CH-17 Using Management and Accounting Information – Business : Book Guide

CHAPTER 17 Using Management and Accounting Information 17.7 TEXTBOOK ANSWER KEYS 17.7a Return to Inside Business PricewaterhouseCoopers 1. When an accounting firm like PwC has been hired to examine and sign off on a public corporation’s annual report, should it limit its consulting work to avoid being influenced by financial ties to the client? Explain your answer. Students who believe an accounting firm should limit consulting for an annual-report client may say that potentially high consulting fees might influence how the firm audits that client. Limiting the consulting would reduce the possibility of unethical influence. Students who take the opposite view may say that an accounting firm with strong controls and ethical standards should be able to keep these two types of work separate and not permit any influence to affect the auditing or the consulting. 2. Why would the Academy of Motion Picture Arts and Sciences hire PwC instead of having its own employees count votes for the Academy Awards? The Academy can reassure its members and the public that ballots are counted accurately and completely by hiring PricewaterhouseCoopers, an independent firm, to count votes. It also wants to be sure that results are kept secret until the awards ceremony and wants to prevent actual vote tallies from being revealed. To avoid any appearance of possible internal tampering or leaks, the organization hires professional accountants, who are accustomed to maintaining strict confidentiality and meticulous record-keeping. 17.7b Review Questions 1. In your own words, describe how information reduces risk when you make a personal or work-related decision. The more information a manager has, the less risk there is that a decision will be incorrect; theoretically, with accurate and complete information, there is no risk whatsoever. On the other hand, a decision made without any information is a gamble. These two extreme situations are rare in business. For the most part, business decision makers see themselves located someplace between either extreme. The same basic assumptions apply to an individual who has to make a decision. (While discussing this question, you may want to review Figure 16.1.) 2. What are information rules? How do they simplify the process of making decisions? Information rules are the great simplifiers. Because they enable business managers, employees, and consumers to make decisions quickly as long as information rules can be applied to the same or a similar set of circumstances, they are the highest order of information organization and structure. 3. What is the difference between data and information? Give one example of accounting data and one example of accounting information. Data are numerical or verbal descriptions that usually result from some sort of measurement. Information is data presented in a form that is useful for a specific purpose. An example of accounting data is the number of items in inventory. An example of accounting information is a graph comparing the number of items sold over a period of six years. 4. List the five functions of an MIS. The five functions of an MIS are (1) to collect data, (2) to store the data, (3) to update the data, (4) to process data into information, and (5) to present information to users. 5. What are the components of a typical business report? A typical business report includes (1) an introduction, (2) the body of the report, (3) conclusions, and (4) recommendations. 6. Describe the three types of computer applications that help employees, managers, and executives make smart decisions. First, a decision-support system (DSS) is a type of computer program that provides relevant data and information to help a firm’s employees make decisions. It also can be used to determine the effect of changing different variables and answer “what if” type questions. Although similar to a DSS, an executive information system (EIS) is a computer-based system that facilitates and supports the decision-making needs of top managers and senior executives by providing easy access to both internal and external information. The third application is the expert system which is a type of computer program that uses artificial intelligence to imitate a human’s ability to think. An expert system uses a set of rules that analyze information supplied by the user about a particular activity or problem. Based on this information, the expert system then provides recommendations or suggests specific actions in order to help make decisions. 7. What purpose do audits and GAAPs serve in today’s business world? A lender, an investor, or anyone else who is considering dealing with a firm will want an accurate and comprehensible report of the firm’s financial status on which to base a decision. Once an audit determines that the firm has followed generally accepted accounting principles, the interested party can be highly certain (although not 100 percent guaranteed) that the firm’s financial statements were prepared by trustworthy and ethical accounting practices and are valid. 8. How do the major provisions of the Sarbanes-Oxley Act affect a public company’s audit procedures? A firm’s auditors (and CEOs and CFOs, for that matter) are now held significantly accountable for the accuracy of the company’s financial statements. Auditors must maintain financial documents and audit work papers for five years and can even be imprisoned for destroying documents. A public corporation must change its lead auditing firm every five years and may not use its auditing firm as a consultant. Compliance with these provisions and others of the Sarbanes-Oxley Act costs corporate management money and time. However, these same provisions, along with the directive that gives additional protection for whistle-blowers, help guarantee the credibility of a public company’s accounting records. 