Introductory Accounting MGMT 20000
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MGMT 200 INTRODUCTORY FINANCIAL ACCOUNTING Chapter 2 Financial Statements Objectives of financial reporting Qualitative characteristics of useful information The financial statements reexamined Ratio analysis The Conceptual Framework FASB Objectives of Financial Reporting Elements of Financial Statements Qualitative characteristics of Accounting information Usefulness characteristics Assumptions Principles Constraints Primary Objective The primary objective of external financial reporting is to provide useful economic information about a business to help external parties make sound financial decisions Qualitative Characteristics Understandability Relevance and Reliability Comparability and Consistency Materiality and Conservatism Elements of Financial Statements Asset Liability Stockholders Equity Revenue Expense Gain Loss The Operatinq Cycle The operating cycle Pay suppliers for goods sell goods to customers collect cash from customers mpact of the operating cycle on the balance sheet and income statement The Balance Sheet Reexamined Assets in order of liquidity decreasing Liabilities in order of maturity Classified separate subtotals for Current assets and current liabilities Stockholders Equity Contributed capital and retained earnings Comparative data two years current year and prior year Consolidated Balance Sheet PepsiCo Inc and Subsidiaries in millions except per share amounts ASSETS Current Assets Inventories Goodwill Other Assets December 27 2008 and December 29 2007 2008 2007 Cash and cash equivalents 2064 910 Shortterm investments 213 1571 Accounts and notes receivable net 4683 4389 2522 2290 Prepaid expenses and other current assets 1324 991 Total Current Assets 10806 10151 Property Plant and Equipment net 11663 11228 Amortizable Intangible Assets net 732 796 5124 5169 Other nonamortizable intangible assets 1128 1248 Nonamortizable Intangible Assets 6252 6417 Investments in Noncontrolled Affiliates 3883 4354 2658 1682 35994 34628 Total Assets Current Liabilities Other Liabilities Retained earnings December 27 2008 and December 29 2007 2008 2007 LIABILITIES AND SHAREHOLDERS EQUITY Shortterm obligations 369 Accounts payable and other current liabilities 8273 7602 Income taxes payable 145 151 Total Current Liabilities 8787 7753 LongTerm Debt Obligations 7858 4203 7017 4792 Deferred Income Taxes 226 646 Total Liabilities 23888 17394 Commitments and Contingencies Preferred Stock no par value 41 41 Repurchased Preferred Stock 138 132 Common Shareholders Equity Common stock par value 1 23 per share Authorized 3600 shares issued 1782 shares 30 30 Capital in excess of par value 351 450 30638 28184 Accumulated other comprehensive loss 4694 952 Repurchased common stock at cost 229 and 177 shares respectivelv 14122 10387 Total Common Shareholders Equity 12203 17325 Total Liabilities and Shareholders Equity 35994 34628 Exercise 22 Classification of Assets and Liabilities Indicate the appropriate classification of each of the following as a current asset CA noncurrent asset NCA current liability CL or longterm liability LTL Inventory Accounts payable Cash Patents Notes payable due in six months Taxes payable Prepaid rent for the next nine months Bonds payable due in 10 years Machinery om mmth x Exercise 29 Financial Statement Classification Potential stockholders and lenders are interested in a company s financial statements Identify the statement balance sheet BS income statement IS retained earnings statement RE on which each of the following items would appear Accounts payable Accounts receivable Advertising expense Bad debts expense Bonds payable Buildings Cash Common stock Depreciation expense Dividends 999 9 S 1P9 Nr A 11 12 13 14 15 16 17 18 19 20 Land held for future expansion Loan payable Office supplies Patent Patent amortization expense Prepaid insurance Retained earnings Sales Utilities expense Wages payable Ratio Analysis WORKING CAPITAL current assets current liabilities CURRENT RATIO current assetscurrent liabilities Problem 2 5 Workinq Capital and Current Ratio The balance sheet of Stevenson Inc includes the following items Cash 23000 Accounts receivable 13000 Inventory 45000 Prepaid insurance 800 Land 80000 Accounts payable 54900 Salaries payable 1200 Capital stock 100000 Retained earnings 