“Understanding Accounting and Financial Statements”. Accounting can be an involved process, but none the less is essential for the manager to understand. The purpose of this module is four-fold:
INSTRUCTIONS:
Watch three entertaining and informative video clips (3:30 minutes each) from The Center for Audit Quality (CAQ):
Watch the video clip (1:07 minutes) entitled “
Goodbye Training Wheels
”. This is an example of a term called “Innovation Transfer” which means “ The transfer of a new idea or method for solving a problem from one group or individual to another, typically from a process improvement consulting group to a client business. Innovation transfer is an important part of Six Sigma and other best practice deployment approaches.” In this case, I am using this example of the young boy in the video learning to ride his bicycle as an analogy of you learning accounting principles: sometimes you just need a little practice and for someone to steady the bike and before long you are peddling on your own!!
(You can read more about innovation transfer at Business Dictionary.com. “Training Wheel Video credit: Andrea Dorfman. Music: Iron and Wine)
Complete the Excel workbook entitled
Chpt 15 Critical Thinking Exercise – Accounting
. This workbook consists of two problems (each worth up to 50 points each totaling the possible 100 points you can earn). The two problems are:
Both problems are in the same Excel workbook and are listed in six (6) tabs at the bottom of the spreadsheet when you open the file. Complete the work in the gray answer boxes for each assignment
>Wheatley List of Accounts
Wheatley International, it is your job to prepare the company’s income statement and balance sheet. Use the accounts listed below to construct the statements. Assume that the tax rate is 25 .
20,600
Expense
Term Notes Payable
(for Inventory)
$90,000 Payable
From that, you subtract the income tax of 25% to get net income. WHEATLEY INTERNATIONAL Net Sales $1,053,000 –
PREPARING FINANCIAL STATEMENTS
As the accountant f
or
%
List of Accounts f
or
WHEATLEY INTERNATIONAL
Accounts Receivable
$
1
Land
$1,500,000
Notes Receivable
$61,200
Insurance Expenses
$54,000
Accounts Payable
$45,000
Interest Expenses
$24,600
Common Stock
$1,896,000
Depreciation
$400,000
Net Sales
$1,053,000
Ending
Inventory
$126,600
Notes Payable (Long‑Term)
$210,000
Beginning Inventory
$154,800
Retained Earnings
$1,459,800
Advertising
$90,000
Cash
$72,000
Salaries
$180,000
Short
–
$15,600
Merchandise Purchased
$316,800
Buildings
$1,050,000
Rent
$13,800
Utilities
$8,400
Equipment & Vehicles
$1,066,000
Goodwill
Bonds
$60,000
Wheatley Income Statement
The formula for the balance sheet is assets equal liabilities plus stockholders’ equity. To prepare a balance sheet, add the assets and liabilities. The difference between the two is stockholders’ equity. For the income statement, you subtract cost of goods sold from net sales (revenue). Then you subtract expenses to get gross incom
e.
(Note: The format of these statements may be slightly different from the format taught in an accounting course. The exact format is less important than understanding the overall concepts.)
