E1-1 Types of businesses Indicate whether each of the following companies is primarily a service, merchandise, or manufacturing business. If you are unfamiliar with the company, you may use the Internet to locate the company's home page or use the finance Web site of Yahoo.com. 1. AFLAC (AFL) 2. Best Buy (BBY) 3. Boeing (BA) 4. Caterpillar (CAT) 5. Citigroup (C) 6. CVS Health Corp. (CVS) 7. DowDuPont Inc. (DWDP) 8. Exxon Mobil (XOM) 9. Facebook (FB) 1Q Ford Motor (F) 11. General Electric (GE) 12. Hilton Hotels 13. H&R Block Inc. (HRD) 14. Oracle (ORCL) 15. Target (TGT) E1-5 Accounting equation Determine the missing amount for each of the following: Assets Liabilities + Stockholders' Equity a. b. $1,320,000 C. $3,150,000 $262,500 $900,000 + + + $450,000 $787,500 E1-7 Net income and dividends The income statement of a corporation for the month of November indicates a net income of $90,000. During the same period, $100,000 in cash dividends were paid. Would it be correct to say that the business incurred a net loss of $10,000 during the month? Discuss E1-17 Financial statements Each of the following items is shown in the financial statements of ExxonMobil Corporation. Identify the financial statement (balance sheet or income statement) in which each item would appear. a. Accounts payable 1. Marketable securities b. Cash equivalents j. Notes and loans payable c. Crude oil inventory k. Operating expenses d. Equipment 1. Prepaid taxes e. Exploration expenses m. Retained earnings f. Income taxes payable o. Selling expenses g. Investments h. Long-term debt n. Sales Elintained 10. The changes in financial condition are reported at the end of the month. E1-27 Business entity concept Crazy Mountain Sports sells hunting and fishing equipment and provides guided hunting and fishing trips. Crazy Mountain is owned and operated by Karl Young, a well-known sports enthusiast and hunter. Karl's wife, Mila, owns and operates Mila's Boutique, a wom- en's clothing store. Karl and Mila have established a trust fund to finance their children's college education. The trust fund is maintained by First Bank in the names of their children, Steve and Isabelle. For each of the following transactions, identify which of the entities listed should record the transaction in its records. Entities B M Crazy Mountain Sports First Bank Trust Fund Mila's Boutique None of the above 1. Karl paid a local doctor for a physical, which was required by the workmen's com pensation insurance policy carried by Crazy Mountain Sports 2. Karl received a cash advance from customers for a guided hunting trip. 3. Mila paid her dues to the YWCA. 4. Karl paid a breeder's fee for an English Springer spaniel to be used as a hunti guide dog 5. Mila deposited a $10,000 personal check in the trust fund at First Bank. 6. Karl paid for an advertisement in a hunters' magazine. 7. Mila authorized the trust fund to purchase mutual fund shares, 8. Mila donated several dresses from the store's inventory to a local charity auction the benefit of a women's abuse shelter. 9. Karl paid for dinner and a movie to celebrate the couple's fifteenth wed anniversary. 10. Mila purchased two dozen spring dresses from a Boise designer for a special spring Elintained 10. The changes in financial condition are reported at the end of the month. E1-27 Business entity concept Crazy Mountain Sports sells hunting and fishing equipment and provides guided hunting and fishing trips. Crazy Mountain is owned and operated by Karl Young, a well-known sports enthusiast and hunter. Karl's wife, Mila, owns and operates Mila's Boutique, a wom- en's clothing store. Karl and Mila have established a trust fund to finance their children's college education. The trust fund is maintained by First Bank in the names of their children, Steve and Isabelle. For each of the following transactions, identify which of the entities listed should record the transaction in its records. Entities B M Crazy Mountain Sports First Bank Trust Fund Mila's Boutique None of the above 1. Karl paid a local doctor for a physical, which was required by the workmen's com pensation insurance policy carried by Crazy Mountain Sports 2. Karl received a cash advance from customers for a guided hunting trip. 3. Mila paid her dues to the YWCA. 4. Karl paid a breeder's fee for an English Springer spaniel to be used as a hunti guide dog 5. Mila deposited a $10,000 personal check in the trust fund at First Bank. 6. Karl paid for an advertisement in a hunters' magazine. 7. Mila authorized the trust fund to purchase mutual fund shares, 8. Mila donated several dresses from the store's inventory to a local charity auction the benefit of a women's abuse shelter. 9. Karl paid for dinner and a movie to celebrate the couple's fifteenth wed anniversary. 10. Mila purchased two dozen spring dresses from a Boise designer for a special spring P1-2 Missing amounts from financial statements The financial statements at the end of Paradise Realty's first month of operations are st below. PARADISE REALTY Income Statement For the Month Ended November 30, 2013 $149,300 Fees earned .. Operating expenses: Wages expense. Rent expense.. Supplies expense Utilities expense. Miscellaneous expense. Total operating expenses Net income $ (a) 14,400 12,000 8,100 4,950 (69,300) $ (b) PARADISE REALTY Statement of Stockholders' Equity For the Month Ended November 30, 2093 Common Stock Retained Earnings $ 0 $ 0 270,000 Balances, Nov. 1, 20Y3..... Issuance of common stock.. Net income.. Dividends...... Balances, Nov. 30, 20Y3.... Total $ 0 270,000 (c) (d) $314,000 (c) (d) $(e) $270,000 99 $4,377 Sosals of property and equipment Purchases of investments (marketable securities) 92,195 Net cash provided by operating activities 37496 Other net cash flows provided by investing activities 