5700 Required 1 Determine the current ratio and working capital 2 Beyond the information provided in your answers to 1 what does the composition of the current assets tell you about Stevenson s liquidity 3 What other information do you need to fully assess Stevenson s liquidity The Income Statement Elements on the Income Statement Revenues operating expenses Other revenues expenses gains and losses Income tax expense Earnings per share Income Statement Format Multistep format Intermediate profit measures Gross margin Sales COGS Operating income Nonoperating items Net income before tax Tax expense Net income Income Statement Format ABC Inc Income Statement for 2006 Sales 100000 Cost of goods sold 60000 Gross margin 40000 Operating expenses 25000 Operating income 15000 Nonoperating items 4000 Income before tax 19000 Income tax expense 7600 Net income 11400 Earnings per share 10000 shares 114 Consolidated Statement of Income PepsiCo Inc and Subsidiaries in millions except per share amounts Fiscal years ended December 27 2008 December 29 2007 and December 30 2006 2008 2007 2006 Net Revenue 43251 39474 35137 Cost of sales 20351 18038 15762 Selling general and admin expenses 15901 14208 12711 Amortization of intangible assets 64 58 162 Operating Pro t 6935 7170 6502 Bottling equity income 374 560 553 Interest expense 329 224 239 Interest income 41 125 173 Income before Income Taxes 7021 7631 6989 Provision for Income Taxes 1879 1973 1347 Net Income 5142 5658 5642 Net Income per Common Share Basic 326 348 342 Diluted 321 341 334 Exercise 24 Missing Income Statement Amounts For each of the following independent cases ll in the blank With the appropriate dollar amount Sara s Amy s Jane s Coffee Shop Deli Bagels Net sales 35000 78000 Cost of goods sold 45000 Gross pro t 7000 18000 Selling expenses 3000 9000 General and administrative expenses 1500 2800 Total operating expenses 8800 13600 Net income 2500 9200 25400 Problem 27 MultipleStep Income Statement The following income statement items arranged in alphabetical order are taken from the records of Shaw Corporation for the year ended December 31 2008 Advertising expense 1500 Commission expense 2415 Cost of goods sold 29200 Depreciation expenseoffice building 2900 Income tax expense 1540 Insurance expensesalesperson s auto 2250 Interest expense 1400 Interest revenue 1340 Rent revenue 6700 Salaries and wages expenseoffice 12560 Sales revenue 48300 Supplies expenseoffice 890 Reguired Assume that Shaw Corporation classifies all operating expenses into two categories 1 selling and 2 general and administrative 1 Prepare a multiplestep income statement for the year ended December 31 2008 2 What advantages do you see in this form of the income statement relative to the singlestep format Compute Shaw s profit margin 4 Comment on Shaw s profitability What other factors need to be taken into account to assess Shaw s profitability 9 Ratio Analysis PROFIT MARGIN Return on Sales Net income Net sales Benchmarks Industry analysis Comparability Time series Consistency The Statement of Retained Earninqs Statement of Changes in Stockholders Equity Ending Retained earnings Opening retained earnings Net income Dividends Ending Retained earnings is the sum of all the earnings through time of the organization less the sum of all losses less the sum of all dividends Consolidated Statement of Common Shareholders Equity PepsiCo Inc and Subsidiaries in millions 2008 2007 2006 Retained Earnings Balance beginning of year 28184 24837 21116 Adoption of FIN 48 7 SFAS 158 measurement date change 89 Adjusted balance beginning of year 28095 24844 Net income 5142 5658 5642 Cash dividends declared common 2589 2306 1912 Cash dividends declared preferred 2 2 1 Cash dividends declared RSUs 8 10 8 Balance end of year 30638 28184 24837 Exercise 26 Statement of Retained Earninqs Landon Corporation was organized on January 2 2006 with the investment of 100000 by each of its two stockholders Net income for its first year of business was 85200 Net income increased during 2007 to 125320 and to 145480 during 2008 Landon paid 20000 in dividends to each of the two stockholders in each of the three years Reguired Prepare a statement of retained earnings for the year ended December 31 2008 Statement of Cash Flows Cash Flows from Investing Activities Purchase of longterm assets Purchase of