9. What is the difference between a private accountant and a public accountant? What are certified public accountants? A private accountant is employed by a private organization. A public accountant is an accountant whose services may be hired on a fee basis by individuals and firms. A certified public accountant is an individual who has met state requirements for accounting education and experience and has passed a rigorous two-day accounting examination. 10. State the accounting equation, and list two specific examples of each term in the equation. The accounting equation is: Assets  Liabilities  Owners’ equity. Examples of assets are cash, marketable securities, accounts receivable, notes receivable, and prepaid expenses. Examples of liabilities are accounts payable, notes payable, salaries payable, taxes payable, and mortgages payable. Examples of owners’ equity are retained earnings and the value of common stock. 11. What is the principal difference between a balance sheet and an income statement? A balance sheet is a summary of the firm’s accounts at a particular time and shows the various dollar amounts that enter into the accounting equation. An income statement is a summary of the firm’s revenues and expenses during a specified accounting period. 12. How are current assets distinguished from fixed assets? Why are fixed assets depreciated on a balance sheet? Current assets are cash or other assets that can be quickly converted to cash or that will be used within a year. Examples are cash, marketable securities, accounts receivable, notes receivable, merchandise inventory, and prepaid expenses. Fixed assets are assets that will be held or used for more than a year. Examples include land, buildings, and equipment. Depreciation is the process of apportioning the cost of a fixed asset over the period during which it will be used. The amount allotted to each year is an expense for that year, and the value of the asset must be reduced by that expense. 13. Explain how a retailing firm would determine the cost of goods sold during an accounting period. To determine the cost of goods sold, a retailing firm would start with the beginning inventory, add the net purchases, and then subtract the ending inventory. 14. How does a firm determine its net income after taxes? The net income after taxes is determined by taking net sales; subtracting cost of goods sold, total operating expenses, and interest; and then subtracting taxes due. 15. What is the purpose of a statement of cash flows? A statement of cash flows illustrates the effect of the operating, investing, and financing activities of a company on cash for an accounting period. 16. Explain the calculation procedure for and significance of each of the following: a. Return on sales. Return on sales is a financial ratio calculated by dividing net income after taxes by net sales. It indicates how effectively the firm is transforming sales into profits. b. The current ratio. A firm’s current ratio is computed by dividing current assets by current liabilities. It can be used to evaluate a firm’s ability to pay its current liabilities. c. Inventory turnover. A firm’s inventory turnover is the number of times the firm sells its merchandise inventory in one year. It is approximated by dividing the cost of goods sold in one year by the average value of the inventory. 17.7c Discussion Questions 1. Do managers really need all the kinds of information discussed in this chapter? If not, which kinds can they do without? Managers may not have a daily need for all the kinds of information discussed, but at some point each manager will touch on some aspect of all the different information types discussed in this chapter. Managers do need all the information they can get about their firm and the environment in which it operates so that they can plan for the future, implement present plans, and evaluate the results. 2. How can confidential data and information (such as the wages of individual employees) be kept confidential and yet still be available to managers who need them? Confidential data can be kept confidential by “locking” them with a special code or password. Only those managers who know the special code or password would have access to those records. 3. Bankers usually insist that prospective borrowers submit audited financial statements along with a loan application. Why should financial statements be audited by a CPA? Usually, a banker will insist on audited financial statements because the auditing process adds a certain degree of credibility to the information contained in the statements. (Caution: The fact that the firm’s financial statements have been audited means that the accountant or auditor found no obvious irregularities or reasons to distrust management. Audited statements do not guarantee that everything is aboveboard; what they guarantee is that the accountant or auditor didn’t find anything that was not.) 4. What can be said about a firm whose owners’ equity is a negative amount? How could such a situation come about? Such a firm is either out of business or experiencing severe financial problems. This situation probably came about as a result of misuse of business assets or operating at a loss for some time. 5. Do the balance sheet, income statement, and statement of cash flows contain all the information you might want as a potential lender or stockholder? What other information would you like to examine? No, the three statements are not enough. Lenders often calculate some of the financial ratios discussed in the chapter. In addition, potential stockholders should consider the contents of a stock prospectus. For existing stocks, investors would benefit by knowing about growth plans, mergers, acquisitions, age of major equipment, quality of management, leadership of the company, and so on. 6. Why is it so important to compare a firm’s current financial statements with those of previous years, those of competitors, and the average of all firms in the industry in which the firm operates? Comparing current financial statements of a firm with statements for previous years tells the company how it is doing in relation to past years and how well it may be achieving its long-term goals. The comparison with competitors indicates how well the company is doing in relation to its competitors and may provide some important tactical information. The comparison with the industry as a whole provides the appropriate background information. 