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Lecture Notes for Financial Accounting, 5th Edition

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    1 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. The Importance of Building a Framework The learning sciences promote an instructional framework to help students build a mental image of a discipline. As students are presented with each advancing topic, they are able to sort the material within this framework, and this makes learning not only easier, but more engaging. Financial Accounting by Spiceland, Thomas, and Herrmann understands the importance of helping students to build a framework. We establish a framework for financial accounting by emphasi zing three simple components: (1) M easurement of business activities, (2) C ommunication of those measurements , and (3) D ecision making by investors and others usin g the information communicated. For each topic in the book, we encourage students to ask themselves, “How is the activity measured , and how is it communicated?” Students will see topic - by - topic how business transactions are recorded and then how those measurement s are communicated in financial statements. The intent is for students to be reminded throughout the book that measurement and communication are linked processes used to tell a company’s financial story. In addition, students will be more engaged and better understand th is measurement - communication process by seeing the important decisions that people make using financial accounting information . The instructor’s manual for each chapter begins with Authors’ Perspectives on the organization of the chapter’s topics, important insights, key illustrations, teaching tips, and some common mistakes to warn students about — all with the purpose of helping you build a framework of financial accounting for your students. Here’s a quick overview of the many features that have b een developed to help your students build a framework. A more detailed discussion is provided in each chapter’s instructor’s manual. Chapter Structure  Chapter 1 – Establish a Framework . The first page of Chapter 1 dispels the misconception that financial accounting is another math class. Financial accounting is presented as “the language companies use to tell their financial story.” This story is told by measuring business activities and then communicating those measurements to decision makers. I llustrations 1 - 1 and 1 - 2, along with their discussion , develop th is framework to help students get started on the right track .  Chapters 2 and 3 – Develop the Accounting Cycle . In Chapters 2 and 3, the chapter titles, illustrations, and text discussion emphasize the measurement role of financial accounting “during the period” versus “end of the period . ” This emphasis helps students to understand the clear distinction between recording transactions during the year versus completing activities at the end of the year (adjusting entries, financial statements, and closing entries). Chapter 3 offers a wide variety of full accounting cycle assignments that directly link the measurement of activities with their communication in financial statements.  Chapters 4 - 10 – Continue the Accounting Cycle . Chapters 4 - 10 are organized in balance sheet order , allowing systematic coverage of topics . In these chapters, additional accounting cycle problems are available using more advanced topics to further reinforce the measurement - communication - decision making framework of financial accounting. You can assign accounting cycle problems that focus specifically on receivables, inventory, long - term assets, current liabilities, long - term liabilities, or equities.

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    2 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education.  Chapter 11 – Statement of Cash Flows . The statement of cash flows is presented as an extension of the information communicated in the balance sheet and income statement . Students are shown the links between these financial statements.  Chapter 12 – Financial Statement Analysis . Chapter 12 provides comparative analysis of Under Armour and Nike. We show how decision makers use financial accounting information to build ratios for comparing companies’ business strategies, operational efficiency, profitability, and risk. Under Armour and Nike were chosen because they are real - world companies that are interesting and familiar to most students. Inside the Framework  Measurement and Communication are presented as the two primary functions of financial accounting . In side the back cover , students can view a one - page illustration that summarizes the complete measurement role of financial accounting and its communication role through linked financial statements. Each topic in the book can be placed within th is general framework. S tudents can get deeper inside the framework by viewing the Chapter Highlights at the end of each chapter. These flowchart - style illustration s demonstrate how each chapter’s primary measurement and communication topics fit within the general framework of financial accounting. Also inside the back cover is a C hart of A ccounts that provides students with a complete list of accounts that they’ll use to record transactions and prepare financial statements. These are the only accounts used in the chapte rs, assignment s , test bank, and all other supplements.  Decision Making makes up the third component of the framework. One of the best ways we can motivate students to learn and enjoy accounting is to see that it has real - world relevance to decision makers . E ach chapter begins with a real - world example in an opening Feature Story to motivate the chapter’s topic. Then throughout the chapter, Decision Points and Decision Maker’s Perspectives are added to help give more meaning and insight into how financial accounting information is used by decision makers. Finally, an Analysis section is provided at the end of each chapter. In these sections, the ratios of two real companies related to that chapter’s theme are calculated and discussed . Students can see how decision makers use these ratios to understand companies’ different business strategies , profitability, and risk . Assignment Material s To give instructors the most flexibility as they develop their students’ understanding, the assignment material is arranged by advancing level of knowledge required — Brief Exercises , Exercises (A & B set), and Problems (A & B set). These assignments are available in Connect in both static and algorithmic formats. Additional assignment material further reinforce s the framework of financial accounting in unique ways , and the se additional assignments can be assigned and auto - graded in Connect .  General Ledger Assignments are accounting software - like assignments that allow students to enter transactions in the general journal and see how those measurements flow automatically through the general ledger and trial balance to build the financial statements. Many of these assignments also include an Analysis requirement, asking students to analyze the information communicated in the financial statements.