marketable securities Sale of longterm assets Sale of Marketable securities Cash Flow from Financing Activities Borrowing money short and longterm Repayment of debt Issuance of stock Repurchasing stock Payment ofdividends Consolidated Statement of Cash Flows PepsiCo Inc and Subsidiaries Mons Fiscal years ended December 27 2008 December 29 2007 and December 30 2006 2008 2007 2006 Net Cash Provided by Operating Activities 6999 6934 6084 Investing Activities Capital spending 2446 2430 2068 Sales of property plant and equipment 98 47 49 Proceeds from Investment in finance assets 27 25 Acquisitions and investments in affiliates 1925 1320 522 Cash restricted for pending acquisitions 40 Cash proceeds from sale of PBG and PAS stock 358 315 318 Divestitures 6 37 Shortterm investments by original maturity More than three months purchases 156 83 29 More than three months maturities 62 113 25 Three months or less net 1376 413 2021 Net Cash Used for Investing Activities 2667 3744 194 Consolidated Statement of Cash Flows Condensed PepsiCo Inc and Subsidiaries in millions Fiscal years ended December 27 2008 December 29 2007 and December 30 2006 2008 2007 2006 Financing Activities Proceeds from issuances of longterm debt 3719 2168 51 Payments of longterm debt 649 579 157 Shortterm borrowings by original maturity More than three months proceeds 89 83 185 More than three months payments 269 133 358 Three months or less net 625 345 2168 Cash dividends paid 2541 2204 1854 Share repurchases common 4720 4300 3000 Share repurchases preferred 6 12 10 Proceeds from exercises of stock options 620 1108 1194 Excess tax benefits from sharebased payment arrangements 107 208 134 Net Cash Used for Financinq Activities 3025 4006 5983 Effect of exchange rate changes 153 75 28 Net IncreaseDecrease in Cash and Cash Equivalents 1154 741 65 Cash and Cash Equivalents Beg of Year 910 1651 1716 Cash and Cash Equivalents End of Year 2064 910 1651 Problem 28 Statement of Cash Flows Colorado Corporation was organized on January 1 2008 with the investment of 250000 in cash by its stockholders The company immediately purchased an office building for 300000 paying 210000 in cash and signing a threeyear promissory note for the balance Colorado signed a veyear 60000 promissory note at a local bank during 2008 and received cash in the same amount During its rst year Colorado collected 93970 from its customers It paid 65600 for inventory 20400 in salaries and wages and another 3100 in taxes Colorado paid 5600 in cash dividends 1 Prepare a statement of cash ows for the year ended December 31 2008 2 What does this statement tell you that an income statement does not MGMT 200 INTRODUCTORY FINANCIAL ACCOUNTING Chapter 1 Accountinq as Communication Users of accounting information The four basic financial statements The Balance Sheet and the accounting equa on The Income Statement The Statement of Retained Earnings E13 E18 Accounting Accounting is a system that collects and processes analyzes measures and records financial information about an organization and reports that information to decision makers The Accounting System 3 d I A Managers F internal 39 decision i 1 Reports make rs information i to decision Collects and processes makers 3 l Investors finanCIal Information g and Creditors external decision makers The Four Basic Financial Statements The Balance Sheet Economic resources and claims against them at a point in time The Income Statement Result of operations for a period of time The Statement of Retained Earnings Change in retained earnings for a period of time The Statement of Cash Flows Change in cash for a period of time The Balance Sheet Basic Accounting Equation Assets Liabilities Stockholders Equity J Economic V Resources Sources of Fmancmg for Economic Resources Consolidated Balance Sheet condensed PepsiCo Inc and Subsidiaries in millions except per share amounts December 27 2008 and December 29 2007 2008 2007 ASSETS Cash and cash equivalents 2064 910 Shortterm investments 213 157 1 Accounts and notes receivable net 4683 4389 Inventories 2522 2290 Prepaid expenses and other current assets 1324 991 Property Plant and Equipment net 11663 11228 Intangible Assets 6984 7213 Investments in Af liates 3883 43 54 Other Assets 2658 1682 Total Assets 3 5994 34628 Consolidated Balance Sheet condensed PepsiCo Inc and Subsidiaries in millions