17.7d Comments on Video Case 17.1 Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide. Information Helps Level the Playing Field for The Little Guys 1. Do you think a fairly small company like The Little Guys still needs a professional accountant after its owners have had so much experience running a successful business? Why or why not? Students should see that the firm definitely needs the services of an accountant to help keep the books in order and ensure compliance with accounting procedures and legal regulations in which the owners might not be expert. Software packages and back-of-the-envelope calculations can help alert managers to potential financial problems, but they can’t oversee the firm’s financial management or help shape future investing, financing, and tax planning. It’s likely, for instance, that The Little Guys’ accountant acted in an advisory capacity in its recent relocation and in the reorganization of some of its departments including payroll, accounts receivable, and accounts payable. A public company would, of course, also rely on an accountant for the preparation of its required financial statements and annual report. 2. Do you think The Little Guys is doing a good job of using information to manage the business? If so, why, and if not, how can the company improve this function? It appears that The Little Guys management team is very much aware of the need to manage cash flows. Having a firm policy to control discounts and payment options used in closing sales can help ensure that customers aren’t taking too long to pay or paying too little (too many discounts or special deals), and negotiating purchase terms from suppliers can help the firm retain its own cash for as long as possible. If either practice is not well managed, the danger is that the company could end up giving up too much cash at both ends of the flow. 3. What are some of the factors that contribute to The Little Guys’ cash-flow problems? How might the owners better manage its cash flows? The two primary reasons that affect this small electronics retailer are selling inventory at a discount and longer payment terms for customers. Selling merchandise at a low price is good for customers, but it reduces the amount of profit the firm makes on televisions, home theater systems, and other electronic products. Lower prices also mean the retailer has less money to pay its bills and expenses. Longer repayment terms are also good for customers, but can create serious cash-flow problems for a retailer. For example, if a customer negotiates a longer repayment term for their electronic purchases, the retailer may have to pay its suppliers before it receives payment for merchandise sold to its customers. In addition to discounted prices and negotiated payment terms, there are other causes of cash-flow problems including lower than expected sales and higher than expected expenses. Although it appears that The Little Guys management team is very much aware of the need to manage cash flows, managing cash flows is a “ongoing” problem for a small retailer that sells inventory at a discount and negotiates customer payment terms. If either practice is not well managed, the company could end up giving up too much cash on both ends of its cash flow. 17.7e Comments on Case 17.2 Making the Numbers or Faking the Numbers? 1. What are the ethical and legal implications of using accounting practices such as the book-and-hold technique to inflate corporate earnings? Both Rob and the second manager he talked with were concerned about the ethical implications of using the book-and-hold technique to inflate corporate earnings. From an ethical view, the sales revenue reported using the book-and-hold technique should be justified because there are actual sales commitments from a customer to purchase products. There should be a paper trail—e mails and written correspondence—which proves the orders are “real” and not just based on speculation. From a legal standpoint, the government has imposed new accounting rules designed to ensure the accuracy of the financial data that are reported to investors, Wall Street analysts, government regulators, lenders, and other interested parties. In the worst case scenario, corporate executives could be held liable and/or receive prison time for reporting inaccurate financial data. 2. Why would Commodore’s auditor insist that Rob document any sales booked under the book-and-hold technique? The auditor wants to show that Rob isn’t making up the transactions and actually expects customers to complete any purchases he reports under book-and-hold. Without proof, Commodore will be unable to justify the use of book-and-hold and could be violating accounting rules and regulations. 