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    3 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education.  Great Adventures Continuing Case is a continuing case that can be assigned in C hapter s 1 - 12 , and it’s available in the General Ledger format. Students will build a comprehensive set of financial statements with each successive chapter . They will see how to apply the framework of financial accounting as a company evolves and grows.  Real - World Financial Analysis Cases ask students to analyze the financial statements of Buckle and American Eagle. These cases can be assigned separately for each company or comparing the two companies.  Ethics Cases and Earnings Management Cases allow s tudents to see a more complete picture of financial accounting by seeing how manage rs can manipulate the estimates and assumptions inherent in financial reporting to alter reported amounts and potentially affect the decision s of financial statement users. Video Instruction In today’s world, many students use visual learning tools, and many instructors teach in hybrid and online formats. For this reason, we continue to expand our video offerings. Each of the videos below can be assigned or simply made available to students in Connect.  Concept Overview Videos include concisely written scripts taken directly from the text . These videos are developed for each Learning Objective. In addition, knowledge check questions aligned to each video can be assigned to students. Some instructors find these useful as pre - class assignments or for use in their online classes.  Let’s Review Videos are in - chapter demonstration problems that provide an additional example of a key topic. These videos walk students through each step of the solution.  Interactive Illustration Videos help students in cases where the material in an illustration is particularly helpful if seen in an animated way. This animation helps to direct students’ attention to a certain part of the illustration while the related instruction is taking place.  Guided Example Videos are provided with Exercises and appear as hints to the student. These videos show students how to solve a similar (but different) exercise. After seeing the video, students can then apply the concepts explained to their assigned Exercise.  Applying Excel Videos show students how to solve a practice problem using Excel. Students can either go directly to the video or first try to solve the problem on their own for additional practice. Many instructors like to assign Excel - based problems in accounting but don’t have the time to teach Excel basics. These videos are meant to help students learn how to apply Excel basics to accounting problems. An Invitation from the Authors Finally, we (the authors) extend an invitation for you to contact us directly with any questions, comments, or requests for additional materials. We appreciate the dialogue we have had with many instructors over the years that have helped us to build a comprehensive set of materials that can be used to help you and your students. Sincerely, David Spiceland (dspice@memphis.edu) Wayne Thomas (wthomas@ou.edu)

