Accounting and the Business Environment

The tobacco comapnies have paid billions because of smoking-related illnesses. In particular, Philip Morris, a leading cigarette manufacturer, paid more than $\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}$in settlement payments in one year.

Requirements

1) Suppose you are the chief financial officer (CFO) responsible for the financial statements of Philips Morris. What ethical issue would you face  as you consider what to  report in your company's annual report about the cash payments? What is the ethical course of action for you to take in this situation? 

2)  What are some of the negative consequences to Philip Morris for not telling the truth ? What are some of the negative consequences to Philip Morris for telling the truth ?    

Question: Match the accounting terminology to the definitions. 3. Time period concept 4. Revenue recognition principle 5. Matching principle a. Requires companies to record revenue when it satisfies each performance obligation. b. Assumes that a business’s activities can be sliced into small time segments and that financial statements can be prepared for specific periods. c. Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period

Question: Blanchette Plant Service completed a special landscaping job for Kerry Company. Blanchette uses ABC and has the following predetermined overhead allocation rates:

                  Activity                                                                   Predetermined

                                                  Allocation Base               Overhead Allocation Rate

                Designing               Number of designs                  \( 290 per design

                  Planting                Number of plants                     \) 20 per plant

The Kerry job included \(750 in plants; \)1,300 in direct labor; one design; and 30 plants.

Requirements

2. If Kerry paid $3,540 for the job, what is the operating income or loss?

Match the accounting terminology to the definitions. 1. Certified management accountants a. information system that measures business activities, processes that information into reports, and communicates the results to decision makers 2. Accounting b. professional accountants who serve the general public 3. Managerial accounting c. person or business to whom a business owes money 4. Certified public accountants d. field of accounting that focuses on providing information for internal decision makers 5. Financial accounting e. professionals who work for a single company 6. Creditor f. field of accounting that focuses on providing information for external decision makers

Match the accounting terminology to the definitions. 7. Cost principle a. oversees the creation and governance of accounting standards in the United States 8. GAAP b. requires an organization to be a separate economic unit 9. Faithful representation c. oversees U.S. financial markets 10. SEC d. states that acquired assets and services should be recorded at their actual cost 11. FASB e. creates International Financial Reporting Standards 12. Monetary unit assumption f. the main U.S. accounting rule book 13. Economic entity assumption g. assumes that an entity will remain in operation for the foreseeable future 14. Going concern assumption h. assumes that items on the financial statements are recorded in a monetary unit 15. IASB i. requires information to be complete, neutral, and free from material error

Using the expanded accounting equation, solve for the missing amount. Assets $ 71,288 Liabilities 2,260 Common Stock ? Dividends 14,420 Revenues 53,085 Expenses 28,675

Using the information provided, analyze the effects of Lawlor Lawn Service’s transactions on the accounting equation. May 1 Received \(1,700 and issued common stock. May 3 Purchased a mower on account, \)1,440. May 5 Performed lawn services for client on account, \(200. May 17 Paid \)60 cash for gas used in mower. May 28 Paid cash dividends of $300.

Using the following information, complete the income statement, statement of retained earnings, and balance sheet for DR Painting for the month of March 2018. The business began operations on March 1, 2018. Accounts Receivable \( 1,400 Salaries Expense \) 800 Accounts Payable 1,000 Service Revenue 7,000 Cash 22,300 Office Supplies 1,800 Stock issued during March 40,000 Truck 20,000 Dividends paid during March 1,500 Utilities Expense 200

Using the following information, calculate the return on assets. Net income for November, 2018 $ 5,000 Total assets, November 1, 2018 76,000 Total assets, November 30, 2018 80,250

Estella Osage publishes an online travel magazine. In need of cash, the business applies for a loan with National Bank. The bank requires borrowers to submit financial statements. With little knowledge of accounting, Estella Osage, a stockholder, does not know how to proceed.