60,695 Other net cash flows used by financing activities 3.921 *adjusted for effect of exchange rate changes on cash and cash equivalents Instructions Prepare Alphabet's statement of cash flows for the year ended December 31. ? P1-5 Financial statements, including statement of cash flows Pendray Systems Corporation began operations on January 1, 2045 as an online retailer of computer software and hardware. The following financial statement data were taken from Pendray's records at the end of its first year of operations, December 31, 2015. Accounts payable $ 40,000 Accounts receivable 88,000 Cash Cash payments for operating activities 896,000 Cash receipts from operating activities 1,087,000 Common stock 120,000 Cost of sales 650,000 Dividends 90,000 Income tax expense 87,000 Income taxes payable 15,000 Interest expense 3,000 Inventories 111,000 Note payable (due in 10 years) 80,000 265,000 Property, plant, and equipment ? Retained earnings 1,175,000 Sales Selling and administrative expenses 100,000 nstructions Prepare an income statement for the year ended December 31, 20Y5. Prepare a statement of stockholders' equity for the year ended December 31, 20 - Prepare a balance sheet as of December 31, 2045. - Prepare a statement of cash flows for the year ended December 31, 20Y5. Chapter 1 The Role of Accounting in Business Business Activities Objective 2 Describe the three All companies engage in the following three business activities business activities of Financing activities to obtain the necessary funds (monies) to organise and operate financing ingesting, operating the company - Investing activities to obtain assets such as buildings and equipment to begin and operate the company Operating activities to earn revenues and profits The preceding business activities are illustrated in Exhibit Exhibit 4 Business Activities BUSINESS ACTIVITIES Business FINANCING ACTIVITIES INVESTING ACTIVITIES OPERATING ACTIVITIES Building and Equipment Contractors Banks and/or Owners Customers and Suppliers Financing Activities Financing activities involve obtaining funds to begin and operate a business. Companies obtain financing through the use of capital markets by borrowing issuing shares of ownership When a company borrows money, it incurs a liability. A liability is a legal obligation to repay the amount borrowed according to the terms of the borrowing agreement. When a company borrows from a vendor or supplier, the liability is called an account payable In such cases, the company promises to pay according to the terms set by the vendor or supplier. Most vendors and suppliers require payment within a relatively short time, such as 30 days. On a recent balance sheet Snap Inc. reported 571.2 million of accounts payable Snap Inc. Connection Chapter 1 The Role of Accounting in the A company may also borrow money buying bonde Bondare and require repayment normally with interest. The amount of the bonds, called the face long-term financing. The interest on the bed wees, is really perd scal ral, wally requires repayment several years in the future. Thus, bonds are form of Bond obligations are reported as bonda payable, and any interest that is de la poned as interest payable Many companies borrow by ning notes payable. A noite payable requires paye of the amount borrowed plus interest. Notes puyatle are similar to brode except that they may be issued on either a short term or a long term basis A company may finance its operations by using shares of ownership for Corp tion, shares of ownership are ined in the form of shares of stock. Although corporation may in a variety of different types of Mock, the basic type of sockled to owners called common stock. Investors who purchase the stock are referred to as stockholders The claims of creditors and stockholders on the acts of a corporation are different Assets are the resources owned by a corporation company). Creditors have fine claim on the company's assets. Only after the creditors claims are satisfied des the stockholders have a right to the corporate assets Creditors normally receive timely payments, which may include interest. In contra stockholders are not entitled to regular payments. However, many corporations distribute earnings to stockholders on a regular basis. These distributions of earnings to stockhold. ers are called dividends. Snap Inc. In a recent yeat. Snap Inc engaged in the financing activity of insuling stock Connection Investing Activities Investing activities involve using the company's assets to obtain additional assets to start and operate the business. Depending upon the nature of the business, a variety of different assets must be acquired Most businesses need assets such as machinery, buildings, computers, office furnish- ings, trucks, and automobiles. These assets have pluysical characteristics and as such are tangible assets. Long-term tangible assets such as machinery, buildings, and land are reported separately as property, plant, and equipment Short-term tangible assets such as cash and inventories are reported separately. A business may also need intangible assets. For example, a business may obtain pat ent rights to use in manufacturing a product. Long-term assets such as patents, goodwill, and copyrights are reported separately as intangible assets. A company may also prepay for items such as insurance or rent. Such items, which are assets until they are consumed, are reported as prepaid expenses. In addition, rights to payments from customers who purchase merchandise or services on credit are reported as accounts receivable. Snap Inc. For a recent year, Snap Inc. engaged in investing activities such as the purchasing of property and nection Operating Activities Operating activities involve using assets to earn revenues and profits. The management of a company does this by implementing one of the business strategies discussed earlier. 