Bus.312 Financial Accounting
Dr. Ahiarah
Your Name:___________________________
Date Submitted:________________________
STRUCTURED QUESTIONS TO BE ANSWERED FROM Chapter 02 Animated Chapter Presentation
(Except As Otherwise Directed) Please submit by class date, but no later than 02/07/2011
Expect To Reap What You Sow In The Course, i.e., What you will get out of it will depend on what you
put into it; this will be the case regardless of where you take this course.
The following are learning objectives specified for this stage of your accounting lessons. They are akin to
key landmarks in this section of the ‘strange’ landscape of accounting that you are trying to get acquainted
with. They are listed to show you that the work you are asked to do relates to course learning expectations.
4.Understand basic Financial Accounting vocabulary (terms and concepts), including, for example, asset, liability, owner's
equity, capital, revenue, expense, income/loss, etc. In addition, be able to distinguish between their correct or erroneous use(s) (in
multiple-choice scenarios, for example). (SUNY Mobility Business Transfer Guide (SMP-BTG) Learning Outcome #2:
Understanding of general accounting concepts and processes)
5.Demonstrate familiarity with some of the underlying theories, logic or operative rules, of the Financial Accounting language,
such as, the conceptual framework (including US-GAAP and/or IASB-IFRS), the basic accounting model, and valid variables
(accountable events) that impact and change the model, and how.
6.Diagrammatically iIllustrate the basic components of a Financial Accounting Information System (FAIS) model, and Identify
its typical (financial statement) outputs. Be able to classify accounts, in say, a disorganized list, into their proper financial
statement types and/or categories, when requested. (SMP-BTG Learning Outcome #1: Understanding of basic financial
statements, their nature, purposes and uses by business decision makers. SMP-BTG: Learning Outcome #4: Ability to
construct balance sheet, income statement and statement of equity for an economic entity)
3.01 Income St. and B/Sh
3.02 Statement of Equity
3.03 Cash Flow Statement
3.04 Other Elements of the Annual Report
13.01 Accounting elements of annual report (See also
Annual Report Walkthrough)
2.01: Financial Statements And US-GAAP
2.02: The FASB and Fin. Accounting Standards
2.03: Govt. Oversight of Accounting and Auditing
2.04: IASB and IFRSs*
12.01 Objectives of fin. statement analysis
12.02 Sources of company information
12.03 Calculation and interpretation of financial ratios
Answer each question clearly and responsively. You may use a separate sheet and answer in the order of
the questions, or answer each question directly below it expanding the workspace as necessary. Do not
write one-liners (unless verbatim from the referenced material) as the one-liners might not demonstrate the
best effort expected and that you are capable of. One-liners and unresponsive answers will not earn full
marks. ALL RESPONSES MUST BE TYPED OR WORD-PROCESSED; HAND-WRITTEN WORK
WILL NOT BE ACCEPTED OR GRADED. You may submit your work electronically.
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A
A Further
Further Look
Look At
At Financial
Financial Statements
Statements
The Classified
Balance Sheet
Current assets
LongLong-term
investments
Property, plant, and
equipment
Intangible assets
Current liabilities
LongLong-term liabilities
Stockholders’
Stockholders’ equity
Using the Financial
Statements
Ratio analysis
Using the income
statement
Using the statement of
stockholders’
stockholders’ equity
Using a classified
balance sheet
Using the statement of
cash flows
Chapter
2-4
Financial Reporting
Concepts
The standardstandard-setting
environment
Characteristics of
useful information
Assumptions and
principles
Constraints
FIGURE 2-4
________________________
In Chapter 1 we introduced the four financial statements which are the outputs of the financial accounting
process. In this section we review the financial statements, and present tools that are useful for evaluating
them so that we can better grasp their information content. Unless otherwise indicated, the following
questions are to be answered based on Best Buy Co. Inc.’s financial statements: Income Statement
(Illustration 2-10); Statement of Stockholders’ Equity (Illustration 2-12); Balance Sheet (Illustration 2-13);
and Statement of Cash Flows (Illustration 2-17). These illustrations come later in the presentation, but they
are also in chapter 2 in the text. We begin by introducing the classified balance sheet. A classified
balance sheet groups together similar assets and similar liabilities, using a number of standard
classifications and sections as indicated in Figure 2-4, above.
(1) From the presentation or chapter 2, in the text, define: (i) Current assets, (ii) Operating cycle, (iii) Longterm investments, (iv) Property, Plant and Equipment, (v) Intangible assets, (vi) Current liabilities, (vii)
Long-term liabilities, (vii) Stockholders’ Equity—Common stock, Retained Earnings. (8 points)
(2) On March 3, 2007 (Illustration 2-13), what was the dollar amount of Best Buy’s:
(i) Total Current Assets,
(ii) Net Property and equipment,