Requirements

1. What are the four financial statements that the business will need to prepare?

2. Is there a specific order in which the financial statements must be prepared?

3. Explain how to prepare each statement.

Match each example with a component of a computerized accounting information system. Components may be used more than once.

Use the following abbreviations to indicate the journal in which you would record transactions a through n.

J = General journal

S = Sales journal

CR = Cash receipts journal

P = Purchases journal

CP = Cash payments journal

Transactions:

a. Cash purchase of merchandise inventory

b. Collection of dividend revenue earned on an investment

c. Prepayment of insurance

d. Borrowing money on a long-term note payable

e. Purchase of equipment on account

f. Cost of goods sold along with a credit sale

g. Cash sale of merchandise inventory

h. Payment of rent

i. Depreciation of computer equipment

j. Purchase of merchandise inventory on account

k. Collection of accounts receivable

l. Expiration of prepaid insurance

m. Sale on account

n. Payment on account

In Vogue, a T-shirt business, is growing fast and needs a better accounting information system. Consider the features of an effective system. Which features are most important? Why? Which feature must you consider if your financial resources are limited?

What is accounting?

Identifying users of accounting information For each user of accounting information, identify if the user would use financial accounting or managerial accounting. a. investor e. controller b. banker f. stockholder c. IRS g. human resources director d. manager of the business h. creditor

Briefly describe the two major fields of accounting

Describe the various types of individuals who use accounting information and how they use that information to make crucial decisions

Recording transactions in a sales journal

___________________________________________________________________

Jun. 1 Sold merchandise inventory on account to Fran Jack, \(1,220. Cost of goods, \)980. Invoice no. 101.

8 Sold merchandise inventory on account to Ireland Frank, \(2,025. Cost of goods, \)1,640. Invoice no. 102.

13 Sold merchandise inventory on account to Jake Thompson, \(420. Cost of goods, \)210. Invoice no. 103.

___________________________________________________________________

Use the following sales journal to record the preceding transactions. All credit sales are terms of n/30.

What are two certifications available for accountants? Briefly explain each certification.

Review your results from Short Exercise SB-4.

Requirements

1. Total each column of the sales journal.

2. Open the following four-column accounts in the accounts receivable subsidiary ledger: Accounts Receivable—Frank; Accounts Receivable—Jack; Accounts Receivable—Thompson; Accounts Receivable—West. Post the transactions to the accounts receivable subsidiary ledger.

3. Open the following selected four-column accounts in the general ledger: Accounts Receivable (112); Merchandise Inventory (118), Bal. $5,000; Sales Revenue (411); Cost of Goods Sold (511). Post the total of each column to the general ledger.

4. Balance the total of the customer ending balances in the accounts receivable subsidiary ledger against Accounts Receivable in the general ledger.

What is the role of the Financial Accounting Standards Board (FASB)?

Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the organization currently responsible for the creation and governance of these standards

Describe the similarities and differences among the four different types of business entities discussed in the chapter.

A business purchases an acre of land for \(5,000. The current market value is \)5,550, and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and which accounting principle supports your answer?

What does the going concern assumption mean for a business?

Which concept states that accounting information should be complete, neutral, and free from material error?

Financial statements in the United States are reported in U.S. dollars. What assumption supports this statement?

Explain the role of the International Accounting Standards Board (IASB) in relation to International Financial Reporting Standards (IFRS).

What is the accounting equation? Briefly explain each of the three parts.

How does retained earnings increase? What are the two ways that retained earnings decreases?

How is net income calculated? Define revenues and expenses.

What are the steps used when analyzing a business transaction?

List the four financial statements. Briefly describe each statement.

What is the calculation for ROA? Explain what ROA measures

Suppose you are starting a business, Wholly Shirts, to imprint logos on T-shirts. In organizing the business and setting up its accounting records, you take your information to a CPA to prepare financial statements for the bank. Name the organization that governs the majority of the guidelines that the CPA will use to prepare financial statements for Wholly Shirts. What are those guidelines called?

