1. Accounting as a Form of Communication
Chapter 1
Accounting as a Form of Communication
Financial Accounting. Alternate 4e by Porter and Norton 1 1

2. Decisions Made with Financial Information
Add new
product line??
Invest??
Build new plant??
Borrow $$??
Loan $$??
Extend credit $$??
Start new business??
Sell stocks or bonds?? 2 2

3. What is Accounting? Identifying Economic to Information Measuring
various
users
Measuring
Communicating

4. Internal and External Users of Accounting Information
Creditors
Current
and
Potential
Owners
Government
Agencies
Suppliers
Trade
Organizations
Financial
Analysts
Banks
Internal
Users -
Management 12 12

5. The Accounting Equation
Assets = Liabilities + Owners’ Equity
(or Stockholders' Equity)
Creditors'
Claims
to Assets
Owners'
Economic
Resources = +
Accounts payable
Notes payable
Capital stock
Retained earnings
Examples:
Cash
Accounts receivable
Inventory 14 14

6. = + Balance Sheet - snapshot of financial position Liabilities Assets
Owners’ Equity
(or Stockholders' Equity)
Stock
Certificate 15 15

7. Winnebago Industries, Inc. Consolidated Balance Sheets
A = L + SE
Winnebago Industries, Inc. Consolidated Balance Sheets
Assets August 31, August 25, 2001 A
Current assets:
Cash and cash equivalents $ 42,225 $102,280
Receivables, less allow. for doubtful accts.
($120 and $244, respectively) , ,571
Dealer financing receivables, less allow. for
doubtful accts ($96 and $117, respectively) , ,263
Inventories 113, ,815
Prepaid expenses , ,604
Deferred income taxes , ,723
Total current assets , ,256
Property, plant and equipment, net , ,536
Investment in life insurance , ,223
Deferred income taxes , ,495
Other assets , ,412
$337, $351,922

8. Winnebago Industries, Inc. Consolidated Balance Sheets
A = L + SE
Winnebago Industries, Inc. Consolidated Balance Sheets
Liabilities and Stockholders' Equity
August 31, August 25, 2001
= L
Current liabilities:
Accounts payable, trade $ 44,230 $ 40,678
Income taxes payable 2, ,938
Accrued expenses 41, ,392
Total current liabilities 88, ,008
Postretirement health care and deferred
compensation benefits 68, ,450
+ SE
Stockholders' equity:
Capital stock common 12, ,943
Additional paid-in capital 25, ,261
Reinvested earnings , ,139
323, ,343
Less treasury stock, at cost , ,879
Total stockholders' equity , ,464 8
$337, $351,922

9. Income Statement
Revenues $$$
Less: Expenses ($$)
Net income $$ 16 16

10. Winnebago Industries, Inc. Consolidated Statements of Operations
August 31, August 25, 2001
Revenues - Expenses = Net Income
Revenues
Net revenues $ 828,403 $ 675,927
Cost of manf. products , ,561
Gross profit 119, ,966
Selling, general and administrative
expenses 38, ,892
Operating income 81, ,474
Financial income , ,754
Income before income taxes 84, ,228
Provision for taxes 29, ,474
Change in acctg. principle, net (1,050)
Net Income $ 54,671 $ 42,704
Expenses
Expenses
Revenues
Expenses

11. Statement of Retained Earnings
Beginning retained earnings $$$
Add: Net income for the period $$
Deduct: Dividends for the period ($$)
= Ending retained earnings $$$ 11 17 17

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

13. Relationships among Financial Statements – Winnebago Industries Example
Income Statement for 2002
Revenues $ xxx
Less: Expenses xxx
Net income $ 54,671
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
Balance Sheets
Total assets $ xxx $ xxx
Liabilities xxx xxx
Capital stock xxx xxx
Retained earnings , ,139
Total liabilities & stockholders' equity $ xxx $ xxx

14. Financial Statement Assumptions
Economic
Entity
Cost
Principle
Time
Period
Going
Concern
Monetary
Unit 20 20

15. 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
Business
Books &
Records
Owners’
Books &
Records 21 21

16. Cost Principle Record assets at cost paid to acquire them
Continue to value assets at historical cost until sold
More objective than market value 22 22

17. Going Concern
Assume business will continue indefinitely into the foreseeable future
Justifies use of historical cost 23 23

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 24 24

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 25 25

20. The Rules of the Game The rules GAAP The rule makers FASB
The rule enforcers
The CPA regulators
GAAP
FASB
SEC
AICPA 26 26

21. Where Accountants Work
Private Business
Nonbusiness Entities
Public Accounting
auditing
tax services
management consulting
Educational Institutions 27 27

22. Ethical Dilemmas

23. Ethics Decision-Making Model
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
Recognize dilemma
Identify interested parties
List alternatives
Select best alternative

24. Ethics Decision-Making Model
For each group (management, shareholders, investors, auditor, creditors, employees), identify potential:
Benefits
Harm
Rights / claims
Conflicting interests
Responsibilities
Recognize dilemma
Identify interested parties
List alternatives
Select best alternative

25. Ethics Decision-Making Model
Recognize dilemma
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?
Identify interested parties
List alternatives and evaluate
Select best alternative

26. Ethics Decision-Making Model
Recognize dilemma
Which alternative best provides decision makers with:
The most relevant info?
The most reliable info?
The most accurate info?
The most neutral info?
Identify interested parties
List alternatives and evaluate
Select best alternative

27. End of Chapter 1