Chapter 1 Discussion Questions 1. What is the purpose of accounting?

Accounting is an information and measurement system that identifies, records, and communicates relevant information to help people make better decisions. 2. Technology is increasingly used to process accounting data. Why then must we study and understand accounting? Accounting is often called the language of business because all organizations set up an accounting information system to communicate data to help people make better decisions. 3. Identify four kinds of external users and describe how they use accounting information. + Investors: are the first type of external user in the field of accounting. An investor is anyone who buys stock in a company or funds a company's operations. Accounting is critical for investors because a company's balance sheet can give clues as to the firm's financial health. Knowing the firm's financial health, or at least having a good approximation of it, is how investors decide what actions to take with existing stock in a company or whether or not they should invest in the first place. + Creditors: are the second type of accounting external user. A creditor is any individual or institution that has lent a firm money. Usually, creditors are banks. Banks use the accounting statements put out by a company to assess the company's lending risk. If creditors find too many liabilities or debts on a firm's balance sheet, they may be less prone to lending large sums of money to the firm. + Tax authorities: are any organization assessing a firm's tax liability. In the United States, an example of a tax authority would be the IRS. A country's tax authority uses a firm's accounting to determine how much money the firm owes based on the corporate tax rate and other tax principles. A tax authority may also use accountants and accounting to determine a firm's assets and tax obligations if the firm has failed to pay the proper amount of taxes in the past. + Customers: need accounting information to determine a company's financial health and to project its future financial solvency. While the individual consumer may not be looking often at a company's accounting methods and results, other firms that do business with a company do. 4. What are at least three questions business owners and managers might be able to answer by looking at accounting information?

W hat res ourc es d oe s an or gani z at i on own? W hat debt s are owe d? How m uch i nc om e i s ear n ed ? Are ex pen ses reason abl e for t he l ev el of sales? Are customers accounts being promptly collected? 5. Identify three actual businesses that offer services and three actual businesses that offer products + Three actual businesses that offer services: AT&T, Bank of America Corporation, Southwest Airlines + Three actual businesses that offer products: Nike, Coca-Cola, Apple Computer 6. Describe the internal role of accounting for organizations. + Routine internal reporting: These reports which are periodically generated are used by managers of the company for their internal decisions. + Non-routine internal reporting: This information or reports are generated to support projects and other decisions that come up as the need arises from them. 7. Identify three types of services typically offered by accounting professionals. Acco u n t i n g pro f es si o nal s off er m an y s ervi c es i nc l ud i n g au d i t i ng, m ana gem en t advice, tax planning, business valuation, and money management. 8. What type of accounting information might be useful to the marketing managers of a business? + Internal Reports: Accounting reporting can help managers to control their expenses. Marketing managers usually require accounting reports comparing department actual expenses versus budgeted amounts. Management can verify why certain expenses are not in line with budget, conduct research and make decisions about the situation. + Other Accounting Reports: Sales reports showing costs associated with sales can be beneficial to marketing managers. especially if they are launching a new campaign or testing a strategy in an area. Accounting can provide reports showing sales amounts over a certain period and, in many cases, allocated by area allowing for analysis and sound decision making. 9. Why is accounting described as a service activity? Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions, in making reasoned choices among alternative courses of action

10. What are some accounting-related professions? Some accounting-related professions include consultant, financial analyst, underwriter, financial planner, appraiser, FBI investigator, market researcher, and system designer 11. How do ethics rules affect auditors' choice of clients? They can even affect the success of products and services. Misleading information can lead to a wrongful closing of a division that harms workers, customers, and suppliers. There is an old saying: Good ethics are good business. 12. What work do tax accounting professionals perform in addition to preparing tax returns? In addition to preparing tax returns, tax accountants help companies and individuals plan future transactions to minimize the amount of tax to be paid. They are also actively involved in estate planning and in helping set up organizations. Some tax account ant s wo rk fo r re gul at or y a genci e s such as t he IR S or t he vari ous st at e departments of revenue. These tax accountants help to enforce tax laws 13. What does the concept of objectivity imply for information reported in financial statements? Why? If something is "objective" it is not influenced by personal feelings, interpretations, or prejudice. On a financial statement, the information requested should be unbiased and based on facts. 14. A business reports its own office stationery on the balance sheet at its $400 cost, although it cannot be sold for more than $10 as scrap paper. Which accounting principle and/or assumption justifies this treatment? Measurement Principle / Cost Principle states that accounting information is based on actual cost. Cost is measured as cash value or amount of cash paid even if the product or service is worth a different amount or exchanged for another services. 15. Why is the revenue recognition principle needed? What does it demand? The revenue recognition principle gives guidance to when a company recognizes revenue. Revenues are recognized when a service is performed or a product is sold regardless of when the money is received. If revenue is recognized too early, the company would look more profitable and if revenue is recognized too late, the company would look less profitable. For instance, if XYZ Corp. provides a service for $2500-, it should recognize $2500 of revenue as soon as the work was done even if the

customer pays at a later time. Therefore, the company can report$1500 of revenue in that month of operation and not receive any cash that month. Noncash payments such as, credit sales, are acceptable under this principle; revenue received is measured as cash received and other items received. Revenue is not the same as cash receipt! 16. Describe the three basic forms of business organization and their key characteristics. Owner's equity represents the interest of the owner/s in the assets of the organizations reporting activities. + Sole Proprietorship - owner's equity is made of only of the interest of a single owner. + Partnership - ownership interests for all partners is added together to determine the total owners' equity of the organization. + Corporation - the total contribution from all owners to the organization represents its owners equity. For all three, the organizations net income is added to owner's equity. 17. Define (a) assets, (b) liabilities, (c) equity, and (d) net assets. a. Assets are resources a company owns or controls. These resources are expected to yield future benefits. b. Liabilities are creditors claims on assets. These claims reflect company obligations to provide assets, products or services to others. c. Equity is the owners claim on assets. d. Equity is equal to assets minus liabilities. This is the reason equity is also called net assets or residual equity 18. What events or transactions change equity? Revenue and expense transactions change equity 19. Identify the two main categories of accounting principles. General principles are the basic assumptions, concepts, and guidelines for preparing financial

statements. General principles stem from long-used accounting practices Specific principles are detailed rules used in reporting business transactions and events.

