUNICATION
Lecture Suggestions
Module 1
LO 2
Have students name businesses that they use or that they work for. Then have them classify the
business by type – supplier, manufacturer, distributor, retailer or service company. Finally, have
them classify the business as to how it is organized – sole proprietorship, partnership, corporation
or nonbusiness entity.
Module 2
LO 5
Focus on the word balance in the balance sheet and the accounting equation. The balance sheet
must balance: assets equal the total of liabilities plus owners’ equity.
Summarize Top of the World’s financial statements (from Examples 1-4 through 1-7) to show how the
income statement and the statement of retained earnings bridge the gap between the balance sheet of one
period and that of the following period:
INSTRUCTOR’S MANUAL
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Module 2
LO 5
Students have a difficult time understanding the concept of equity. Have students think about their
equity in their assets. If they purchased a car for $10,000 and took out a $3,000 loan, what is their
equity in the car? Put this transaction into the accounting equation to see that the left side represents
the economic resources and the right side represents the claims to the resources.
Module 3
LO 6
Determine what accounting assumption principle has been violated in each situation below:
• Melissa is the owner of Missy’s Tea Shop, a sole proprietorship. She purchases a new
computer for her personal use at home. Melissa records the computer as an asset of
Missy’s Tea Shop.
Solution
• Economic entity concept
• Cost principle
• Time period assumption
• Going-concern assumption
Module 3
LO 7
Students think they “know” what an auditor does, but do not have a clear conception of the specifics.
Conduct a brief discussion in class of how an auditor really “audits” the financial statements. What
Module 3
LO 8
The AICPA code of ethics can serve as a good discussion tool. Thinking about some of the major
frauds, what if any ethics rules were broken? Is unethical conduct always illegal? What are the
CHAPTER 1 ACCOUNTING AS A FORM OF COMMUNICATION
DECISION
MODELS This chapter introduces the student to the Financial Decision Framework (Module 2 - LO4) and the Ethics
Decision Making Model ( Module 3 - LO8). Chapter 2 introduces the Ratio Analysis Model. Many students
believe that accounting is simply another term for bookkeeping. Accounting involves using financial
information to make smart business decisions.
Decision models often involve both quantitative and qualitative data. It is also important to use only
relevant facts to make a decision – this can be especially critical now that so much information is available
on the internet. According to the definition in Chapter 2 of the text, “Relevant information is information
that is useful to the decision-making process. Relevant information may provide clear information about
past financial events that is helpful for predicting the future. To be relevant, the information must also be
timely; that is, it must be available at the time the decision is being made.”
Financial Decision Model (Business Decision Model) (page 10):
1. Formulate the Question.
2. Gather Information from the Financial Statements and Other Sources.
INSTRUCTOR’S MANUAL
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Ethical Decision Making Model (Exhibit 1-9)
1. Recognize an ethical dilemma.
• A dilemma is likely to occur when a company is considering a decision about
2. Analyze the key elements in the situation.
• Who may benefit or be harmed?
• How are they likely to benefit or be harmed?
3. Determine what alternative methods are available to report the transaction, situation or event.
• Which of the alternatives is most relevant and a faithful representation? Timeliness is
important and potential bias must be identified.
4. Resolution
• Select the best or most ethical alternative, considering all of the circumstances and
consequences.
CHAPTER 1 ACCOUNTING AS A FORM OF COMMUNICATION
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Projects and Activities
Module 2
LO 4
Users of Accounting Information and Their Needs
Outside assignment: The competition
In this chapter of your textbook, many examples are drawn from the financial statements of Chipotle
Mexican Grill, Inc. How does it compare to other similar businesses?
Solution
There is, of course, no “right” answer to this question, or, countless right answers could be given. Students
begin to learn where to find information. The sources are everywhere. Comparisons can begin anywhere.
For restaurants, comparisons can begin in the restaurant itself. The student might like to “try out” the
product. By visiting company websites, a student can research a particular company. Competitive studies
can be done using the internet. Of course the library, and helpful reference librarians, will supply material
for this assignment. Students do not necessarily need sophisticated electronic databases to continue their
research, although these are certainly useful and great to have. Your school’s resources may be limited, and
the students need to open their minds to various means of inquiry, available in “hard copy,” including
books, newspapers, magazines, and journals.
Module 2
LO 5
Financial Statements: How Accountants Communicate
Outside assignment: Prepare your own balance sheet
Do you have your own personal balance sheet? Before you say, “No, I’m not a business, so I don’t have
accounts or anything,” think about the question. Financial records, and the statements that result from them,
are a way of recording formally what already exists physically. Don’t you already have some assets, like a
bank account, a car, a stereo and TV, perhaps furniture? How about liabilities? Do you owe anyone money?
INSTRUCTOR’S MANUAL
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Set up a balance sheet form similar to the one in the textbook in the review problem (Greenway
Corporation). Instead of using the accounts for Greenway Corporation, fill in your own name, and your
own “accounts.” Approximate the costs of your assets if you do not know their exact cost, in accordance
with the principles you are learning. Are you going to list any of them at market value? Why or why not?
What is the difference between the total of your assets and your total liabilities?
Solution
Your students may need a bit of guidance to get started, mainly because they do not think of their
possessions as “assets.” Begin by reviewing the definition of an asset. They will see that a balance sheet is
In-class discussion: Why do we need so many statements?
The balance sheet gives the company’s status at the end of a chosen accounting period. It includes the
results of all the operations that took place during this period. Why do we need to have an income
statement and statement of retained earnings, which simply expand upon the retained earnings account? If
we wanted detail, couldn’t we just include it as part of the retained earnings section of the balance sheet?
