Beruflich Dokumente
Kultur Dokumente
Accounting as a Form of
Communication
Key Concepts:
n What is accounting?
n Who uses financial information?
n Why do users need accounting information?
n What information is communicated through the Balance Sheet, Income Statement, and
Statement of Retained Earnings?
n What are the primary assumptions made in preparing financial statements?
n What opportunities will be available to you as an accounting major?
Chapter Outline
Balance sheet is the statement that summarizes assets, liabilities and equity at a specific point in time,
usually the end of a month, quarter, or year
n The entity's status at that point in time
Income statement summarizes the period's revenues and expenses
n Flow rather than statuswhole period's activities
n Revenues less expenses
Statement of retained earnings links the income statement to the balance sheet
n Income increases retained earnings
n Dividends, distributions of income, reduce retained earnings; thus
Beginning retained earnings + Net income Dividends
= Ending retained earnings
Statement of cash flows is the fourth major financial statement. It is introduced in Chapter 2.
Joint effort:
n Securities and Exchange Commission (SEC): publicly traded companies ("listed stocks")
www.sec.gov
n Financial Accounting Standards Board (FASB): public reporting
www.rutgers.edu/Accounting/raw/fasb
n American Institute of Certified Public Accountants (AICPA): advisory body to FASB;
auditing standards
www.aicpa.org
n International Accounting Standards Committee: development of worldwide accounting
standards
www.iasc.org.uk
Public accounting:
n Audit records assure fair reporting to stockholders and other outside users
opinions, not statements of fact
unable to verify every transaction
n Tax return preparation, tax planning
n Management consulting
Education
Accounting as a career:
n Traditional roles include auditing
n Emerging specialty roles include tax accounting, environmental accounting, forensic
accounting, software development, accounting in entertainment and telecommunications, etc.
Accountants and Ethical Judgments:
Judgments necessary about what to present and how to present it
Great trust placed in accountants by statement users
Lecture Suggestions
Who are the internal users of financial information? Ask students to name as many as they can. How LO 1
does management accounting information help them? Who are the external users of accounting
information? Why is the information they need different from what internal users need?
Focus on the word balance in the balance sheet and the accounting equation. The balance sheet must LO 2
balance: assets equal the total of liabilities plus owners' equity.
Summarize Unos financial statements 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:
IN THOUSANDS
2000 RE balance = 56.0 2000 income retained 4.0 + 1999 RE balance 52.0
The reader can find many pieces of desired financial information (net income, dividends paid, cash
balance) in more than one place in the statements. Students should learn to "read" the statements, to
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 you progress through the book.
Students think they "know" what an auditor does, but do not have a clear conception of the specifics. LO 4
Conduct a brief discussion in class of how an auditor really "audits" the books. What specifically do they
do? 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.
For students with a Pizzeria Unos in the local area: With several classmates make a survey of
pizzerias in your area. Visit a Pizzeria Uno and several of its competitors. Ask your server for the most
popular pizza in the restaurant and ask several questions about the pizza. Compare the friendliness,
knowledge, and courtesy of your server. Evaluate the ambiance of the restaurants. Are you greeted
upon arrival? Time how long it takes to get a seat, to have your order is taken, until salad or antipasto
is delivered, until the pizza arrives? Is the pizza presented in an appetizing way? Is it hot and fresh
from the oven? And now the ultimate test the first bite. Try to determine ownership if the restaurant
is local or part of a chain, is it a franchise. Have you seen ads for the restaurant and where? Is there a
customer survey form available?
For students without a local Pizzeria Uno: Visit a local supermarket. Do they sell Unos products? If
not, have they ever heard of them? Why don't they sell them? What do they sell? Examine the frozen
pizzas to see which brands the store sells in place of, or in addition to, Unos. Can you find the
name(s) and address(es) of the manufacturer(s)? What immediate comparisons between products can
you make? Where should you go next if you want to find out more about these companies?
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 in the store. Students see how many brands are available, in-store advertising, relative prices,
and packaging. Of course, this consumer research is the perfect excuse for some sampling, too. Once
they've read the pizza labels, and tried the products, they will probably go off in a number of
directions. Many of the packages nowadays contain "800 numbers, or internet web addresses," which
can be a treasure trove of information. 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. But 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.
The quickest way to research is by using the internet. Students can go to a company's web site and
find financial information. They can access information by using sites such as Reportgallery.com or
Marketguide.com. Students enjoy searching for information on the web.
Encourage students to share current events and good reference sites with the class throughout the
semester. Each student (or a group of students) can be responsible for a specific company during the
semester. It is very interesting to have the class choose an industry to follow during the semester.