INCOME STATEMENT
FY 201X
REVENUES
COST OF GOODS SOLD
Beginning Inventory
Merchandise Purchased
+
Cost of Goods Available for Sale
$471,600
Less: Ending Inventory
Cost of Goods Sold
$345,000
GROSS PROFIT (GROSS MARGIN)
OPERATING EXPENSES
Selling Expenses
Salaries
Advertising
Total Selling Expenses
$270,000
General Expenses
Insurance
Interest Expense
Rent
Utilities
Total General Expenses
Total Operating Expenses
NET PROFIT (INCOME) BEFORE TAXES
Less: Income Tax Expenses (25%)
NET INCOME (PROFIT) AFTER TAXES
$252,900
Wheatley
| Complete the balance sheet. (Fill in the gray highlighted areas) | |||
| December 31, 201X | |||
| ASSETS | |||
| Current Assets | |||
| Accounts Receivable | |||
| Total Current Assets | |||
| Fixed Assets | |||
| Equipment & Vehicles | |||
| Total Fixed Assets | |||
| Other Assets | |||
| Goodwill | |||
| Total Other Assets | |||
| TOTAL ASSETS | $3,686,400 | ||
| LIABILITIES AND | STOCKHOLDERS’ EQUITY | ||
| Current Liabilities | |||
| Short-Term Notes Payable | |||
| Total Current Liabilities | $60,600 | ||
| Long‑Term Liabilities | |||
| Notes Payable (Long-Term) | |||
| Total Long‑Term Liabilities | |||
| Total Liabilities | |||
| Owner’s Equity | |||
| Common Stock | |||
| Total Owners’ Equity | |||
| TOTAL LIABILITIES AND | |||
| You are considering investing in Acme Incorporate | d. | |
| Calculate the requested financial ratios | ||
| (IMPORTANT EXPLAIN WHAT THESE NUMBERS MEAN IN RELATION TO ACME) | ||
| a. | Current ratio | |
| b. | Debt-to-equity ratio | |
| Return on sales (use net income AFTER taxes) | ||
| Return on equity (use net income AFTER taxes) | ||
| Earnings per share (use net income AFTER taxes) | ||
| Would you invest in Acme Incorporated? Why or why not? |
| ACME INCORPORATED | |
| STATEMENT OF INCOME | |
| $4,090,970 | |
| Other Income | $104,227 |
| Total Revenue | $4,195,197 |
| $2,673,129 | |
| $1,522,068 | |
| $333,300 | |
| $306,036 | |
| $639,336 | |
| NET INCOME BEFORE TAXES | $882,732 |
| $220,683 | |
| $662,049 |
| $280,928 | ||
| Marketable Securities | $514,800 | |
| $108,694 | ||
| $855,771 | ||
| Inventories | $218,156 | |
| Prepain Expenses and Other | $88,237 | |
| $2,066,586 | ||
| $510,000 | ||
| Plant and Building | $304,096 | |
| $218,500 | ||
| $1,744,701 | ||
| Goodwill, Net | $49,930 | |
| $3,861,217 | LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| $226,977 | ||
| Accrued Expenses and Other | $380,496 | |
| Current Portion of Finance Debt | $382,579 | |
| $990,052 | ||
| $228,772 | ||
| $380,000 | ||
| Other Long‑Term Liabilities | $29,478 | |
| Total Long-Term Liabilities | $638,250 | |
| $1,628,303 | ||
| $389,538 | ||
| (342,196 Shares Outstanding) | ||
| $1,843,377 | ||
| $2,232,915 | ||
| Calculate the requested financial ratios. (Fill in the gray highlighted areas) | |
| Current ratio. The current ratio is the ratio of the firm’s current assets to its current liabilities, | |
| calculated as follows: | |
| Current ratio = | |
| Current assets | |
| Current liabilities | |
| :1 | Show the ratio |
| Debt-to-equity ratio. The debt-to-equity ratio measures the degree to which the company | |
| is financed by borrowed funds that must be repaid. It is calculated as follows: | |
| Debt-to-equity ratio = | |
| $1,628,300 | Show percentage or decimal format (e.g. .346 or 35%) |
| $2,232,815 | |
| Return on sales. Return on sales is calculated by comparing a company’s net income | |
| with its total sales, calculated as follows: | |
| Return on sales = | |
| Return on equity. Return on equity measures how much was earned for each dollar invested | |
| by owners. It is calculated by comparing a company’s net income with its total owner’s equity: | |
| Return on equity = | |
| Net income | |
| Owners’ equity | |
| Earnings per share. Earnings per share measures the amount of profit earned by a company | |
| for each share of common stock it has outstanding: | |
| Earnings per share = | |
| Net income | |
| Number of shares outstanding | $342,196 |
| $1.935 per share |