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    Chapt er 01 - A Framework for Financial Accounting 1 - 1 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Chapter 1 A Framework for Financial Accounting INSTRUCTOR’S MANUAL Authors’ Perspectives P ART A: Accounting as a Measurement/Communication Process LO1 - 1 Describe the two primary functions of financial accounting. LO1 - 2 Understand the business activities that financial accounting measures. LO1 - 3 Determine how financial accounting information is communicated through financial statements. LO1 - 4 Describe the role that financial accounting plays in the decision - making process. Eliminate the Misconception – It’s important on Day 1 to change any misconception students have about financial accounting. Most students think this is going to be another math class. C hapter 1 begins by explaining that this is not the case. Financial accounting is described as “ the language companies use to tell their financial story. ” The concept of s torytelling has broad appeal across all business students. Companies tell their financial stories using financial stat ements and related disclosures.  Illustration 1 - 2 (with video) presents a simple framework students can use to visualize financial accounting. This illustration looks more like a business class than a math class. We can simplify the course by explaining to students that they will need to learn two functions of accounting over the semester : (1) how to measure business activities and (2) how to communicate those measurements. To better understand why accountants measure and communicate the way they do , students will also see how financial accounting helps investors, creditors, and others in mak ing decisions. Start Simple – The financial accounting course can be intimidating to many students, most of wh om have never had an accounting course. We can simplify the measurement - communication - decision making nature of financial accounting with the following illustrations:  Illustration 1 - 4 provides a complete list of the measurement categories students will need to know. S tudents will see many account titles throughout the semester , and this may seem overwhelming to them at first. However, we can explain that all of these accounts fall into six easy - to - learn categories (Note: hold off on introducing gains and losses until later chapters). Seeing only these six measurement categories makes the measurement function seem more attainable .  Illustration 1 - 9 (with video) provides the full set of financial statements students will need to know . More detail ed financial statements a re shown previously in Illustration 1 - 5 through 1 - 8. Seeing the full set of financial statements in a single illustration helps students realize that learning the communication role of financial accounting is

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    Chapt er 01 - A Framework for Financial Accounting 1 - 2 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. manageable .  Illustration 1 - 10 was creat ed by the Pathways Commission of the American Accounting Association. Accounting serves an impor tant role in a prosperous society by measuring economic activity and communicating useful information to help investors and creditors make good decisions. We can confidently tell our students that financial accounting matters and has relevance to the well - being of our society. PART B: Financial Accounting Information LO1 - 5 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Accounting i s a Dynamic Social Science – Many students are surprised to learn that the formal rules of financial accounting are established by a private - sector body, the Financial Accounting Standards Board. Some are also surprised to find out that separate rules have been established outside of the United States by the International Accounting Standards Board. The differen ces in stan dards between the two boards reflect the fact that accounting is a social science , unlike the formal sciences (mathematics, physics, chemistry, etc.). The rules of the formal sciences do not differ across countries (for example, in all countries, 2 + 2 = 4, and water is made up of two atoms of hydrogen and one atom of oxygen). However, t he rules of financial accounting do not exist on their own; they are developed by the society for which they exist . Differences in beliefs and economic conditions across countries can lead to differences in accounting standards and practices , as well as changes over time in the same country . Many students will find the dynamic nature of a social science like accounting far more exciting than mathematics. Intrigu ing Role of the Audit or – The description of financial accounting a s “ the language companies use to tell their financial story ” was introduced in Part A. In Part B, students are introduced briefly to the role of an independent auditor in p r oviding verification that companies are telling their story accurately. Students are highly interested in cas es of financial statement fraud , and instructor s can explain that topics covered throughout the book will demonstrate how fraud occur s . There are two types of auto - gradable assignments at the end of each chapter that can be assigned related to financial statement fraud : 1. Ethics Cases . In Part B of the text , students will see a simple four - step framework for thinking about ethical decisions related to financial re porting. In Ethics c ases at the end of the chapter, s tudents will work through this framework using a topic related to that particular chapter . All of these cases are assignable and auto - graded in Connect. 2. Earnings Management Cases . S tudents need to understand how certain assumptions and discretion available in financial accounting provide an opportunity for managers to manipulat e reported amounts. The solution s to the cases involve students understanding the financial statement effects of earnings management . All of these cases are assignable and auto - graded in Connect.