Each student (or group) could follow a specific retailer, restaurant, computer manufacturer, internet
company, etc.
Solution
This annual report exercise can be used as a term project in Financial Accounting sections with
favorable student responses. It is not enough to tell students to read an annual report, even if they have
it right in front of them. They are busy, and will skim through it with no outside incentive. A list of
questions provides incentive. No matter whose annual report they read, students are always surprised
at how much information it contains, and at how readable it generally turns out to be. The above is not
by any means a comprehensive list, but rather a starting point to which you can add your own
questions. There is so much to be found between the covers of the report. If you want more
academic content, you could very easily add more questions related to the financial statements.
Some terms introduced in these questions have not yet been covered. Exposure to the terms keeps the
students interested and may encourage them to read ahead.
The exercise could also be delayed to Chapter 2 or even farther along in the term, when the students
will have learned more and you can ask more analytical questions, or more technical accounting
questions. It is good to include a question that requires some writing. For #17 in this case, you might
substitute one of the questions below. Tell the students, as a guideline, that the answer to the essay
question should be 1 to 1 typed pages.
"What is your impression of this company based on their Annual Report? Would
you invest in this company? Would you lend them money? Would you like to work
for them?"
"Describe what in your opinion are the three most important issues the company
faces in the coming year, and what they are doing to deal with them."
Find an article that discusses the companys current financial status and their
prospects for the future, either as a competitor in their chosen business, or as an
investment.
Try one or more of the companys products. Discuss how successfully the product
reflects the companys corporate mission and personality as conveyed in their annual
report.
Answers to the questions (other than opinion essays):
1. Aaron D. Spencer
2. Craig S. Miller
3. 100 Charles Park Rd., Boston, MA 02132
4. www.unos.com
5. The stock reached a high of $12.65 during the fourth quarter 2000
6. Approximately 2200 as of October 1, 2000.
7. NYSE (symbol UNO )
8. Ernst & Young LLP
9. 110 company owned stores with average sales of $2,052M
10. 55 franchises with average sales of $2,071M.
11. Total revenue is total inflow of assets from operations from all sources. Unos has three sources of
revenue: restaurant sales, consumer product sales and franchise income. In 1998 total revenues
were $191,276M and 2000 revenues were $231,170M. The percentage growth was 20.85%.
12. Net income for 1998 was $5,387 and for 2000 was $4,035M, which is an absolute decrease of
$1,352M!! This is a percentage drop of 25%.
13. The Diluted Earnings per share for 2000 was $ .34 and for 1998 was $ .45.
14. Pizzeria Unos are located in 30 states, and in Puerto Rico, Mexico, and the United Arab Emirates.
It has a consumer products division that sells to an airline, supermarkets and movie theaters.
15. The last day of the Company's 1999 fiscal year was October 3 and the 2000 fiscal year was
October 1.
16. American Airlines
17. Students may present a variety of articles. However depending on the search engine, many articles
are likely to be about the same news item.
some assets, like a bank account, a car, a stereo and TV, perhaps furniture? How about liabilities? Do
you owe anyone money?
Set up a balance sheet form similar to the one in your 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 not an abstraction created from nowhere, but a way of writing down what physically exists.
Students may be asked to prepare a personal balance sheet when they fill out a loan application. They
are asked, essentially, for a balance sheet, although not in so many words. The historical cost concept
is introduced here, in the question of cost versus market value. Students may debate what their assets
are worth. They finish by calculating their own equity or net worth (using the old phrase), that
is, what they own outright with no outside claims or liens. Doing this in personal terms makes the
concepts more real than doing it for some abstract company whose equity means nothing to a
student.
Expenses are incurred to earn revenues. Dividends are not a part of the revenue process. Expenses
imply an obligation, whereas no requirement to pay dividends exists. The company may (or may not)
feel that they should pay dividends, but are not required to do so. Finally, expenses involve payments
to outside parties: suppliers, employees, banks. Dividends are paid to the owners of the company. In
other words, they are withdrawals by the owners. Return to simple proprietorships or partnerships to
reinforce the difference between an expense and a withdrawal from Getting Started in Business.
Accounting Careers
The financial accounting course can be an opportunity for a business major to choose accounting as a
career. It is a great time to encourage students to explore career opportunities.
Have students interview accountants about their careers and share their findings with the class.
Students can research the web to obtain salary information. Also, have student visit the web site of the
AICPA (www.aicpa.org). The site includes a link "Just for Students".
Secure a copy of Room Zoom from the AICPA and make it available to interested students. This CD-
ROM provides exciting information about CPA careers. Encourage students to get involved with your
school's student accounting organizations.