Chapter 1 Homework Dividends Are Paid The Owners The Company

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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:

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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

specifically do they do? How do you become a CPA? You get some wide-ranging answers, and can

shed a lot of light on the subject by leading the class around to some real facts to replace ill-formed

notions. The AICPA website http://www.aicpa.org/BECOMEACPA/Pages/BecomeaCPA.aspx has

some excellent information for students.

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

Module 2

LO 5

The reader can find many pieces of desired financial information (net income, dividends paid, cash

become familiar with what is in them, and where it is located. This familiarity will help them keep the

more complicated detailed topics in perspective as they progress through the book.

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.

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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.

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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?

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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?

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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:

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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.

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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

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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?

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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

Outlook for technology

Information sources

Annual reports

Investor newsletters

periodicals

Google search

Earnings forecast

limits