3. If you were in Rob’s situation, would you agree to use the book-and-hold technique this month? Justify your decision. The purpose of this question is to stimulate discussion of the ethical issues involved in Rob’s decision. Students should be able to explain why they agree or disagree with using the book-and-hold technique. Those who agree may say that the technique is commonly used in the industry and is legal. They may also say that Rob expects to actually complete the transactions, not just book them on paper only, even though the transactions will not be completed until weeks later. These students may fear being fired and not want to be responsible for other people losing their jobs. Students who oppose using the book-and-hold technique may observe that Rob is not sure when he will actually complete the transactions (if at all) and seems uncomfortable with booking the transactions in advance. Book-and-hold is not ethical (or legal) if the transactions are on paper only. These students may also say that top managers are acting unethically when they coerce employees into taking questionable steps under the threat of being fired. Ask students to look beyond Rob’s current decision and consider what he should do if he is asked to use book-and-hold next month or next year. 4. Imagine that Commodore has taken out a multimillion-dollar loan that must be repaid next year. How might the lender react if it learned that Commodore was using the book-and-hold method to make revenues look higher than they really are? Students should understand that lenders are keenly interested in tracking the financial health of corporate borrowers. Using the book-and-hold method over several quarters would inflate revenues and lead the lender to believe that Commodore is better able to handle its debt when, in fact, Commodore might be unable to repay its loan on time. The lender would not have a positive reaction to financial statements that hide the corporation’s true situation. Most major lenders are public corporations and must satisfy the earnings expectations of analysts and shareholders—the same pressure that Commodore is under. 17.7f Building Skills for Career Success 1. Social Media Exercise 1. What do you think of these rules? Do you agree or disagree? Why? While the term “testimonial” isn’t defined, it could include the “like” button on Facebook. In other words, if a client “likes” an investment advisor on Facebook, this could be considered publishing a testimonial, and this activity is prohibited. Likewise, it would be a bad idea for an investment advisor to seek “fans” because it could constitute using a testimonial in its advertising. Students’ answers on whether they agree or disagree with the rules will vary. Some will object to rules in general and will argue that the government cannot edict rules for every circumstance, particularly when the landscape is shifting as fast as it is in social media. In other words, by the time the rules are published, they will be out of date because technology has changed. Others may argue that, although social media is a new frontier, there need to be some rules or complete lawlessness will abound. The rules themselves are somewhat vague, and this can also be argued both pro and con. Students who prefer clear-cut rules that allow them to not have to think about compliance will be uncomfortable with the rules. Others may argue that the rapidly changing landscape of social media demands flexibility in rules. 2. Can you think of other industries that may have to contend with the transparency of social media? Students’ answers will vary, but some examples might include CPAs, attorneys, and surgeons. 2. Journaling for Success 1. Today, personal finance and accounting software packages are used by millions of people. Based on your initial research, would you prefer to purchase Quicken software or use a free software package available from a bank or financial institution? Why? Quicken permits (1) tracking of spending from checkbook balancing, online bill payment, expense categorization, bank and credit card information downloads, and budget creation and management; (2) financial planning by downloading and tracking 401(k) and IRA accounts, tax deduction searches, college, retirement and home purchase planning, and storage of financial statements; (3) monitoring investments by portfolio planning, investment tracking, Morningstar, investment reports, generating tax schedules, and minimizing capital gains. One Quicken package also provides home business help such as the generation of invoices. Most bank or financial institution software is more basic providing information such as debits, credits, automatic spending categories, automatic bill paying, and various types of budgeting, including expense recording. It is likely that students will prefer a free software package from a bank or financial institution since it is free, less complicated, and more user friendly. Additionally, most students probably do not have sophisticated financial analysis needs. 2. Why do you think these money-management software packages have become so popular? Do you think either type of software package could help you manage your finances? Money-management packages have become popular because they provide an important service, are user friendly, are easy to access on the Internet, and have received a good deal of advertising. Again, it is likely that either type of software package would help students manage their current finances. 3. Developing Critical-Thinking Skills A personal balance sheet shows your assets (what you own), liabilities (what you owe), and the amount of equity you have in assets, while a personal income statement shows your income and expenses for a period of time. Until you understand your present financial condition, it is very difficult to prepare a plan for improving. In analyzing these data, you should see areas where too much money is being spent or wasted. In preparing your plan for improvement, you must decide what is important to you. You must set goals and prepare objectives for accomplishing the goals. This may mean changing your priorities regarding how you spend your money, or it may signify that you need to earn more money by getting another job or a second job. Once you develop a plan, you must stick with the plan. That is the only way you can improve your financial situation and get the things you want. 4. Building Team Skills By comparing the present financial statements with statements in previous accounting periods, you can see where changes have occurred. Another way is to compare the present financial statements with statements from other firms in the industry. By using the debt-to-owners’ equity ratio, the creditors have provided about 70 cents of financing for every dollar provided by the owners. The debt-to-owners’ equity ratio for businesses generally ranges between 33 and 50 percent. Anything above 50 percent is too risky, and bankers are not going to lend money to the business. The high debt-to-owners’ equity ratio can be reduced by paying off debts or by increasing the owners’ investment in the business. In this business, prices of products may need to be increased, several people laid off to reduce salaries, and the advertisement budget reduced by finding less expensive ways to promote the business. 