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    Chapt er 01 - A Framework for Financial Accounting 1 - 3 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. PART C: C areers in Accounting LO1 - 6 Identify career opportunities in accounting. Ca n I get a job? – This is a question on all students’ minds . Accounting tends to be one of the first business courses that students take. Many of them don’t yet know what their major will be, what they’ll like, and if they can get a job. We can capture the best students in accounting by emphasizing it has real - world relevance, strong job demand, and many different career opportunities. Part C provides a discussion of careers in accounting. T his discussion can be used to bo th inform and motivate students . This section emphasizes the broad range of job opportunities available to those earning a degree in accounting, perhaps dispelling the traditional view of accountants. It also discusses the strong demand for accounting majors.  Illustration 1 - 14 provides a convenient list of some of the typical career opportuni ties in the different areas of accounting. Instructors can point out that accounting has been one of the top majors for decades, and as businesses continue to grow in their use of information, accountants will surely be needed in the decades to come. A PPENDIX LO1 - 7 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. T he conceptual framework is discussed in the appendix. I nstructor s can cover the conceptual framework in this chapter and then refer back to it as topics in subsequent chapters are covered. Alternatively, instructor s may wish to cover the conceptual framework in conjunction with another chapter, such as Chapter 12, Financial Statement Analysis , to help in providing a summary overview of the course . Self - S tudy M aterials ■ Let’s Review — Measuring business activities (p. 8). ■ Let’s Review — Communicating through financial statements (p. 17). ■ Chapter Highlights (p. 31). ■ Key Points by Learning Objective (p. 32). ■ Glossary of Key Terms (p. 33). ■ Self - Study Questions w ith answers available (p. 34). ■ Applying Excel videos to demonstrate key topics (p. 35). ■ Videos for Let’s Review and certain illustrations.

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    Chapt er 01 - A Framework for Financial Accounting 1 - 4 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Key Points by Learning Objective Throughout the chapter, Key Points provide quick synopses of the critical pieces of information students should be understanding. These Key Points are summarized by Learning Objective at the end of the chapter, providing students with a convenient study guide . LO 1 - 1 Describe the two primary functions of financial accounting. The functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors and other outside users for decision - making purposes . LO 1 - 2 Understand the business activities that financial accounting measures. The measurement role of accounting is to create a record of the activities of a company. To make this possible, a company must maintain an accurate record of its assets, liabilities, stockholders’ equity, revenues, expenses, and dividends . LO 1 - 3 Determine how financial accounting information is communicated through financial statements. The income statement compares revenues and expenses for the current period to assess the company’s ability to earn a profit from running its operations. The statement of stockholders’ equity reports information related to changes in common stock and retained earnings each period. The change in retained earnings equals net income less dividends for the period. The balance sheet demonstrates that the company’s resources (assets) equal creditors’ claims (liabilities) plus owners’ claims (stockholders’ equity) to those resources on a particular date. The statement of cash flows reports cash transactions from operating, investing, and financing activities for the period. All transactions that affect revenues or expenses reported in the income statement ultimately affect the balance sheet through the balance in retained earnings . LO 1 - 4 Describe the role that financial accounting plays in the decision - making process . Financial accounting serves an important role by providing information useful in investment and lending decisions. No single piece of company information better explains companies’ stock price performance than does financial accounting net income. A company’s debt level is an important indicator of management’s ability to respond to business situations and the possibility of bankruptcy .

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    Chapt er 01 - A Framework for Financial Accounting 1 - 5 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. LO 1 - 5 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. The rules of financial accounting are called generally accepted accounting principles (GAAP). The Financial Accounting Standards Board (FASB) is an independent, private body that has primary responsibility for the establishment of GAAP in the United States. The primary objective of financial accounting is to provide useful information to investors and creditors in making decisions . LO 1 - 6 Identify career opportunities in accounting. Because of the high demand for accounting graduates, the wide range of job opportunities, and increasing salaries, this is a great time to obtain a degree in accounting . Appendix LO 1 - 7 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. The conceptual framework provides an underlying foundation for the development of accounting standards and interpretation of accounting information. To be useful for decision - making, accounting information should have relevance and faithful representation .

