1

Chapter 1Accounting as a Form of

Communication

Financial Accounting. Alternate 4e by Porter and Norton

2

Decisions Made with Financial Information

Invest??

Borrow $$??

Sell stocks or bonds??

Build new plant??

Add new product line??

Start new business??

Loan $$??Extend credit $$??

3

What is Accounting?

Identifying

Measuring

Communicating

EconomicInformation

to various

users

4

Internal and ExternalUsers of Accounting Information

Internal Users -

Management

CreditorsCurrentand

PotentialOwners

GovernmentAgencies

SuppliersTrade

Organizations

FinancialAnalysts

Banks

5

The Accounting Equation

Assets = Liabilities + Owners’ Equity (or Stockholders'

Equity)Creditors'

Claimsto Assets

Owners'Claims

to Assets

EconomicResources

= +

Examples:CashAccounts receivableInventory

Accounts payableNotes payable

Capital stockRetained earnings

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Balance Sheet

Assets Liabilities

Owners’ Equity(or Stockholders' Equity)

=

+A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

StockCertificate

- snapshot offinancial position

7

Current assets:Cash and cash equivalents $ 42,225 $102,280Receivables, less allow. for doubtful accts. ($120 and $244, respectively) 28,616 21,571Dealer financing receivables, less allow. for doubtful accts ($96 and $117, respectively) 37,880 40,263Inventories 113,654 79,815Prepaid expenses 4,314 3,604Deferred income taxes 6,907 6,723

Total current assets 233,596 254,256

Property, plant and equipment, net 48,927 46,536Investment in life insurance 23,602 22,223Deferred income taxes 22,438 21,495Other assets 8,514 7,412

$337,077 $351,922

Winnebago Industries, Inc.Consolidated Balance SheetsAssets August 31, 2002 August 25, 2001

A

A = L + SE

Winnebago Industries, Inc.Consolidated Balance Sheets

Current liabilities:Accounts payable, trade $ 44,230 $ 40,678Income taxes payable 2,610 4,938Accrued expenses 41,761 34,392

Total current liabilities 88,601 80,008

Postretirement health care and deferred compensation benefits 68,661 64,450

Liabilities and Stockholders' EquityAugust 31, 2002 August 25, 2001

Stockholders' equity:Capital stock common 12,944 12,943Additional paid-in capital 25,740 22,261Reinvested earnings 284,856 234,139

323,540 269,343Less treasury stock, at cost 143,725 61,879

Total stockholders' equity 179,815 207,464

$337,077 $351,922

= L

+ SE

A = L + SE

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9

Income Statement

Revenues $$$

Less: Expenses ($$)

Net income $$

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Winnebago Industries, Inc.Consolidated Statements of Operations

Net revenues $ 828,403 $ 675,927Cost of manf. products 708,865 588,561Gross profit 119,538 86,966Selling, general and administrative

expenses 38,341 31,892Operating income 81,197 55,474Financial income 2,859 3,754Income before income taxes 84,056 59,228Provision for taxes 29,385 15,474Change in acctg. principle, net --- (1,050)

Net Income $ 54,671 $ 42,704

August 31, 2002 August 25, 2001

Revenues

Revenues - Expenses = Net Income

Revenues

Expenses

Expenses

Expenses

Statement of Retained Earnings

Beginning retained earnings $$$Add: Net income for the period $$Deduct: Dividends for the period ($$)= Ending retained earnings $$$

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12

Winnebago Industries, Inc.Statement of Retained Earnings for 2002

Beginning balance, retained earnings $ 234,139

Add: Net income 54,671

Deduct: Cash dividends (3,954)

Ending balance, retained earnings $ 284,856

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Income Statement for 2002Revenues $ xxxLess: Expenses xxxNet income $ 54,671

Statement of Retained Earnings for 2002Beginning balance, retained earnings $ 234,139Add: Net income 54,671Deduct: Cash dividends (3,954)Ending balance, retained earnings $ 284,856

Relationships among Financial Statements – Winnebago Industries Example

Balance Sheets 2002 2001Total assets $ xxx $ xxx Liabilities xxx xxxCapital stock xxx xxxRetained earnings 284,856 234,139Total liabilities & stockholders' equity $ xxx $ xxx

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Financial Statement Assumptions

EconomicEntity

CostPrinciple

GoingConcern

MonetaryUnit

TimePeriod

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Economic Entity Concept

Each entity has its own books, records and financial statements that are separate from owners

No intermingling of personal and business assets and liabilities or income and expenses

BusinessBooks &Records

Owners’Books &Records

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Cost Principle

Record assets at cost paid to acquire them

Continue to value assets at historical cost until sold

More objective than market value

17

Going Concern

Assume business will continue indefinitely into the foreseeable future

Justifies use of historical cost

18

Monetary Unit

How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.)

Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements

19

Time Period Assumption

Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year)

Necessary to provide users with financial results on a timely basis

Requires use of estimates 1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

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The Rules of the Game

GAAP

FASB

SEC

AICPA

The rules

The rule makers

The rule enforcers

The CPA regulators

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Where Accountants Work Private Business

Nonbusiness Entities

Public Accounting

– auditing

– tax services

– management consulting

Educational Institutions

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Ethical Dilemmas

Conflicting GAAP rules

Pressure to make choices not in best

interests of company,employees, and

stockholders

No specificGAAP rules

Biased information

or fraud

“Aggressive”accounting

practices

Pressure to compromise

acctg procedures

Personalresponsibilitiesand obligations

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Ethics Decision-Making Model

Recognize dilemma

Identify interested parties

List alternatives

Select best alternative

Likely to occur when considering decision about accounting methods or disclosures and:

• There are conflicting rules

• There are no clear GAAP

• Fraud or other questionable actions have occurred

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Ethics Decision-Making Model

Recognize dilemma

Identify interested parties

List alternatives

Select best alternative

For each group (management, shareholders, investors, auditor, creditors, employees), identify potential:

• Benefits

• Harm

• Rights / claims

• Conflicting interests

• Responsibilities

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Ethics Decision-Making Model

Recognize dilemma

Identify interested parties

List alternatives and evaluate

Select best alternative

Which alternative provides:

• The most useful and timely info?

• The most reliable info?

• Info that most accurately represents what it claims?

• Info that is free from bias?

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Ethics Decision-Making Model

Recognize dilemma

Identify interested parties

List alternatives and evaluate

Select best alternative

Which alternative best provides decision makers with:

• The most relevant info?

• The most reliable info?

• The most accurate info?

• The most neutral info?

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End of Chapter 1