Chloe Michaels plans on opening Chloe Michaels Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and wants owners of the business to not be held personally liable for the business’s debts. Additionally, Chloe wants the business to be a separate taxable entity. Which type of business organization will meet Chloe’s needs best?

You would like to start a cellular telephone equipment service business. You are considering organizing the business as a sole proprietorship. Identify the advantages and disadvantages of owning a sole proprietorship.

Michael McNamee is the proprietor of a property management company,Apartment Exchange, near the campus of Pensacola State College. The business has cash of \(8,000 and furniture that cost \)9,000 and has a marketvalue of \(13,000. The business debts include accounts payable of \)6,000. Michael's personal home is valued at \(400,000, and his personal bank accounthas a balance of \)1,200. Consider the accounting principles and assumptionsdiscussed in the chapter, and identify the principle or assumption that best matches the situation:

a. Michael's personal assets are not recorded on the Apartment Exchange's

balance sheet.

b. The Apartment Exchange records furniture at its cost of \(9,000, not its market

value of \)13,000.

c. The Apartment Exchange reports its financial statements in U.S. dollars.

d. Michael expects the Apartment Exchange to remain in operation for the

foreseeable future

Recording transactions in a cash receipts journal

___________________________________________________________________

Jul. 5 Sold merchandise inventory for cash, \(1,700. Cost of goods, \)1,400.

     12 Collected interest revenue of \(2,050.

     18 Received cash from Heidi Next, \)1,200, on account. There was no 

          discount.

___________________________________________________________________

Use the following cash receipts journal to record the preceding transactions.

Using the accounting equation Thompson Handyman Services has total assets for the year of \(18,400 and total liabilities of \)9,050. Requirements 1. Use the accounting equation to solve for equity. 2. If next year assets increased by \(4,300 and equity decreased by \)3,850, what would be the amount of total liabilities for Thompson Handyman Services?

Review your results from Short Exercise SB-6.

Requirements

1. Total each column of the cash receipts journal.

2. Open the following four-column accounts in the accounts receivable subsidiary ledger: Accounts Receivable—Dylan, Bal. \(5,280; Accounts Receivable—Next, Bal. \)2,250. Post the transactions to the accounts receivable subsidiary ledger.

3. Open the following selected four-column accounts in the general ledger: Cash (111), Bal. \(4,550; Accounts Receivable (112), Bal. \)7,530; Merchandise Inventory (118), Bal. \(3,250; Sales Revenue (411), Bal. \)25,000; Sales Discounts Forfeited (412); Interest Revenue (419); Cost of Goods Sold (511), Bal. $14,500. Post the total of each column to the general ledger. Also, post the Other Accounts column to the general ledger.

4. Balance the total of the customer ending balances in the accounts receivable subsidiary ledger against Accounts Receivable in the general ledger.

Using the accounting equation Roland’s Overhead Doors reports the following financial information: Assets $ 45,800 Liabilities 17,220 Common Stock 27,460 Dividends 6,500 Revenues 8,850 Expenses ? Requirements 1. Use the accounting equation to solve for the missing information. 2. Did Roland’s Overhead Doors report net income or net loss?

Recording transactions in a purchases journal

Oct. 1 Purchased merchandise inventory on account with credit terms of 4/10,n/30 from Mayer Co., \(2,200.

11 Purchased office supplies on account from Bird Co., \)600. Terms were n/EOM.

24 Purchased furniture on account with credit terms of 3/10, n/60 from SillyCo., $900.

Use the following purchases journal to record the preceding transactions.

Identifying accounts Consider the following accounts: a. Accounts Payable b. Cash c. Common Stock d. Accounts Receivable e. Rent Expense f. Service Revenue g. Office Supplies h. Dividends i. Land j. Salaries Expense Identify each account as Asset, Liability, or Equity

Posting transactions from a purchases journal to a subsidiary ledger and general ledger

Review your results from Short Exercise SB-8.