5. Researching Different Careers One source for finding current salary ranges for accountants is to search the Occupational Outlook Handbook on the Internet using this address: www.bls.gov/oco. Another source is to use the printed copy of the Occupational Outlook Handbook in the library. The Occupational Outlook Handbook states that accountants and auditors prepare, analyze, and verify financial reports and taxes and monitor information systems that furnish this information to managers in business, industrial, and government organizations. Four major fields of accounting are public accounting, management accounting, government accounting, and internal auditing. 17.8 QUIZZES I AND II Quiz I True-False Questions Select the correct answer. 1. T F For a manager or employee, information and data mean the same thing. 2. T F Financial accounting provides managers and employees within the organization with the information needed to make decisions about a firm’s financing, investing, marketing, and operating activities. 3. T F The accounting equation is assets + liabilities = owners’ equity. 4. T F Another name for the balance sheet is the statement of financial position. 5. T F The statement of cash flows illustrates how the operating, investing, and financing activities of a company affect cash during an accounting period. Multiple-Choice Questions Circle the letter before the most accurate answer. 6. A computer program that uses artificial intelligence to imitate a human’s ability to think is a(n) a. decision-support system (DSS). b. expert system. c. GAAP. d. database. e. executive information system (EIS). 7. Cash, inventory, and equipment are listed as __________ on a firm’s balance sheet. a. revenues b. expenses c. assets d. liabilities e. owners’ equity 8. Assets that can be converted quickly into cash or that will be used in one year or less are a. intangible assets. b. current assets. c. owners’ equity. d. current liabilities. e. revenues. 9. Beginning inventory + net purchases – ending inventory = a. gross sales. b. operating expenses. c. cost of goods sold. d. net profit before taxes. e. gross expenses. 10. Which of the following ratios measures how effectively a firm is transforming sales into profits? a. Return on sales b. Return on owners’ equity c. Acid-test d. Current turnover e. Earnings per share Quiz II True-False Questions Select the correct answer. 1. T F As a result of the Sarbanes-Oxley Act, the FDIC is responsible for establishing a full-time federal oversight board that will police the accounting industry. 2. T F A database is a single collection of data and information stored in one place that can be accessed by people throughout a firm to make business decisions. 3. T F Based on the accounting equation, owners’ equity is the difference between total assets and total liabilities. 4. T F The values of copyrights, patents, and goodwill are reported on a firm’s balance sheet as intangible assets. 5. T F Because of GAAPs, it is possible to compare accounting data for one firm with accounting data for competing firms. Multiple-Choice Questions Circle the letter before the most accurate answer. 6. A _______ is a measure that summarizes a particular characteristic of an entire group of numbers. a. pie chart b. statistic c. database d. datum e. tabular display 7. If assets total $125,000 and owners’ equity totals $75,000, how much are the firm’s liabilities? a. $200,000 b. $125,000 c. $75,000 d. $50,000 e. $0 8. Which of the following types of accounts would be listed on a firm’s balance sheet? a. Current liabilities b. Current assets c. Long-term assets d. Fixed assets e. Intangible assets 9. Revenues – cost of goods sold – expenses = a. fixed assets. b. owners’ equity. c. net sales. d. gross profit. e. net income before taxes. 10. The ratio computed by dividing cost of goods sold by the average value of inventory is a. return on owners’ equity. b. return on sales. c. liabilities turnover. d. current ratio. e. inventory turnover. 17.9 ANSWER KEY FOR QUIZZES I AND II Quiz I True-False Multiple-Choice 1. F 6. b 2. F 7. c 3. F 8. b 4. T 9. c 5. T 10. a Quiz II True-False Multiple-Choice 1. F 6. b 2. T 7. d 3. T 8. b 4. T 9. e 5. T 10. e 17.10 CLASSROOM EXERCISES 17.10a Homework Activities • Have students bring in an article that shows an example of a company’s assets or liabilities. • Researching and Following a Company Throughout the Course (continuing assignment). Have students locate the company’s most recent annual report and financial statements. What profitability ratios does the company report? How do they compare with those of one of the company’s major competitors? • Have students find a company’s annual report (on the Web) and prepare a summary of as many of the firm’s financial ratios as possible. They should be prepared to hand in the annual report along with their summary, and you may ask them to annotate the annual report to indicate where they found the relevant information. To make this assignment more complex, have students analyze (compare and contrast) the ratios for two companies in the same industry. • Provide students with the IRS corporate fraud investigations Web site [http://www.irs.gov/uac/ Corporate-Fraud---Criminal-Investigation-(CI)]. As a research/homework assignment, have students choose any one of the fraud investigations listed and have them conduct a periodical and Web site search. The results can be written up in a two-page paper. 