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    Chapt er 01 - A Framework for Financial Accounting 1 - 6 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. A As ss si ig gn nm me en nt t C Ch ha ar rt ts s Questions Learning Objective(s) Topic Time (Min.) 1 LO1 - 1 Define accounting 5 2 LO1 - 1 Identify decision makers 5 3 LO1 - 1 Define financial accounting 5 4 LO1 - 1 Determine the functions of accounting 5 5 LO1 - 2 Classify business activities 5 6 LO1 - 2 Determine financing activities 5 7 LO1 - 2 Determine investing activities 5 8 LO1 - 2 Determine operating activities 5 9 LO1 - 2 Distinguish legal forms of business 5 10 LO1 - 2 Define account types 5 11 LO1 - 2 Name advantages and disadvantages of the legal forms of business 5 12 LO1 - 3 Describe basic financial statements 5 13 LO1 - 3 Understand financial reporting periods 5 14 LO1 - 3 Identify revenues and expenses 5 15 LO1 - 3 Understand the accounting equation 5 16 LO1 - 3 Identify assets and liabilities 5 17 LO1 - 3 Understand the link between the income statement and balance sheet 5 18 LO1 - 3 Identify cash flows 5 19 LO1 - 3 Explain other forms of financial accounting information 5 2 0 LO1 - 4 Explain the role of accounting in society 5 21 LO1 - 5 Define GAAP 5 22 LO1 - 5 Describe the role of the FASB 5 23 LO1 - 5 Compare U.S. GAAP and IFRS 5 2 4 LO1 - 5 Understand the historical role of the securities acts 5 2 5 LO1 - 5 Describe the role of the auditor 5 26 LO1 - 5 List the three objectives of financial reporting 5 27 LO1 - 6 Understand the benefits of an accounting degree 5 2 8 LO1 - 7 Discuss relevance and faithful representation 5 2 9 LO1 - 7 Identify the components of relevance and faithful representation 5 3 0 LO1 - 7 Describe cost effectiveness 5 3 1 LO1 - 7 Define the four basic assumption underlying GAAP 5

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    Chapt er 01 - A Framework for Financial Accounting 1 - 7 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Brief Exercises Learning Objective(s) Topic Time (Min.) BE1 - 1 LO1 - 1 Define accounting 5 BE1 - 2 LO1 - 2 Identify the different types of business activities 5 BE1 - 3 LO1 - 2 Identify the different forms of business organizations 5 BE1 - 4 LO1 - 2 Recognize the different account classifications 5 BE1 - 5 LO1 - 2 Assign account classifications 5 BE1 - 6 LO1 - 2 Assign account classifications 5 BE1 - 7 LO1 - 3 Describe each financial statement 5 BE1 - 8 LO1 - 3 Determine the location of items i n financial statements 5 BE1 - 9 LO1 - 5 Identify different groups engaged in providing high - quality financial reporting 5 BE1 - 10 LO1 - 5 Identify the objectives of financial accounting 5 BE1 - 11 LO1 - 6 Identify careers for accounting majors 5 BE1 - 12 LO1 - 7 Identify the components /aspects of relevance 5 BE1 - 1 3 LO1 - 7 Identify the components /aspects of faithful representation 5 Exercises Learning Objective(s) Topic Time (Min.) E1 - 1 LO1 - 2 Identify the different types of business activities 5 E1 - 2 LO1 - 2 Identify account classifications and business activities 5 E1 - 3 LO1 - 2 Identify account classifications and business activities 5 E1 - 4 LO1 - 2 Calculate net income and stockholders’ equity 10 E1 - 5 LO1 - 2 Calculate net loss and stockholders’ equity 10 E1 - 6 LO1 - 3 Prepare an income statement 5 E1 - 7 LO1 - 3 Prepare a statement of stockholders’ equity 10 E1 - 8 LO1 - 3 Prepare a balance sheet 5 E1 - 9 LO1 - 3 Prepare a statement of cash flows 10 E1 - 10 LO1 - 3 Link the income statement to the statement of stockholders’ equity 15 E1 - 11 LO1 - 3 Link the statement of stockholders’ equity to the balance sheet 15 E1 - 12 LO1 - 3 Link the balance sheet to the statement of cash flows 15 E1 - 1 3 LO1 - 3 Comput e missing amounts from financial statements 10 E1 - 1 4 LO1 - 3 Calculate the balance of retained earnings 5 E1 - 1 5 LO1 - 3 Calculate amounts related to the balance of retained earnings 10

