finman_11e_tm_ch01

Transparency Master 1-1

Institute of Management Accountants

Standards of Ethical Conduct

1. Maintain an appropriate level of professional competence. 2. Refrain from disclosing confidential information. 3. Avoid conflicts of interest. 4. Communicate information fairly and objectively.


American Institute of Certified Public Accountants

Codes of Professional Conduct

1. Exercise sensitive professional and moral judgment. 2. Act in a way that will serve the public interest,

honor the public trust, and demonstrate commitment to professionalism.

3. Perform all professional responsibilities with the highest sense of integrity. 4. Maintain objectivity and be free of conflicts of

interest. 5. Observe the profession's technical and ethical

standards and continually improve competency and quality of services.

6. Use ethical standards when determining the

scope and nature of services to be provided.


ETHICS CASE

Lauren Smith is the controller for Sports Central, a chain of sporting goods stores. She has been asked to recommend a site for a new store. Lauren has an uncle who owns a shopping plaza in the area of town where the new store is to be located, so she decides to contact her uncle about leasing space in his plaza. Lauren also contacted several other shopping plazas and malls, but her uncle's store turned out to be the most economical place to lease. Therefore, Lauren recommended locating the new store in her uncle's shopping plaza. In making her recommendation to management, she did not disclose that her uncle owned the shopping plaza.


ETHICS CASE

John Jones is the chief accountant for the Southwest district office of Security Life Insurance Company. While preparing the fourth-quarter sales report, John overheard the company president say that he would close Security's Phoenix office if it did not meet its fourth-quarter sales quota. John's best friend from college works at the Phoenix office. Anxious to find out whether the office was in jeopardy, John immediately finished the Phoenix office's report, only to find that it showed sales 25% below the quota. Later that afternoon, the company president called John for Phoenix's sales results. John told the president that he had not finished preparing the sales report for the Phoenix office. John wanted time to compile data that might convince the president to continue operations in Phoenix, despite lagging sales.


ETHICS CASE

Tech-Smart Computer Company recently discovered a defect in the hard disks installed in its model R24 computer. The hard disk head in these units retracts too violently whenever the computers are turned off. As a result, the hard disks are destroyed after the computer is turned on and off approximately 500 times. Tech-Smart has sold 4,000 model R24 computers nationwide. The marketing department at Tech-Smart contacted most of the 4,000 owners of the model R24 computer and discovered that 20% (or 800) used their computers in businesses that operated 24 hours per day. These customers never turn their computers off; therefore, the defect should not damage their hard disk units. Judy Govan, Tech-Smart's controller, has been asked to determine the cost to correct the hard disk problem and to recommend a course of action. After studying the marketing department's report, Judy decides to recommend that Tech-Smart replace the hard drives only in the 3,200 units used by customers who actually turn their computers off.


ETHICS CASE

Tom Brown, the controller for MicroTech Software Company, is responsible for preparing the company's financial statements. He learns that sales for the first quarter of the year have dropped so dramatically that the company is in danger of bankruptcy. As a result, he applies for an accounting position with another software company that competes with MicroTech. During his job interview, Tom is asked why he wants to leave MicroTech. He replies truthfully, "The company's sales are down another 10% this quarter. I fear they will go out of business." At that time, MicroTech had not released its sales results to the public.


SPECIALIZED FIELDS IN ACCOUNTING

Financial Accounting preparing reports that show the profits and financial health of the company using the rules of accounting, known as generally accepted accounting principles (GAAP) Auditing evaluating financial records and reports to determine whether they present the results of a company's operations fairly Management Accounting providing data to management to assist in running day-to-day operations



Cost Accounting tracking costs, particularly those to manufacture a product Tax Accounting preparing tax returns and helping companies and individuals reduce the amount of taxes paid by carefully planning their business activities Accounting Systems designing accounting systems that collect accurate data and protect a company's assets (cash, inventory, etc.) from misuse or theft; since most accounting systems today are maintained on a computer, this area requires computer hardware and software knowledge



International Accounting focusing on issues related to international trade; for example, buying or selling goods in a foreign currency Not-for-Profit Accounting reporting on the operations of nonprofit organizations (such as churches, charities, educational institutions, and governmental agencies) Social Accounting measuring the social costs and benefits of various actions Accounting Instruction teaching accounting to students


WRITING EXERCISE

1. Sally Vertrees purchased a personal computer for use at home. Sally owns a dental practice. She occasionally uses the computer for a task related to her dental practice; however, the computer is used primarily by Sally's children. Can the computer be recorded as an asset in the accounting records of Sally's dental office? Why or why not?

2. Jason Thompson purchased an office

building 10 years ago for $780,000. The building was just appraised at $1.25 million. What value should be used for the building in Jason's accounting records? Support your answer.


THE ACCOUNTING EQUATION

Assets = Liabilities + Owner's(Stockholders) Equity OR The Cost of the Where the Funds to Items Used in = Buy Those Items Running a Business Came From, Either Creditors or the Owner Example: A business buys a $20,000 delivery van by exchanging $5,000 of capital stock as a down payment and financing the rest. Assets = Liabilities + Stockholder's Equity $20,000 = $15,000 + $5,000


EVENTS/CONDITIONS RECORDED IN

ACCOUNTING RECORDS

1. Receipt of cash 2. Payment of cash 3. Events that create a legal obligation to pay out cash (or other assets) in the future 4. Events that obligate another party to pay

you cash (or other assets) in the future 5. Sale of a product or completion of a service for a customerthis is known as earning revenue 6. The use of products or services in running

your businessthis is known as incurring an expense


RECORDING BUSINESS TRANSACTIONS Jim's Lawn Care

1. Jim Hamilton began a lawn care business in May by depositing $800 in a business bank account in exchange for Capital Stock.