2. Other types of stock are discussed in Chapter 8 "Liabilities and Sockholders' Equity Chapter 1 The ole of Accounting in the Revenue is the increase in acts from selling products VI. Revenues are no mally identified according to their source. For example, even received from sing products are called sales Revenue received froen providing services are called fee warned. Inacent year Snap Inc. oported $825 million at revenue Snap Ine. Connection To eam revenue, a business incun costs, such as wages of employees, salaries of managers, rent, insurance, advertising, freight, and titles. Costs used to earn revenue are called expenses and are identified and reported in a variety of ways. For example, the cost of products sold is referred to as the cost of goods sold, cost of merchandise sold, or cost of sales. Other expenses are normally assified as either selling expenses or administrative expenses. Selling expenses include those costs directly related to the selling of a product or service. For example, selling expenses include such conts as sales salaries, sales commissions, freight, and advertising costs. Administrative expenses include other costs not directly related to the selling such as officer salaries and other costs of the corporate office. By comparing the revenues for a period to the related expenses, it can be determined whether the company has earned net income or incurred a net loss, Net Income results when revenues exceed expenses. A net loss results when expenses exceed revenues In a recent year, Snap Inc. reported loss from operations of $3.5 billion and a netom of 534 billion Snap Inc. Connection a after taxes As discussed next, the major role of accounting is to provide stakeholders with informa tion on the financing, investing, and operating activities of businesses. Financial statements are one source of such information. What Is Accounting and Its Role in Business? Objective 3 The role of accounting is to provide information about the financing, investing, and and describe its role Define accounting operating activities of a company to its stakeholders. For example, accounting provides in business information for managers to use in operating the business. In addition, accounting pro vides information to other stakeholders, such as creditors, for assessing the economic performance and condition of the company. Accounting is often called the language of business. In a general sense, accounting is defined as an information system that provides reports to stakeholders about the economic activities and condition of a business. This text focuses on accounting and its role in business. However, many of the concepts discussed also apply to individuals, governments, and not-for-profit organizations. For example, individuals must account for their hours worked, checks written, and bills paid. Stakeholders for individuals include creditors, dependents, and the government. A primary purpose of accounting is to summarize the financial performance of a busi- ness for external stakeholders, such as banks and governmental agencies. The branch of accounting that is associated with preparing reports for users external to the business is called financial accounting Accounting also can be used to guide management in making financing, investing, and operations decisions for the company. This branch of account ing is called managerial accounting. Financial and managerial accounting may overlap. For example, financial reports for external stakeholders are often used by managers in 10 Chapter 1 The Role of Accounting in Business assessing the potential impact of their decisions on the company, The head of the account ing department in a company is called comptroller or chief financial officer (CFO). a Snap Inc. Connection The interim Chief Financial Officer of Snap Inc. is Lara Sweet, who has a Bachelor of Science (85) degree in accounting from George Mason University The two major objectives of financial accounting are: To report the financial condition of a business at a point in time To report changes in the financial condition of a business over a period of time The relationship between these two financial accounting objectives is shown in Exhibit 5. Exhibit 5 Objectives of Financial Accounting Financial Condition at January 1, 2046 Change in Financial Condition for Year Ending December 31, 2016 Financial Condition at December 31, 2046 The first objective can be thought of as a still photograph (snapshot) of the company's financial (economic) condition as of a point in time. The second objective can be thought of as a moving picture (video) of the company's financial (economic) performance over time The objectives of accounting are achieved by (1) recording the economic events affect ing a business and then (2) summarizing the impact of these events on the business in financial reports, called financial statements. Complete the following assigned homework questions located in your textbook, as well as any objective exercises listed below. Upload your homework assignment as a Word Doc, Excel, or Scanned Page. Chapter 1 Homework, Questions E1-1, E1-5, E1-17, E1-27, P1-2, P1-5, EX OBJ 2, EX OBJ 3 EX OBJ 2 Question: Describe the two ways companies obtain financing through the use of Capital Markets. EX OBJ 3 Question: In your own words, explain the role of Investing Activities in a business. Item Best Quality (10 pts) Average Quality Lowest Quality No credit (7 pts) (4 pts) (Opts) Homework All problems attempted. Submission is organized and professional Answers logical and on the right track Some problems attempted. Subm ission unorganized No homework submitted Very little attempted Submission difficult to interpret