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    Chapt er 01 - A Framework for Financial Accounting 1 - 8 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. E1 - 16 LO1 - 3 Use the accounting equation to calculate amounts related to the balance sheet 10 E1 - 1 7 LO1 - 3 Calculate missing amounts related to the statement of cash flows 10 E1 - 18 LO1 - 5 Understand the role of the auditor E1 - 1 9 LO1 - 7 Identify the purpose of qualitative characteristics 10 E1 - 20 LO1 - 7 Identify business assumptions underlying GAAP 5 Problems Learning Objective(s) Topic Time (Min.) P1 - 1 A LO1 - 2 Classify business activities 10 P1 - 2 A LO1 - 2 Assign account classifications 10 P1 - 3 A LO1 - 3 Prepare financial statements 20 P1 - 4 A LO1 - 3 Understand the format of financial statements and the link s among them 25 P1 - 5 A LO1 - 3 Prepare financial statements 20 P1 - 6 A LO1 - 7 Identify underlying assumptions of GAAP 15 P1 - 7 A LO1 - 7 Understand the components of the FASB’s conceptual framework 10 P 1 - 1 B LO1 - 2 Classify business activities 10 P1 - 2 B LO1 - 2 Assign account classifications 10 P1 - 3 B LO1 - 3 Prepare financial statements 20 P1 - 4 B LO1 - 3 Understand the format of financial statements and the link among them 25 P1 - 5 B LO1 - 3 Prepare financial statements 20 P1 - 6 B LO1 - 7 Identify underlying assumptions of GAAP 15 P1 - 7 B LO1 - 7 Understand the components of the FASB’s conceptual framework 10 Additional Perspectives Topic Time (Min.) AP1 - 1 Continuing Problem: Great Adventures 20 AP1 - 2 Financial Analysis: American Eagle Outfitters, Inc. 15 AP1 - 3 Financial Analysis: The Buckle, Inc. 15 AP1 - 4 Comparative Analysis: American Eagle Outfitters, Inc. vs. The Buckle, Inc. 20 AP1 - 5 Ethics 20 AP1 - 6 Internet Research 30 AP1 - 7 Written Communication 25

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    Chapt er 01 - A Framework for Financial Accounting 1 - 9 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Alternate Let’s Review On December 31, Wortham Services reports the following year - end amounts. Assets : Cash $11,000 Revenues : Service $85,000 Acc oun ts rec eivable 19,000 Buildings 32,000 Expenses : Advertising 12,000 Liabilities : Salaries payable 5,000 Insurance 18,000 Notes payable 20,000 Salaries 44,000 Additional information: a. The balance of retained earnings at the beginning of the year is $6,000. b. The company pays dividends of $5,000 on December 31. c. Common stock is $20,000 at the beginning of the year, and $5,000 of additional shares are issued during the year. Required: Prepare the (1) income statement, (2) statement of stockholders’ equity, and (3) balance sheet. Solution : 1. Income statement: 2. Statement of stockholders’ equity: Wortham Services Income Statement Year ended Dec. 31 Wortham Services Statement of Stockholders’ Equity Year ended Dec. 31 Service revenue $85,000 Common Stock Retained Earnings Less: Beginning $20,000 $ 6,000 Adv ertis . expense (12,000) New issuances 5,000 Ins urance expense (18,000) Net income 11,000 Salaries expense (44,000) Less: Dividends (5,000) Net Income $ 11,000 Ending $25,000 $12,000 3. Balance sheet: Wortham Services Balance Sheet December 31 Assets Liabilities Cash $11,000 Salaries p ayable $ 5,000 Acc ounts r ec eivable 19,000 Notes payable 20,000 Building s 32,000 Stockholders’ Equity Common s tock 25,000 Retained e arnings 12,000 Total assets $62,000 Total liabilities and equity $62,000