Requirements

1. Total each column of the purchases journal.

2. Open the following four-column accounts in the accounts payable subsidiaryledger: Accounts Payable—Bird Co.; Accounts Payable—Mayer Co.; AccountsPayable—Silly Co. Post the transactions to the accounts payable subsidiaryledger.

3. Open the following selected four-column accounts in the general ledger:Merchandise Inventory (115); Office Supplies (116); Furniture (151); AccountsPayable (211). Post the total of each column to the general ledger. Also, post theOther Accounts column to the general ledger.

4. Balance the total of the vendor ending balances in the accounts payable subsidiaryledger against Accounts Payable in the general ledger.

Tiny Town Kennel earns service revenue by caring for the pets of customers. Tiny

Town Kennel is organized as a corporation. During the past month, Tiny Town

Kennel has the following transactions:

a. Received \(520 cash for service revenue earned.

b. Paid \)325 cash for salaries expense.

c. Received a \(1,000 contribution in exchange for common stock.

d. Earned \)640 for service revenue, but the customer has not paid Tiny Town

Kennel yet.

e. Received utility bill of \(85, which will be paid next month.

f. Cash dividends of \)100 were paid to stockholders.

Indicate the effects of the business transactions on the accounting equation for Tiny

Town Kennel. Transaction (a) is answered as a guide.

 Increase asset (Cash); Increase equity (Service Revenue)

Recording transactions in a cash payments journal

Jan. 5 Issued check no. 430 to purchase equipment for cash, \(1,700.

7 Purchased merchandise inventory for cash, \)450, issuing check no. 431.

18 Paid Kat Co. amount owed, \(775, less \)100 discount. Issued check no.  

432.

28 Issued check no. 433 to pay utilities, $260. The bill was just received, 

andthere is no liability recorded.

Use the following cash payments journal to record the preceding transactions.

Elaine’s Inflatables earns service revenue by providing party planning services and inflatable playscapes. Elaine’s Inflatables is organized as a corporation. During the past month, Elaine’s Inflatables had the following transactions:

a. Received contributions of \(10,000 in exchange for common stock.

b. Purchased equipment for \)5,000 on account

c. Paid \(400 for office supplies.

d. Earned and received \)2,500 cash for service revenue.

e. Paid \(400 for wages to employees.

f. Cash dividends of \)1,000 were paid to stockholders.

g. Earned \(1,000 for services provided. Customer has not yet paid.

h. Paid \)1,000 for rent.

i. Received a bill for $250 for the monthly utilities. The bill has not yet been paid.

Indicate the effects of the business transactions on the accounting equation for

Elaine’s Inflatables. Transaction (a) is answered as a guide.

a. Increase asset (Cash); Increase equity (Common Stock)

Posting transactions from a cash payments journal to a subsidiary ledger and general ledger

Review your results from Short Exercise SB-10.

Requirements

1. Total each column of the cash payments journal.

2. Open the following four-column accounts in the accounts payable subsidiaryledger: Accounts Payable—Kat Co., Bal. \(1,900. Post the transactions to theaccounts payable subsidiary ledger.

3. Open the following selected four-column accounts in the general ledger: Cash(111), Bal. \)5,000; Merchandise Inventory (118), \(2,100; Equipment (150),\)9,900; Accounts Payable (211), $1,900; Utilities Expense (541). Post the total ofeach column to the general ledger. Also, post the Other Accounts column to thegeneral ledger.

4. Balance the total of the vendor ending balances in the accounts payable subsidiaryledger against Accounts Payable in the general ledger. 

Identifying accounts on the financial statements Consider the following accounts: a. Accounts Payable b. Cash c. Common Stock d. Accounts Receivable e. Rent Expense f. Service Revenue g. Office Supplies h. Dividends i. Land j. Salaries Expense Identify the financial statement (or statements) that each account would appear on. Use I for Income Statement, RE for Statement of Retained Earnings, B for Balance Sheet, and C for Statement of Cash Flows.