Week 1 CNOW Assignment

1. MP.PREPARING.FINANCIAL.STMTS-BASIC1.00

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Mastery Problem: Preparing Basic Financial Statements Accounting Concepts

Should we buy stock in a company? Should we extend a line of credit to a company? Should we continue with current operations or change how we do business? These are the types of questions stakeholders ask themselves. Stakeholders require useful accounting information in order to make accurate financial decisions. In accordance with a generally accepted accounting principles (GAAP),a company’s financial statement must contain accurate accounting information and is used in financial reporting.

How do you know whether accounting information is useful? Review each of the accounting concepts below that describe the qualitative characteristics of accounting information.

Business entity concept Cost concept Going concern concept Matching concept

Objectivity concept Unit of measure concept Adequate disclosure concept Accounting period concept

In each of the following scenarios, which accounting concept is being violated?

1. A major explosion at your company’s main production facility caused a two-month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low. Adequate disclosure concept

2. Because of recent technological breakthroughs in your company’s main product, the selling price has increased and the accountants have increased the value of the company’s inventory. Objectivity concept

3. The accountants at your company have decided to state the financial statements in euros because the company does a lot of business in Italy. Unit of measure concept

4. Your company’s monthly income statement shows the highest monthly revenue earned this year (in

July) compared to the highest amount paid for each expense so far this year. Matching concept

5. Your company recently filed for bankruptcy. Going concern concept

6. Building construction costs have skyrocketed in your area, making your company’s building significantly more valuable, so the accounting records have been updated to reflect the estimated selling price for this asset. Cost concept

7. Most of your company’s sales occur in the fall, so a summary income statement was issued for

Spring-Summer of the current year. Accounting period concept

8. A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company’s financial statements. Business entity concept

Feedback

Hover over each qualitative characteristic to determine the best fit for each question.

1. Adequate disclosure concept: A major explosion at your company’s main production facility caused a two-month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low.

2. Objectivity concept: Because of recent technological breakthroughs in your company’s main product, the selling price has increased and the accountants have increased the value of the company’s inventory.

3. Unit of measure concept: The accountants at your company have decided to state the financial statements in euros because the company does a lot of business in Italy.

4. Matching concept: Your company’s monthly income statement shows the highest monthly revenue earned this year (in July) compared to the highest amount paid for each expense so far this year.

5. Going concern concept: Your company recently filed for bankruptcy.

6. Cost concept: Building construction costs have skyrocketed in your area, making your company’s building significantly more valuable, so the accounting records have been updated to reflect the estimated selling price for this asset.

7. Accounting period concept: Most of your company’s sales occur in the fall, so a summary income statement was issued for Spring-Summer of the current year.

8. Business entity concept: A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company’s financial statements.

The financial statements

Financial statements are the primary source of a company’s accounting information. Open each financial statement for more information, and decide which statement would work best for each of the given scenarios.

Desired Action Financial Statement

1. Compare revenues with expenses and analyze profitability Income Statement

2. Analyze how much cash was spent on investing activities Statement of Cash F

3. Compare stockholders’ equity at the beginning of the period with stockholders’ equity at Statement of Stockh the end of the period Equity

5. See a snapshot of a company’s financial position at a given point in time Balance Sheet

Feedback

Hover of the definition of each financial statement to determine the best fit for each desired action.

The desired actions would each require a particular financial statement, as follows. For more information, reference the definition of each financial statement, above.

1. “Compare revenues with expenses and analyze profitability” requires an income statement;

2. “Analyze how much cash was spent on investing activities” requires a statement of cash flows;

3. “Compare owner’s equity at the beginning of the period with owner’s equity at the end of the period” requires a statement of owner’s equity;

4. “See a snapshot of a company’s financial position at a given point in time” requires a balance sheet.

APPLY THE CONCEPTS: Construct the income statement

When constructing the income statement, it is important to understand that the income statement reports the revenues and expenses for a period of time, based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses.

The excess of the revenue over the expenses is called net income or net profit.

Pleasant Co. has compiled the following account balances from its general ledger on July 31, 20Y8 (the last day of its fiscal year).

Use the information given to create Pleasant Co.’s annual financial statements. Construct Pleasant’s income statement for 20Y8.

Pleasant Co.

From the balances above, select the appropriate revenue and expense items, and compute the appropriate subtotals.

Pleasant Co.’s income statement accounts shown in the list of balances are Fees earned, Service revenue, Advertising expense, Interest expense, Rent expense, Utilities expense, and Wages expense. Enter the given values related to all company revenue and expense activities. The company generated $85,130 in net income.