2. Purchased lawnmowers and other lawn equipment on account, $1,000.

3. Paid cash for supplies, $50. 4. Performed lawn care services for credit customers

and billed them $700. 5. Received $700 cash from the customers billed in #4. 6. Paid $1,000 cash for the lawn equipment purchased

in #2. 7. Paid for an advertisement in a local newspaper, $150. 8. Performed lawn care services for cash customers and immediately received $420. 9. Paid wages to a part-time assistant, $85. 10. Performed lawn care services for credit customers

and billed them $600. 11. Received an invoice from Gas-n-Go for gasoline

purchased on account during May, $110. The invoice will not be paid until next month.

12. At the end of May, Jim paid dividends of $100 to the stockholder.


RECORDING BUSINESS TRANSACTIONS

Jims Lawn Care Solution

Accounts Lawn Accounts Capital Cash Receivable Supplies Equipment Payable Stock 1. +800 +800 Investment

Bal. 800 800 2. +1,000 +1,000

Bal. 800 1,000 1,000 800 3. 50 +50

Bal. 750 50 1,000 1,000 800 4. +700 +700 Revenue

Bal. 750 700 50 1,000 1,000 1,500 5. +700 700

Bal. 1,450 0 50 1,000 1.000 1,500 6. 1,000 1,000

Bal. 450 50 1,000 0 1,500 7. 150 150 Adv. Exp.

Bal. 300 50 1,000 1,350 8. +420 +420 Revenue

Bal. 720 50 1,000 1,770 9. 85 85 Wage Exp.

Bal. 635 50 1,000 1,685 10. +600 +600 Revenue

Bal. 635 600 50 1,000 2,285 11. +110 110 Gas Exp.

Bal. 635 600 50 1,000 110 2,175 12. 100 100 Dividend

Bal. 535 600 50 1,000 110 2,075


FINANCIAL STATEMENTS Jim's Lawn Care

Income Statement For the Month Ended May 31, 20--

____________________________________________________________ Fees earned $ Operating expenses: Advertising expense $ Gasoline expense $ Wages expense $ Total operating expenses $ Net income $

Jim's Lawn Care Retained Earnings Statement

For the Month Ended May 31, 20-- ____________________________________________________________ Retained Earnings, May 1 $ Investment $ Net income for May $ Less dividends $ Increase in stockholder's equity $ Retained Earnings, May 31 $

Jim's Lawn Care Balance Sheet

May 31, 20-- ____________________________________________________________ Assets Liabilities Cash $ Accounts payable $ Accounts receivable $ Supplies $ Stockholders Equity Lawn equipment $ Capital Stock $ Retained Earnings $ Total assets $ Total liabilities and Stockholders equity $


FINANCIAL STATEMENTSSOLUTIONS Jim's Lawn Care

Income Statement For the Month Ended May 31, 20--

____________________________________________________________ Fees earned $1,720 Operating expenses: Advertising expense $150 Gasoline expense 110 Wages expense 85 Total operating expenses 345 Net income $1,375

Jim's Lawn Care Retained Earnings Statement

For the Month Ended May 31, 20-- ____________________________________________________________ Retained Earnings May 1 $ 0 Net income for May 1,375 Less dividends 100 Increase in retained earnings 1,275 Retained Earnings, May 31 $1,275

Jim's Lawn Care Balance Sheet

May 31, 20-- ____________________________________________________________ Assets Liabilities Cash $ 535 Accounts payable $ 110 Accounts receivable 600 Supplies 50 Stockholders equity Lawn equipment 1,000 Capital stock 800 Retained Earnings 1275 Total Stockholders Equity $2,075 Total assets $2,185 Total liabilities and stockholders equity $2,185


STATEMENT OF CASH FLOWS

PURPOSE: Report cash received and cash paid in the course of doing business.

Cash flows are divided into the following categories: 1. Cash flows from operating activities OPERATING ACTIVITIES: Cash received or paid in * Providing services to a customer * Buying and selling a product 2. Cash flows from investing activities INVESTING ACTIVITIES: Cash received or paid in * Buying or selling long-term assets 3. Cash flows from financing activities FINANCING ACTIVITIES: Cash received or paid due to * Investments received and dividends paid * Borrowing and repaying cash


Relationship Between Liabilities and Stockholders Equity

Stockholders Assets = Liabilities + Equity Company A 100,000 = 95,000 + 5,000 Company B 100,000 = 90,000 + 10,000


RATIO OF LIABILITIES TO STOCKHOLDERS EQUITY

Ratio of Liabilities Total Liabilities to Stockholders Equity = ------------------------------------------

Total Owners Equity (or Total Stockholders Equity)

RATIO OF LIABILITIES TO STOCKHOLDERS EQUITY

Jim's Lawn Care May 31, 20--

Ratio of Liabilities $110

to Stockholders Equity

= ----------- = .053

$2075


Types of Businesses

Service

Provide services rather than products

Merchandising

Sell products they purchase from other businesses to customers

Manufacturing

Change basic inputs into products that are sold to customers


Types of Business Organizations

Proprietorship

Owned by one individual

Partnership

Owned by two or more individuals

Corporation

Organized under state or federal statutes as a separate legal taxable entity

Limited Liability Entity (LLC)

Combines the attributes of a partnership and a corporation

finman_11e_tm_ch01

Documents