17.10b Classroom Activities • Sell It Off, Sell It All Off! Exercise. If your class is small, the whole class can do this exercise as a single group. In larger classes, divide the class into groups of eight to ten. The objective of the exercise is to demonstrate the listing of assets in a balance sheet. Give each student a copy of the handout. They should have approximately 20 minutes to investigate the classroom and their individual belongings to find assets that can be converted to cash (liquidity). To make the project even more fun, let them investigate as much of the entire building as possible in the allotted time. Remind them not to disturb any other classes that might be in session. At the end of 20 minutes, they are to reorder all their found assets in order of liquidity. This will take approximately 10 to 15 minutes. Each group should then report their findings and defend their answers. • Let’s Buy a Nursery Exercise. Assemble students in groups of four to six students. Hand out the “Let’s Buy a Nursery” exercise that involves business ratios and assessing those ratios. Ask students to take approximately 20 minutes to calculate the ratios and answer the questions that follow. • Balance It! Exercise. This exercise can be done in groups of three or four students or individually. Pass out the “Balance It!” exercise to each student whether in groups or not. Emphasize that the answers to the exercise are not dependent upon upper- or lower-case letters or number format. Allow 15 to 20 minutes for this exercise. • Operating Expenses Brainstorming Classroom Exercise. Have students list the kinds of items that a university or college should consider when developing data for operating expenses. Handouts and instructor notes are provided. • Income and Outgo Statement Exercise. Have students create a simple personal income statement. • Accounting Jeopardy. Use the online jeopardy game that is available at http://jeopardylabs.com/play/accounting-terms8. This is a jeopardy game that can be played during class, and it is intended to reinforce the key terms covered in this chapter. You can divide student into teams and give a prize (or bonus points) to the winning team. 17.10c Exercise Handouts Follow on Next Pages SELL IT OFF, SELL IT ALL OFF! You and your teammates have an opportunity to start a fabulous new business but you need cash. You have 20 minutes to scour the classroom and surrounding area to find items you can convert to cash. List all the items you can find on the left-hand side of the sheet. At the end of 20 minutes, re-order the items in order of liquidity. Remember, balance sheets list all assets in order from the most liquid to the least liquid. Be prepared to defend your listing. All Assets Assets in Order of Liquidity 1. 1. 2. 2. 3. 3. 4. 4. 5. 5. 6. 6. 7. 7. 8. 8. 9. 9. 10. 10. 11. 11. 12. 12. LET’S BUY A NURSERY After years of saving, learning, investing, and preparing, you’re ready to make the big leap and purchase an existing nursery. You’ve narrowed your choices to two: Plants ‘n Growin’ Things and When It Grows. As the next step, you will assess the ratios to further narrow your decision. Plants ‘n Growin’ Things Nursery When It Grows Nursery Net income after taxes: $59,000 Owners’ equity: $390,000 Return on owners’ equity: Return on Owners’ Equity Which nursery is doing better? Net income after taxes: $209,000 Owners’ equity: $130,000 Return on owners’ equity: Net income after taxes: $59,000 Net sales: $190,000 Return on sales: Return on Sales Which nursery is doing better? Net income after taxes: $209,000 Net sales: $980,000 Return on sales: Current assets: $289,000 Current liabilities: $178,000 Current ratio: Current Ratio Which nursery is doing better? Current assets: $499,000 Current liabilities: $388,000 Current ratio: Net sales: $190,000 Accounts receivable: $22,000 Accounts receivable turnover: Accounts Receivable Turnover Which nursery is doing better? Net sales: $980,000 Accounts receivable: $87,500 Accounts receivable turnover: Cost of goods sold: $121,000 Average inventory: $22,000 Inventory turnover: Inventory Turnover Which nursery is doing better? Cost of goods sold: $688,000 Average inventory: $90,000 Inventory turnover: After calculating the above ratios and determining which nursery is doing better in each individual ratio, which nursery are you most interested in? Why? What could be done for the ratio(s) that were not favorable to the nursery that you chose? Balance It! Match the following words/numbers with the blanks in the balance sheet on the next page. (Ignore upper- and lower-case spellings and whether numbers are shown as currency or not.) ____ Equity ____ Receivable ____ Accounts ____ Common ____ Accumulated ____ Fixed ____ Payable ____ Less ____ Total ____ Intangible ____ Current ____ Notes ____ Long-term ____ Assets ____ Doubtful ____ 142,000 ____ 18,000 ____ 25,000 ____ 62,000 ____ 32,000 Balance It! Answers 1. Current 2. Accounts 3. Doubtful 4. Receivable 5. Total 6. Fixed 7. Accumulated 8. Less 9. Assets 10. Intangible 11. Payable 12. Notes 13. Long-term 14. Equity 15. Common 16. 62,000 17. 18,000 18. 25,000 19. 32,000 20. 