(iii) Total Current Liabilities,
(iv) Total Long-term Liabilities,
(v) Total Stockholders’ Equity?
(vi) Write Best Buy company's balance sheet equation as of March 3, 2007, by filling in the dollar
amounts for each of these elements: Assets = Liabilities + Stockholders’ Equity. (6 points)
(3) For the fiscal year ended March 3, 2007 (Illustration 2-10), what was the dollar amount of, (i-a) net
income, or (i-b) net loss that the Company reported. Comment on the change in Net Sales versus the
change in net income in the two-year period reported. (3 points)
(4) For the fiscal year ended March 3, 2007 (Illustration 2-17) what were the dollar amounts of,
(a) Net Cash Inflow from OPERATING ACTIVITIES,
(b) Net Cash Outflow for INVESTING ACTIVITIES, and
(c) Net Cash Inflow from FINANCING ACTIVITIES.
(d) Calculate Best Buy Co’s FREE CASH FLOW for the fiscal year ended March 3, 2007, as shown in the presentation
(e) Would you feel better about a company’s health if you knew that most of its cash was generated by
operating its business rather than by selling its operating assets or by borrowing cash from lenders? (5
points)
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USING FINANCIAL STATEMENTS: Analyzing and Interpreting
Common-size, percentage analysis (graphical and tabular formats)
Ratio Analysis: Profitability, Liquidity and Solvency
The instructor will present full Analysis of Rainbow Paint Co.’s Financial Statements in the second class
SET OF STANDARDS AND RULES RECOGNIZED AS A GENERAL GUIDE FOR FINANCIAL
REPORTING: How does Best Buy decide on the type of financial information to disclose? What
format should it use? How should it measure assets, liabilities, revenues, and expenses? The answers
are found in a set of rules and practices having substantial authoritative support, referred to as
generally accepted accounting principles (US-GAAP). Various standard-setting bodies, in
consultation with the accounting profession and the business community, determine these guidelines:
The Securities and Exchange Commission (SEC) is the agency of the U.S. government
that oversees U.S. financial markets and accounting standard-setting bodies.
The Public Company Accounting Oversight Board (PCAOB) determines auditing
standards and reviews auditing firms.
The Financial Accounting Standards Board (FASB) is the primary accounting standardsetting body in the United States.
The International Accounting Standards Board (IASB) issues standards (IFRS) that
have been adopted by many countries outside of the United States. The FASB and IASB
have worked closely to try to minimize the differences in their standards. Recently the
SEC announced that foreign companies that wish to have their shares traded on U.S.
stock exchanges will no longer have to prepare reports that conform with U.S.
accounting standards, as long as their reports conform with international accounting
standards. Also, the SEC proposed that it will allow some U.S companies to adopt IFRS
as early as 2009. The SEC also laid out a roadmap by which all U.S. companies will be
required to switch to IFRS by 2016. The adoption of IFRS by U.S. companies would make
it easier for investors to compare U.S. and foreign companies, as well as for U.S.
companies to raise capital in international markets.
5. The Conceptual Framework for Financial Accounting consists of:
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A.
B.
C.
D.
E.
F.
Ability to easily evaluate one company’s results relative to another’s.
Belief that a company will continue to operate for the foreseeable future.
The judgment concerning whether an item is large enough to matter to decision makers.
The reporting of all information that would make a difference to financial statement users.
The practice of preparing financial statements at regular intervals.
The quality of information that indicates the information makes a difference in a decision.
G. A belief that items should be reported on the balance sheet at the price that was paid to acquire the item.
H.
I.
J.
K.
L.
A company’s use of the same accounting principles and methods from year to year.
The use of accounting methods that do not overstate assets or income.
Tracing accounting events to particular companies.
The desire to minimize errors and bias in financial statements.
Reporting only those things that can be measured in dollars.
M. What is the primary criterion by which accounting information can be judged?
a. Consistency.
b. Predictive value.
c. Usefulness for decision making.
d. Comparability
(13 points for 5a-m)
THIS IS THE END OF THE STRUCTURED QUESTIONS TO WHICH YOU ARE EXPECTED TO
RESPOND IN CHAPTER 2. BELOW ARE NOTES AND AMPLIFICATIONS FOR YOUR FURTHER
ENLIGHTENMENT
In 2008, the Securities and Exchange Commission issued a preliminary "roadmap" that may lead the U.S. to abandon
Generally Accepted Accounting Principles in the future (to be determined in 2011), and to join more than 100
countries around the world instead in using the London-based International Financial Reporting Standards.[1] As of
2010, the convergence project was underway with the FASB meeting routinely with the IASB.[6]
Basic objectives
Financial reporting should provide information that is:

