Quiz #1

1. Quiz #1 • Monday, September 17 • Ch 1 , 2 & 5 (pp. 231 – 246 only)

2. By JIM CONNOLLY Conseco To Give More Info To Auditors  Published 3/2/2009 Conseco Inc. will delay releasing its annual report in order to gather information the company must supply to avoid receiving a negative report from its auditorsabout its ability to continue as an ongoing concern, the company says. Conseco, Carmel, Ind., says it will file itsForm 10-K annual report with the U.S. Securities and Exchange Commission on or before March 17. Conseco needs the additional time to finalize the analysis and disclosure related to its investment portfolio, the company says. The independent auditor has asked Conseco for more information regarding the company’s liquidity and debt covenant margins, particularly those affected by investment portfolio losses, Conseco says. If Conseco does not provide the information, the audit opinion will include an additional paragraph raising concern about Conseco’s ability to continue as an ongoing entity, Conseco says. Unless lenders granted a waiver, the inclusion of such a paragraph would be a default under Conseco’s senior credit facility, Conseco says.

3. Investing and Financing Decisions and the Balance Sheet Chapter 2

4. LEARNING OBJECTIVES 1 through 5 ONLY

5. Understanding the Business To understand amounts appearing on a company’s balance sheet we need to understand the following issues: What business activities change the balance sheet? How do specific activities affect each balance? How do companies keep track of balance sheet amounts?

6. Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss Qualitative Characteristics Relevance Reliability Comparability Consistency The Conceptual Framework Objective of Financial Reporting To provide economic information to external users for decision making.

7. The Conceptual Framework Objective of Financial Reporting To provide economic information to external users for decision making • Primary Characteristics • Relevance - Predictive value, • feedback value, and timeliness. • Reliability - Verifiability, • representational faithfulness, • and neutrality. • Secondary Characteristics • Comparability - Across • companies. • Consistency – Period to • period. Qualitative Characteristics Relevance Reliability Comparability Consistency Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss

8. ASSET - Economic resource with expected future benefits. • LIABILITY - Probable future sacrifices of economic resources. • STOCKHOLDERS’ EQUITY – Financing provided by owners and operations. • REVENUE - Increase in assets or settlement of liabilities from ongoing operations. • EXPENSE - Decrease in assets or increase in liabilities from ongoing operations. • GAIN - Increase in assets or settlement of liabilities from peripheral activities. • LOSS - decrease in assets or increase in liabilities from peripheral activities. The Conceptual Framework Objective of Financial Reporting To provide economic information to external users for decision making Elements of Statements Asset Liability Stockholders’ Equity Revenue Expense Gain Loss Qualitative Characteristics Relevance Reliability Comparable Consistent

9. The Conceptual Framework Assumptions Separate entity - Activities of the business are separate from activities of owners. Continuity - The entity is a going concern (i.e., it will not go out of business).

10. The Conceptual Framework Assumptions Separate entity - Activities of the business are separate from activities of owners. Continuity - The entity is a going concern (i.e., it will not go out of business). Unit-of-measure - Accounting measurements will be in the national monetary unit (e.g., $ in the U.S.). Time period (periodicity) (Ch 3, p. 106) – Guidance on measuring revenues and expenses.

11. The Conceptual Framework Principles Historical cost (p. 50) - Amount given in exchange (i.e., acquisition cost) is the basis for the initial recording of elements. This is a trade-off between relevance (current value, which is a matter of opinion) and reliability (historical cost which can be verified). The rationale for using historical cost is the loss of reliability from using current value is greater than the loss of relevance from using historical cost.

12. The Great Fair-Value Debate by Cindy Fornelli | August 18, 2009 “The basic principle of using market information to value at least some assets dates back over thirty years. During the last 15 years, FASB has adopted standards that have expanded and refined the application of fair-value accounting, because it has been widely viewed as an important driver of increased transparency. Put simply, applying market information to value assets and liabilities gives investors relevant information about the economic realities of the companies in which they choose to invest.”

13. Cash Inventory Notes Payable Equipment Accounts An organized format used by companies to accumulate the dollar effects of transactions.

14. Typical Account Titles The Balance Sheet AssetsCashShort-Term InvestmentAccounts ReceivableNotes ReceivableInventory (to be sold)SuppliesPrepaid ExpensesLong-Term InvestmentsEquipmentBuildingsLandIntangibles LiabilitiesAccounts PayableAccrued ExpensesNotes PayableTaxes PayableUnearned Revenue Bonds Payable Stockholders’ EquityContributed CapitalRetained Earnings

15. Typical Account Titles The Income Statement RevenuesSales RevenueFee RevenueInterest RevenueRent Revenue ExpensesCost of Goods SoldWages ExpenseRent ExpenseInterest ExpenseDepreciation ExpenseAdvertising ExpenseInsurance ExpenseRepair ExpenseIncome Tax Expense

16. Current Assets (pp. 51 – 52) • Resources that corporation will use or turn into cash within one year from the date of the balance sheet. • Inventory is always a current asset.

17. Current Liabilities (pp. 51 – 52) • Liabilities that will be paid or settled within one year.

18. Current liabilities + Noncurrent (long-term) liabilities + Stockholders’ equity Total liabilities and stockholders’ equity Basic Structure of a Classified Balance Sheet Current assets + Noncurrent (long-term) assets Total assets

19. A = L + SE Realized, sold, or consumed in one year or operating cycle Top of the WorldBalance Sheet as of June 30, 2008 Current assets Cash $ 400 Accounts receivable 800 Prepaid insurance 100 Supplies 200 Total current assets $ 1,500 Investments Marketable securities 500 Land held for future expansion 2,200 2,700 Property, plant, and equipment Land $4,000 Lodge, lifts and equipment $2,600 Less Accumulated depreciation (200)2,400 Total property, plant and equipment 6,400 Intangible assets Patent 400 Total assets$11,000 A Assets

20. Analysis of Liquidity Of particular interest to bankers and other creditors Ability of company to pay debts as they become due Working Capital Current Ratio LO4

21. Current assets $2,000 Current liabilities 1,600 Working Capital $ 400 Top of the World’s Liquidity What's the trend?? Current Ratio = Current Assets = 1.25:1 Current Liabilities

22. Keeping Cash Safe Vincent Ryan - CFO Magazine June 1, 2008 As the economy sputters, companies are striving to maintain their liquidity.