142,000 Operating Expenses Brainstorming You and the other members of your group have five minutes to brainstorm as many operating expense items incurred by your college or university as you can. Be as specific as you can. Three items are listed to get you started. Good luck! • Utilities such as heat, electricity, and air conditioning • Small office supplies such as paper clips, pens, and writing pads • Copying-related expenses: copier leases, paper, toner, repair, space, copy center personnel Operating Expenses Brainstorming Instructor Notes Students may include the following additional items: • Utilities such as heat, electricity, and air conditioning • Small office supplies such as paper clips, pens, and writing pads • Copying-related expenses: copier leases, paper, toner, repair, space, copy center personnel • Building maintenance: repair, updates, salaries of maintenance personnel, equipment such as tools, cleaning, and other disposables • Landscaping expenses: salaries, seeds, plants, carts, shovels, trucks • Snow removal equipment: shovels, carts, salt • Institutional advertising: TV commercials, brochures, handouts, salaries • Athletic facilities, equipment, salaries • Computer systems, computers, maintenance, repair, software • Science laboratories, equipment • Security systems, salaries Income and Outgo Statement Use this handout to determine your monthly income and expenses. Make changes as appropriate for your personal situation. Cash Income: Monthly salary ________________________ Financial aid ________________________ Parental contribution ________________________ Other ________________________ Subtotal for income ________________________ Cash Outflow: Housing ________________________ Utilities (if not included) ________________________ Food ________________________ Entertainment ________________________ Car expenses (without gas) ________________________ Gas for car _________________________ School supplies ________________________ Health and beauty items ________________________ Other ________________________ Subtotal for outflow ________________________ Net gain or loss ________________________ RUNNING A BUSINESS—PART 6 Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide. Adding MIS and Social Media to Graeter’s Recipe for Success 1. Suppose you were writing a social media plan for Graeter’s, with two objectives: to improve brand awareness in markets where the ice cream is just becoming available and to build online orders during holiday periods. What quantitative and qualitative measurements would you plan to use to evaluate the results of your plan? Students are likely to suggest a variety of possible measurements. Brand awareness might be measured by number of Web site visitors, number of Facebook likes, and changes to these quantitative measures over time. Higher numbers of visitors and likes would mean higher brand awareness, although it wouldn’t necessarily indicate whether brand attitudes and preference were becoming more positive over time. Qualitative measures such as sentiment analysis would help Graeter’s determine how people feel about its brand. To measure effectiveness in building online orders, Graeter’s would count the number of orders during the period and, for an extra check, compare the results to the number of orders received during the same period in the previous year. Qualitative measures would include looking at customer satisfaction scores related to online ordering to ensure that orders are being fulfilled correctly and on time. 2. Graeter’s uses information to track cash, sales revenue, and expenses on a daily basis. How does this type of accounting system facilitate effective decision-making and discourage store-level theft? The type of information Graeter’s gathers can serve as input for a decision-support system, an executive information system, or an expert system, any of which would allow managers to construct models, answer “what if” questions, project future scenarios, analyze situations, and make better decisions. By allowing the company to more closely track how its resources generate sales revenues, software applications can provide automatic feedback mechanisms that readily pinpoint any resource. 3. As a small but fast-growing, privately-owned company, which of the financial ratios should Graeter’s track especially closely? Why? Graeter’s will want to track return on sales, because this ratio shows how effectively the firm is transforming sales into profits. Since the company is now investing more resources in growing sales, it will want to be sure that profits follow. Graeter’s will also keep an eye on its current and acid-test ratios, because these indicate how readily the firm can pay its current liabilities or debts. If it has in fact undertaken borrowing to finance its growth, it will watch its debt-to-owners’ equity ratio carefully. Graeter’s will, of course, track its inventory turnover, particularly because its products are perishable. Finally, it will pay attention to its accounts receivable turnover because it is now a wholesaler and sells to national supermarket chains. BUILDING A BUSINESS PLAN—PART 6 The Financial Plan Component Students’ next big and important step is to prepare a financial plan. Alert students to be fully prepared when faced with a need for financing. When they complete this section, students will realize that if they are prepared and are creditworthy, financing may be easier than they think. Warn students that most lenders and investors demand current financial statements that have been prepared by an independent CPA. Refer students to Chapter 17 in the textbook, “Using Management and Accounting Information,” to help them answer the pertinent questions in this part of the business plan. Make sure that students answer at least the following questions about the investment needed, sales and cash-flow forecasts, breakeven analysis, and sources of funding: • Money needed to open the business and the amount needed to keep it going • Money they have now to start the business and to stay in business • Monthly income statement for the first year and by quarter for the second and third years • Balance sheets for the first three years of operation • Breakeven analysis Reinforce final projections by comparing them with industry averages for their chosen industry. Review of Business Plan Activities Before students tackle the next and final part of the business plan, they should review their answers to the questions in each part to make sure that all their answers are consistent throughout the entire business plan. Then