Solution
Many students, when they begin to prepare financial statements, mix up the statements. A very common
In-class discussion: Dividends
Dividends, you have learned, are a distribution of income, not an expense. What is the difference? Why
can’t the corporation list them as an expense, since dividends are just another amount of money paid out to
somebody?
Solution
This concept is important in other business courses (i.e., finance). Therefore, students need to become
comfortable with the concept as quickly as possible. The key concepts here are:
◼ To whom are the dividends paid?
CHAPTER 1 ACCOUNTING AS A FORM OF COMMUNICATION
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In-class discussion: GAAP
Although regulations promulgated by the SEC and the IRS, for example, carry legally prescribed penalties,
the standards used by the accounting profession, under which published statements are prepared, carry no
such penalties. If nothing will happen to a company that does not follow generally accepted accounting
principles, why do so? What prevents a company from deviating from these conventions if it sees an
advantage to doing so?
Solution
Here is a question of peer pressure, which students understand very well. If the principles are indeed
“generally accepted,” then they are also generally used, and the company that does not use them will stand
GAAP is difficult to escape for a public company. On the other hand, private companies are less subject to
these rules, because they are not required to publish financial statements. Few of these private entities can
go very far without buying on account, or borrowing money from banks, and creditors generally require
audited statements, which again have to conform to GAAP.
Module 3
LO 6
Conceptual Framework for Accounting
Food for thought: The independent auditors’ opinion
MannKind Corporation is a biopharmaceutical company focused on the discovery and development of
therapeutic products for diseases such as diabetes. AFREZZA, their only FDA approved product, is a rapid-
acting inhaled insulin. The following is an excerpt from Mannkind’s 2014 10-K3:
INSTRUCTOR’S MANUAL
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continue as a going concern. The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.”4
Answer the following:
◼ What is the general purpose of an auditors’ report?
Solution
◼ The auditors’ opinion is just that, an opinion. It is, importantly, an unbiased opinion, by someone
independent from the company. Auditors perform tests in accordance with PCAOB auditing
standards to verify that the statements were prepared in accordance with generally accepted
Module 3
LO 7
Setting Accounting Standards
Food for thought: How does FASB make the rules?
Solution
This independent board has seven members, appointed for five-year terms, from business, public
accounting, and academe. They are paid substantial salaries for their full-time service. Members of the
4 Mannkind Corporation, December 31, 2014 10-K, p.70.
CHAPTER 1 ACCOUNTING AS A FORM OF COMMUNICATION
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Module 3
LO 8
Introduction to Ethics in Accounting
Ethics: What does it mean to you?
The topic of ethics is discussed in this chapter. It is a recurring theme throughout the book because it is a
critical item in accounting as it is in any profession. Take a few minutes to ask yourself what ethics means
to you. In a brief paragraph, give your own definition of ethics (please do not simply quote something out
of a dictionary, but rather give your own personal meaning). Consider what the accountants might have felt
at some of the companies embroiled in the major accounting scandals.
This last question is difficult. You have defined what ethics means to you, your own standards, and what
you wish to learn. Do you live by the rules you define? Think carefully. Are there instances where your
actual performance falls short of what you say is correct?
Solution
This assignment can have two parts. Assign this at the beginning of the course as an outside assignment,
Accounting Careers
The financial accounting course can be an opportunity for a business major to understand accounting and
for accounting majors to explore the numerous career opportunities available to them.
Have students interview accountants about their careers and share their findings with the class. Students
can research the Web to obtain salary information. Robert Half International is the world’s largest
Have students bring in advertisements for accounting positions from the internet, the newspaper, and
professional publications.
The many accounting financial statement frauds have highlighted some interesting, non-traditional
INSTRUCTOR’S MANUAL
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Encourage students to get involved with their college’s student accounting organizations. It is a great
networking opportunity.
DECISION In-class discussion: Financial Decision Framework
MODELS
Have the students assume that they have just received $1,000 for their graduation from college. They are
considering investing the money in a publicly traded technology stock or taking a well-deserved vacation to
the Bahamas with their family. Using the financial decision framework, have the students determine what
information is needed to help them make the decision to invest the money.
Solution:
Note that this problem illustrates that data can be both qualitative and quantitative. It is more difficult to
quantify data on the vacation. We can determine how much it will cost, but what is the return? How do we
measure qualitative costs? How can we put on number on how much our rest and having a good time with
our family is worth to us?
The answers will vary, but should follow the following basic format:
1. Formulate the Question. Should I invest the money in the technology sector of the stock market?
2. Gather information from the Financial Statements and Other Sources.
• Consider alternative uses for the money – your vacation.
In-class discussion: Investment decision
Assume that you just won the lottery and are looking at several options for your winnings, including
investing the money in a stock in the technology field, or keeping the money in a savings account at the
bank. Using the financial decision framework determine what information is needed to help them make the
decision to invest the money.
Solution:
The answers will vary, but should follow the following basic format:
1. Formulate the Question. Where should I invest my lottery winnings?
CHAPTER 1 ACCOUNTING AS A FORM OF COMMUNICATION
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3. Analyze the Information Gathered. Use the financial statements to perform analysis, compare
financial statements of the companies in the industry, and compare the companies to industry
averages. Also look at the nonfinancial data for the company – is it developing new products, are
there lawsuits, how is the company meeting its social responsibilities.
4. Make the decision. Taking into account all of the sources of information, determine if you will
invest the money in the technology field or put the money in a savings account.
5. Monitor the decision. Have you received any dividends, did the price of the stock increase above
the amount you paid for it. Has the bank interest rate changed?
The following chart may be helpful:
ISSUES
STOCK
BANK ACCOUNT
Risk
High
Low
Information needed
Market price
Interest rate
Amount of dividends, if any
Stability of bank