except per share amounts December 27 2008 and December 29 2007 2008 2007 LIABILITIES Shortterm obligations 369 Accounts payable and other current liabilities 8273 7602 Income taxes payable 145 151 LongTerm Debt Obligations 7858 4203 Other Liabilities 7017 4792 Deferred Income Taxes 226 646 Total Liabilities 23888 17394 SHAREHOLDERS EQUITY Common stock 3 81 480 Retained earnings 3063 8 28184 Other shareholders equitV 18913 11430 Total Shareholders EquitV 12106 17234 Total Liabilities and Shareholders Eguity 35994 34628 Exercise 13 The Accountinq Equation Ginger Enterprises began the year with total assets of 500000 and total liabilities of 250000 Using this information and the accounting equation answer each ofthe following independent questions 1 What was the amount of Ginger s owners equity at the beginning of the year 2 If Ginger s total assets increased by 100000 and its total liabilities increased by 77000 during the year what was the amount of Ginger s owners equity at the end of the year 3 If Ginger s total liabilities increased by 33000 and its owners equity decreased by 58000 during the year what was the amount of its total assets at the end of the year 4 If Ginger s total assets doubled to 1000000 and its owners equity remained the same during the year what was the amount of its total liabilities at the end of the year The Income Statement Net income Revenues Expenses Revenues are the inflow of resources from the sale of goods or services during a period of time Expenses are the resources used up to earn the revenues during a period of time Consolidated Statement of Income PepsiCo Inc and Subsidiaries in millions except per share amounts Fiscal years ended December 27 2008 December 29 2007 and December 30 2006 2008 2007 2006 Net Revenue 43251 39474 35137 Cost of sales 20351 18038 15762 Selling general and administrative expenses 15901 14208 12711 Amortization of intangible assets 64 58 162 Operating Pro t 6935 7170 6502 Bottling equity income 374 560 553 Interest expense 329 224 239 Interest income 41 125 173 Income before Income Taxes 7021 7631 6989 Provision for Income Taxes 1879 1973 1347 Net Income 5142 5658 5642 Net Income per Common Share 326 348 342 The Statement of Retained Earninqs Statement of Changes in Stockholders Equity Ending Retained earnings Opening retained earnings Net income Dividends Ending Retained earnings is the sum of all the earnings through time of the organization less the sum of all losses less the sum of all dividends Consolidated Statement of Common Shareholders Equity PepsiCo Inc and Subsidiaries in millions 2008 Fiscal Vears ended December 27 2008 D L 29 2007 and D 2007 2006 L 30 2006 Retained Earnings Balance beginning of year 28184 24837 21116 Adoption of FIN 48 7 SFAS 158 measurement date change 89 Adjusted balance beginning of year 28095 24844 21116 Net income 5142 5658 5642 Cash dividends declared 2599 2318 1921 Balance end ofVear 30638 28184 24837 Exercise 18 Net Income or loss and retained earninqs The following information is available from the records of Prestige Landscape Design Inc at the end of the 2008 calendar year Accounts payable 5000 Office equipment 7500 Accounts receivable 4500 Rent expense 6500 Capital stock 8000 Retained earnings Cash 13000 beginning of year 8500 Dividends paid Salary and during the year 3000 wage expense 12000 Landscaping revenues 25000 Reguired Use the information above to answer the following questions 1 What is Prestige s net income for the year ended December 31 2008 What is Prestige s retained earnings balance at the end of the year What is the total amount of Prestige s assets at the end of the year What is the total amount of Prestige s liabilities at the end of the year How much owners equity does Prestige have at the end of the year What is Prestige s accounting equation at December 31 2008 Problem 16 Income Statement and Balance Sheet Green Bay Corporation began business in July 2008 as a commercial fishing operation and passenger service between islands Shares of stock were issued to the owners in exchange for cash Boats were purchased by making a down payment in cash and signing a note payable for the balance Fish are sold to local restaurants on open account and customers are given 15 days to pay their account Cash fares are collected for all passenger traffic Rent for the dock facilities is paid