useful to present to potential investors and creditors and other users in making rational investment, credit,
and other financial decisions.
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

helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and
uncertainty of prospective cash receipts.
about economic resources, the claims to those resources, and the changes in them.
Basic concepts
To achieve basic objectives and implement fundamental qualities GAAP has four basic assumptions, four basic
principles, and four basic constraints.
Assumptions




Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenue and expense
should be kept separate from personal expenses.
Going Concern: assumes that the business will be in operation indefinitely. This validates the methods of asset
capitalization, depreciation, and amortization. Only when liquidation is certain this assumption is not applicable.
Monetary Unit principle: assumes a stable currency is going to be the unit of record. The FASB accepts the nominal
value of the US Dollar as the monetary unit of record unadjusted for inflation.
The Time-period principle implies that the economic activities of an enterprise can be divided into artificial time
periods.
Principles




Cost principle requires companies to account and report based on acquisition costs rather than fair market value for
most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide
subjective and potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most
debts and securities are now reported at market values.
Revenue principle requires companies to record when revenue is (1) realized or realizable and (2) earned, not when
cash is received. This way of accounting is called accrual basis accounting.
Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are
recognized not when the work is performed, or when a product is produced, but when the work or the product actually
makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as
expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater
evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost
of Goods Sold are good examples of application of this principle.
Disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as a
larger amount of information costs more to prepare and use. Information disclosed should be enough to make a
judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes
or as supplementary information
Constraints




Objectivity principle: the company financial statements provided by the accountants should be based on objective
evidence.
Materiality principle: the significance of an item should be considered when it is reported. An item is considered
significant when it would affect the decision of a reasonable individual.
Consistency principle: It means that the company uses the same accounting principles and methods from year to year.
Prudence principle: when choosing between two solutions, the one that will be least likely to overstate assets and
income should be picked (see convention of conservatism).
Required Departures from GAAP
Under the AICPA's Code of Professional Ethics under Rule 203 - Accounting Principles, a member must depart from GAAP if
following it would lead to a material misstatement on the financial statements, or otherwise be misleading. In the departure the
member must disclose, if practical, the reasons why compliance with the accounting principle would result in a misleading
financial statement. Under Rule 203-1-Departures from Established Accounting Principles, the departures are rare, and usually
take place when there is new legislation, the evolution of new forms of business transactions, an unusual degree of materiality, or
the existence of conflicting industry practices.[7]
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Read more: http://www.answers.com/topic/generally-accepted-accounting-principles-united-states#ixzz1Byu2X8tz