Specific principles arise more often from the rulings of authoritative groups. 20. What do accountants mean by the term revenue? Revenue (sales) is the amount received from selling products and services 21. Define net income and explain its computation.

Net income (also called income, profit or earnings) equals revenues minus expenses(if revenues exceed expenses). Net income increases equity. If expenses exceed revenues, the company has a net loss. Net loss decreases equity 22. Identify the four basic financial statements of a business. 1. Income statement describes a companys revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 2. Statement of retained earningsexplains changes in retained earnings from net income (or loss) and from any dividends over a period of time. 3. Balance sheet describes a companys financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows identifies cash inflows (receipts) and cash outflows (payments) over a period of time. 23. What information is reported in an income statement? It provide information about revenues and expenses. Revenues are reported first on the income statement. They include consulting revenues and rental revenue. Expenses such as Rent and salary expenses are reported after revenues. Expenses reflect the costs to generate the revenues reported. Net income (or loss) is reported at the bottom of the statement. 24. Give two examples of expenses a business might incur. Rent and utilities are examples. 25. What is the purpose of the statement of retained earnings? The statement of retained earnings explains the changes in retained earnings from net income (or loss) and from any dividends over a period of time. This means that the statement of retained earnings reports the change in retained earnings from the beginning to end of a time period, usually a year. 26. What information is reported in a balance sheet? The balance sheet reports permanent accounts with a balance. All assets, liabilities, and owners capital + net income/retained earnings will go into the balance sheet. You want to make sure your accounting equation stays in balance. (Assets=liabilities + owner's capital) 27. The statement of cash flows reports on what major activities? The purpose of the statement of cash flows is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash balance. Managers focus on

cash for a very good reasonwithout sufficient cash balance at the right time, a company may miss golden opportunities or may even fall into bankruptcy. 28. Define and explain return on assets. Return on assets (ROA) is stated in ratio form as income divided by assets invested. 29. Define return and risk. Discuss the trade-off between them Return refers to income, and risk is the uncertainty about the return we hope to make. All investments involve risk. The lower the risk of an investment, the lower is its expected return. Higher risk implies higher, but riskier, expected return. The trade-off between return and risk is a normal part of business. Higher risk implies higher, but riskier, expected returns. To help us make better decisions, we use accounting information to assess both return and risk. 30. Describe the three major business activities in organizations. + Financing activities provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. Organizations are careful in acquiring and managing financing activities because they can determine success or failure. The two sources of financing are owner and non-owner. + Investing activities are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. Assets are funded by an organizations financing. Organizations differ on the amount and makeup of assets. Some require land and factories to operate. Others need only an office. Determining the amount and type of assets for operations is called asset management. Invested amounts are referred to as assets. + Operating activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. Sales and revenues are the inflow of assets from selling products and services. Costs and expenses are the outflow of assets to support operating activities. Strategic management is the process of determining the right mix of operating activities for the type of organization, its plans, and its market. 31. Explain why investing (assets) and financing (liabilities and equity) totals are always equal. Assets = Liabilities + Owner's Equity. The two sides of the accounting equation must always be equal because the rights to all the assets of a business are owned by someone. The creditors have a claim against the assets of a business until the liabilities have been paid. The owner has a

claim against the remaining assets of the business. If no liabilities exist, then the owner's equity will equal to the total assets. 32. Refer to the financial statements of Research In Motion in Appendix A near the end of the book. To what level of significance are dollar amounts rounded? What time period does its income statement cover? The dollar amounts in Research In Motions financial statements are rounded to the nearest thousand ($1,000). Research In Motions consolidated statement of earnings( o r i n c o m e statement) covers the fiscal year (con sisting of 52 weeks) ended February 27, 2010. Research In Motion also reports comparative income statements for the previous two years (consisting of 52 weeks). 33. Identify the dollar amounts of Apple's 2009 assets, liabilities, and equity as reported in its statements in Appendix A near the end of the book The dollar amounts of Apple's 2009 assets: $ 47,501 The dollar amounts of Apple's 2009 liabilities: $15,861 The dollar amounts of Apple's 2009 equity: $ 31,640 34. Refer to Nokia's balance sheet in Appendix A near the end of the book. Confirm that its total assets equal its total liabilities plus total equity. Yes, total assets equal its total liabilities plus total equity. Asset = Liabilities + Equity

$ 35,738 = ($5,801 + $15,188) + $ 14,749 35. Access the SEC EDGAR database (www.sec.gov) and retrieve Palms 2009 10-K (filed July 24, 2009; ticker PALM). Identify its auditor. What responsibility does its independent auditor claim regarding Palms financial statements? The i ndep end ent audi t or for P al m , In c., i s Del oi t t e and T ouch LLP . The audi t o r expressly states that our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. The auditor also states that these consolidated financial statements and financial statement schedule are the responsibility of the Companys management.