at the beginning of each month Salaries and wages are paid at the end of the month The following amounts are from the records of Green Bay Corporation at the end of its first month of operations Accounts receivable Boats Capital stock Cash Dividends Fishing revenue Notes payable Passenger service revenue Rent expense Retained earnings Salary and wage expense 18500 80000 40000 7730 5400 21 300 60000 12560 4000 7 18230 Reguired 1 Prepare an income statement for the month ended July 31 2008 2 Prepare a balance sheet at July 31 2008 3 What information would you need about Notes Payable to assess fully Green Bay s longterm viability Explain your answer Statement of Cash Flows Shows the change in cash for the period in three major categories Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities The change in cash plus the opening cash balance equals the ending cash balance the Balance Sheet amount Consolidated Statement of Cash Flows Condensed PepsiCo Inc and Subsidiaries in millions Fiscal years ended December 27 2008 December 29 2007 and December 30 2006 2008 2007 2006 Net Cash Provided by Operating Activities 6999 6934 6084 Net Cash Used for Investing Activities 2667 3744 194 Net Cash Used for Financing Activities 3025 4006 5983 Effect of exchange rate changes 153 75 28 Net change in Cash and Cash Equivalents 1154 741 65 Cash and Cash Equivalents Beg of Year 910 1651 1716 Cash and Cash Equivalents End of Year 2064 910 1651 Financial Statement Articulation 1 The Balance sheet is at a point in time end of fiscal year 2 The Income Statement is the result of operations for a period of time The year ending on the balance sheet date the fiscal year 3 The Statement of Retained earnings records the change in retained earnings for the fiscal year The ending balance is the balance sheet amount 4 The Statement of Cash Flows records the change in cash for the fiscal year The ending cash balance is the balance sheet amount The Annual Report The notes to the financial statements Summary of significant accounting policies The Audit Report Generally Accepted Accounting Principles GAAP How are GAAP determined Securities and Exchange Commission SEC Financial Accounting Standards Board FASB Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders PepsiCo Inc In our opinion the consolidated nancial statements referred to above present fairly in all material respects the nancial position of PepsiCo Inc as of December 27 2008 and December 29 2007 and the results of its operations and its cash ows for each of the scal years in the threeyear period ended December 27 2008 in conformity With US generally accepted accounting principles Also in our opinion PepsiCo Inc maintained in all material respects effective internal control over nancial reporting as of December 27 2008 based on criteria established in Internal Control 7 Integrated Framework issued by COSO KPMG LLP New York New York February 19 2009 Financial Statement Assumptions Economic Entity Concept Cost Principle Going Concern Monetary Unit Time Period Assumption Problem 110 Primary Assumptions Made in Preparing Financial Statements Joe Hale opened a machine repair business in leased retail space paying the first month s rent of 300 and a 1000 security deposit with a check on his personal account He took the tools worth about 7500 from his garage to the shop He also bought some equipment to get started The new equipment had a list price of 5000 but Joe was able to purchase it on sale at Sears for only 4200 He charged the new equipment on his personal Sears charge card Joe s first customer paid 400 for services rendered so Joe opened a checking account for the company He com leted a second job but the customer has not paid Joe the 2500 for his work At the end of the first month Joe prepared the following balance sheet and income statement Cash Equipment Total JOE S MACHINE REPAIR SHOP BALANCE SHEET JULY 31 2008 400 Equity 5000 5400 Total JOE S MACHINE REPAIR SHOP INCOME STATEMENT FOR THE MONTH ENDED JULY 312008 Sales 2900 Rent 300 Tools 4200 4500 Net income 1 600 L O L O I I Joe believes that he should show a greater profit next month because he won t have large expenses for items such as tools Reguired Identify the assumptions that Joe has violated and explain how each event should have been handled Prepare a corrected balance sheet and income statement