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    Chapt er 01 - A Framework for Financial Accounting 1 - 10 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Common Mistakes Common Mistakes made by students are highlighted in each of the chapters. With greater awareness of the potential pitfalls, student s can avoid making the same mistakes and gain a deeper understanding of the chapter material. Common Mistake Dividends represent the payment of cash but are not considered an expense in running the business. Students sometimes mistakenly include the amount of dividends as an expense in the income statement, rather than as a distribution of net income in the statement of stockholders’ equity.

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    Chapt er 01 - A Framework for Financial Accounting 1 - 11 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Decision Points and Decision Maker’s Perspectives Decision Points and Decision Maker’s Perspectives are provide d throughout each chapter to give insight into how measurement and communication of financial accounting information help decision makers. Decision Points Question Accounting Information Analysis How can I tell if a company is profitable? Income statement If revenues exceed expenses, a company has net income and is profitable. Question Accounting Information Analysis Was the change in stockholders’ equity the result of external or internal sources ? S tatement of stockholders’ equity When a company sells common stock, equity increases due to external sources. When a company has profits during the year in excess of dividends paid, equity increases due to internal sources . Question Accounting Information Analysis What are creditors’ claims and owners’ claims to the company’s resources ? Balance sheet The amount of total liabilities equals creditors’ claims to the company’s resources. The extent to which total assets exceed total liabilities represents owners’ claims. Decision Maker’s Perspective The statement of cash flows can be an important source of information to investors and creditors. For example investors use the relationship between net income (revenues minus expenses) and operating cash flows (cash flows from revenue and expense activities) to fore - cast a company’s future profitability. Creditors compare operating cash flows and investing cash flows to assess a company’s ability to repay debt. Financing activities provide informa - tion to investors and creditors about the mix of external financing of the company.

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    Chapt er 01 - A Framework for Financial Accounting 1 - 12 Copyright © 201 9 McGraw - Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw - Hill Education. Ethic al Dilemma You have been the manager of a local restaurant for the past five years. Because of increased competition, you notice you’re getting fewer customers. Despite all your attempts to attract new customers and cut costs, the restaurant’s p rofitability continues to decline. The restaurant owner tells you that if this year’s profit is lower than last year’s, you’ll lose your job. When preparing financial statements at the end of the year, you notice that this year’s profit is lower. You know that by purpose ly understating certain expenses, you can falsely report higher profits to the owner for this year. That will allow you to keep your job for at least one more year and look for a new job in the meantime. What should you do? What if you really believe the lower profitability is caused by factors outside your control? Would this make the false reporting acceptable? Key Issues  Reporting higher profit makes the restaurant’s operations seem more profitable, signaling better managerial performance.  Self - preservation (keeping your job) vs. honesty (accurate reporting)  Managing expectations — justifying why performance is truly declining Option 1 : Do not understate expenses  The actions we take depict the type of person we are , not whom we hope to be. You may believe other causes besides your performance dr o ve the decline in performance, but that should not be an excuse to lie and manipulate your boss.  A strong likelihood exists that the understatement of expenses will eventually be detected (by auditors, owner, employees, etc.).  If caught, the ability to maintain employment with this restaurant or anywhere else will be a challenge.  The best defense of your job is to prepare the financial statements accurately and present a thorough analysis to the restaurant owner regarding what you see as the true cause of the decline in performance. A proactive approach with possible solutions to the problem would be well received by a competent owner. Option 2 : Understate expenses  As t he decline in performance is not your fault , you may decide that f alsifying the financial statements will allow you time to either explain to the owner why performance has declined or to look for another job.  It does not seem fair to be punished for things outside your control. You shouldn’t have to lose your job just because the restaurant is not doing as well as it used to.

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