23. Customers "Banking" on Your Working Capital Sarah Johnson - CFO.com | US March 4, 2009 Nearly all business-to-business suppliers are feeling their working capital squeezed by customers delaying payments, according to the Credit Research Foundation.

24. Crisis Spawns Payables-Receivables Crunch Sarah Johnson - CFO.com | US November 6, 2008 CFOs are paying close attention to both the payment terms their suppliers are demanding and the credit terms of their customers.

25. Mini-Exercises • M2-4, p. 82

26. Every transaction affects at least twoaccounts (duality of effects). The accounting equation must remain in balance after each transaction. Principles of Transaction Analysis A = L + SE (Assets) (Liabilities) (Stockholders’Equity)

27. Most transactions with external parties involve an exchange where the business entity gives up something but receivessomething in return. (cf. executory bilateral contract) Duality of Effects (pp. 56 – 57)

28. Executory Bilateral Contract pp. 54 & 57

29. Balancing the Accounting Equation Step 1: Accounts and effects • Identify the accounts affected and classify them by type of account (A, L, SE). • Determine the direction of the effect (increase or decrease) on each account. Step 2: Balancing • Verify that the accounting equation (A = L + SE) remains in balance.

30. Identify & Classify the Accounts 1. Cash (asset). 2. Contributed Capital (equity). Determine the Direction of the Effect 1. Cash increases. 2. Contributed Capital increases. Analyzing Transactions (p. 58) (a) Papa John’s issues $2,000 of additional common stock to new investors for cash.

31. Analyzing Transactions (p. 58) Papa John’s issues $2,000 of additional common stock to new investors for cash. A= L + SE

32. Identify & Classify the Accounts 1. Cash (asset). 2. Notes Payable (liability). Determine the Direction of the Effect 1. Cash increases. 2. Notes Payable increases. Analyzing Transactions(p. 58) (b) The company borrows $6,000 from the local bank, signing a three-year note.

33. Analyzing Transactions(p. 58) The company borrows $6,000 from the local bank, signing a three-year note. A= L + SE

34. Identify & Classify the Accounts 1. Equipment (asset). 2. Cash (asset). 3. Notes Payable (liability). Determine the Direction of the Effect 1. Equipment increases. 2. Cash decreases. 3. Notes Payable increases. Analyzing Transactions(p. 58) (c) Papa John’s purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payablefor the rest.

35. Analyzing Transactions(p. 58) Papa John’s purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payablefor the rest. A = L + SE

36. Analyzing Transactions(p. 59) (f) Papa John’s board of directors declares $3,000 in cash dividends. The Company will pay shareholders next month. Identify & Classify the Accounts 1. Dividend Payable (liability). 2. Retained Earnings (equity). Identify & Classify the Accounts Determine the Direction of the Effect 1. Dividends Payable increases. 2. Retained Earnings decreases. Determine the Direction of the Effect

37. Analyzing Transactions (p. 59) Papa John’s board of directors declares $3,000 in dividends to shareholders. A = L + SE

38. Closerevenues, gains,expenses and lossesto retained earnings. Preparea completeset of financial statements.Disseminatestatementsto users. End of the periodAdjustrevenues and expensesand related balance sheet accounts. The Accounting Cycle During the periodAnalyzetransactions.Recordjournal entries in the general journal.Post amounts to the general ledger.

39. How Do Companies Keep Track of Account Balances? T-Accounts Journal Entries

40. The left side of the T-account is always the debit side. Direction of Transaction Effects The rightside of the T-account is always the credit side. Account Name Right Left Debit Credit

41. ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Transaction Analysis Model Debits and credits affect the Balance Sheet Model as follows: A = L + SE

42. ASSETS LIABILITIES EQUITIES Debit for Increase Credit for Decrease Debit for Decrease Credit for Increase Debit for Decrease Credit for Increase Remember that Stockholders’ Equity includes Contributed Capital and Retained Earnings. The Debit-Credit Framework A = L + SE

43. A journal entry might look like this: Analytical Tool: The Journal Entry Account Titles: Debited accounts on top.Credited accounts on bottom. Reference: Letter, number, or date. Amounts: Debited amounts on left. Credited amounts on right.

44. The T-Account After journal entries are prepared, the accountant posts (transfers) the dollar amounts to each account affected by the transaction. Ledger Post

45. Identify & Classify the Accounts 1. Cash (asset). 2. Contributed Capital (equity). Determine the Direction of the Effect 1. Cash increases. 2. Contributed Capital increases. Analyzing Transactions (p. 58) (a) Papa John’s issues $2,000 of additional common stock to new investors for cash.

46. Analyzing Transactions (p. 58) Papa John’s issues $2,000 of additional common stock to new investors for cash. A= L + SE

47. Papa John’s issues $2,000 of additional common stock to new investors for cash. (a)

48. The company borrows $6,000 from the local bank, signing a three-year note.

49. It is possible to prepare a balance sheet as of any point in time from the balances in the accounts. Balance Sheet Preparation – “Snapshot” Balance Sheet

50. End of Chapter 2 It’s accrual world.