APPLY THE CONCEPTS: Construct the Statement of Stockholders' Equity.

The statement of stockholders' equity shows the change in statement of stockholders' equity as a result of net income and any dividends. It also serves as an important link between the income statement and the balance sheet in that it translates the effects of net income into an updated number for statement of stockholders' equity. Construct Pleasant’s statement of stockholders' equity for 20Y8.

Pleasant Co.

Hover over the statement of stockholders' equity definition in the earlier step to review the construction of this statement. Remember that Net Income or Net Loss from the statement in the prior step is the linking value between these two statements.

The statement of stockholders’ equity reports the changes in financial condition due to changes in stockholders’ equity for a period. There was no change in common stock during the year. During 20Y8, the company generated a net income of $85,130 (demonstrated above), and paid $47,120 in dividends.

APPLY THE CONCEPTS: Construct the balance sheet

The balance sheet, also known as the statement of financial position, shows the company’s assets and the claims against those assets in the form of liabilities and stockholders' equity. Unlike financial statements that display financial performance over a given interval of time, the balance sheet is a

snapshot of a financial position at a given point in time.

Construct Pleasant’s balance sheet in account form for 20Y8.

Pleasant Co.

$

Total assets

Liabilities

s' equity

Feedback

Select the appropriate asset and liability values from the list of account balances in the earlier step.

Remember that the updated Capital balance from the previous statement is the key value in linking these two statements together.

Also recall the basic Accounting equation:

A = L + E

The table of account balances gives you the amount to enter for most of the entries. Common stock $186,481 and retained earnings $314,570 are carried forward from the Statement of Stockholders' Equity.

Feedback Correct

1 Accounting Concepts

Should we buy stock in a company? Should we extend a line of credit to a company? Should we continue with current operations or change how we do business? These are the types of questions stakeholders ask themselves. Stakeholders require useful accounting information in order to make accurate financial decisions. In accordance with a generally accepted accounting principles (GAAP),a company’s financial statement must contain accurate accounting information and is used in financial reporting.

How do you know whether accounting information is useful? Review each of the accounting concepts below that describe the qualitative characteristics of accounting information.

Business entity concept Cost concept Going concern concept Matching concept

Objectivity concept Unit of measure concept Adequate disclosure concept Accounting period concept

In each of the following scenarios, which accounting concept is being violated?

1. A major explosion at your company’s main production facility caused a two-month stoppage of operations during a busy time of year. It went unreported because the accountant said its dollar effect was too low. Adequate disclosure concept

2. Because of recent technological breakthroughs in your company’s main product, the selling price

has increased and the accountants have increased the value of the company’s inventory. Objectivity concept

3. The accountants at your company have decided to state the financial statements in euros because the company does a lot of business in Italy. Unit of measure concept

4. Your company’s monthly income statement shows the highest monthly revenue earned this year

(in July) compared to the highest amount paid for each expense so far this year. Matching

concept

5. Your company recently filed for bankruptcy. Going concern concept

6. Building construction costs have skyrocketed in your area, making your company’s building significantly more valuable, so the accounting records have been updated to reflect the estimated selling price for this asset. Cost concept

7. Most of your company’s sales occur in the fall, so a summary income statement was issued for

Spring-Summer of the current year. Accounting period concept

8. A completely separate company from the one with which you are concerned may not make it through the year. This information was included in your company’s financial statements. Business

entity concept

The financial statements

Financial statements are the primary source of a company’s accounting information. Open each financial statement for more information, and decide which statement would work best for each of the given scenarios.

Types of Financial Statements

Income statement Statement of stockholders' equity

Balance sheet Statement of cash flows

2

Desired Action Financial Statemen

1. Compare revenues with expenses and analyze profitability Income Statement

2. Analyze how much cash was spent on investing activities Statement of Cash

3. Compare stockholders’ equity at the beginning of the period with stockholders’ equity at Statement of Stock the end of the period Equity

5. See a snapshot of a company’s financial position at a given point in time Balance Sheet

3 APPLY THE CONCEPTS: Construct the income statement

When constructing the income statement, it is important to understand that the income statement reports the revenues and expenses for a period of time, based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses. The excess of the revenue over the expenses is called net income or net profit.

Pleasant Co. has compiled the following account balances from its general ledger on July 31, 20Y8 (the last day of its fiscal year).

+ Account balances

Account Amount

Cash

Accounts receivable

Supplies

Prepaid insurance

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