they should write a brief statement that summarizes all the information for this part of the business plan. Chapter 17 Video Case: Information Helps Level the Playing Field for The Little Guys RUNNING TIME: 6:17 Chapter 17 discussed the many uses of management and accounting information. Information produces knowledge and empowers managers and employees to make better decisions. A management information system (MIS) is a means of providing managers with the information they need to perform their jobs effectively. The five functions performed by an MIS system are collecting data, storing data, updating data, processing data into information, and presenting information. Accounting is the process of systematically collecting, analyzing, and reporting financial information. The accounting process is based on the accounting equation: Assets = Liabilities + Owners’ equity. A balance sheet is a summary of a firm’s assets, liabilities, and owners’ equity accounts at the end of an accounting period. An income statement is a summary of a firm’s financial operations during the specified accounting period. Since 1987, the Securities and Exchange Commission and the FASB have required all publicly traded companies to include a statement of cash flows in their annual reports. The firm’s financial statements and its accounting information become more meaningful when compared with corresponding information for previous years, for competitors, and for the industry in which the firm operates. Concepts Illustrated in the Video • Accounting Software • Cash Flow • Credit • Depreciation • Financial Analysis • Independent Retailers • Inventory • Manufacturer Relationships VIDEO CASE SUMMARY The Little Guys sells and installs top-brand home audio and theater equipment and has built an enviable reputation since its founding in 1994. The company prides itself on its highly knowledgeable salespeople and outstanding customer service, which have helped it survive economic downturns and strong competition from larger companies like Best Buy. With the help of QuickBooks accounting software and a professional accountant, the company’s co-owners have deepened their knowledge of accounting and finance as the business has grown. Cash flow is a major concern for the company. Sometimes, the firm has to make a special push to sell off inventory in order to generate extra cash flow when taxes are due, or when it wants to purchase new merchandise that is in high demand. One reason for diminished cash flow is the fact that customers often negotiate prices at The Little Guys. By establishing good relationships with suppliers, the company can obtain special discounts or improved payments terms. Critical-Thinking Questions Using information from the case and the video, answer the following questions: 1. Do you think a fairly small company like The Little Guys still needs a professional accountant after its owners have had so much experience running a successful business? Why or why not? Students should see that the firm definitely needs the services of an accountant to help keep the books in order and ensure compliance with accounting procedures and legal regulations of which the owners might not be aware. Software packages and back-of-the-envelope calculations can help alert managers to potential financial problems, but they can’t oversee the firm’s financial management or help shape future investing, financing, and tax planning. It is likely, for instance, that The Little Guys’ accountant acted in an advisory capacity in its recent relocation and in the reorganization of some of its departments including payroll, accounts receivable, and accounts payable. A public company would, of course, also rely on an accountant for the preparation of its required financial statements and annual report. 2. Do you think The Little Guys is doing a good job of using information to manage the business? If so, why, and if not, how can the company improve this function? It appears that The Little Guys management team is very much aware of the need to manage cash flows. Having a firm policy to control discounts and payment options used in closing sales can help ensure that customers are not taking too long to pay or paying too little (too many discounts or special deals), and negotiating purchase terms from suppliers can help the firm retain its own cash for as long as possible. If either practice is not well managed, the company could end up giving up too much cash at both ends of the flow. 3. What are some of the factors that contribute to The Little Guys’ operating expenses? Students should be able to infer that the company pays salespeople salaries, pays the accountant a fee or retainer, and incurs overhead expenses for maintaining its store and its warehouse including insurance and utilities. Trucks to deliver equipment to customers are another type of overhead expense, along with depreciation of equipment, salespeople’s salaries, and sales promotion expenses such as the cost of maintaining the company’s Web site. Chapter 17 Lecture Launcher: I’m Not Cut Out for This Kind of “Number Crunching” VIDEO SUMMARY Sylvie asks her friend, Dan, a CPA, to look at Urban Farmz’s accounting numbers. “The debt to income ratio is way off,” Dan tells her after taking a look at them. “I thought you said these guys were doing well.” “They are just growing so fast that I can’t control their day-to-day spending, most of which is actually necessary,” Sylvie confirms. Dan says Urban Farmz is taking too long to collect from its customers. He suggests maybe its accounts should be sent to a collections agency. Sylvie disagrees. “The boys would freak, and it would basically wipe out their customer base,” she explains. Can Dan help Urban Farmz out of its financial mess? Sylvie hopes so. Solution Manual for Business William M. Pride, Robert J. Hughes, Jack R. Kapoor 9781133595854, 9780538478083, 9781285095158, 9781285555485, 9781133936671, 9781305037083