Accounting as a Form of Communication Chapter 1 Accounting as a Form of Communication Financial Accounting. Alternate 4e by Porter and Norton 1 1

Decisions Made with Financial Information Add new product line?? Invest?? Build new plant?? Borrow $$?? Loan $$?? Extend credit $$?? Start new business?? Sell stocks or bonds?? 2 2

What is Accounting? Identifying Economic to Information Measuring various users Measuring Communicating

Internal and External Users of Accounting Information Creditors Current and Potential Owners Government Agencies Suppliers Trade Organizations Financial Analysts Banks Internal Users - Management 12 12

The Accounting Equation Assets = Liabilities + Owners’ Equity (or Stockholders' Equity) Creditors' Claims to Assets Owners' Economic Resources = + Accounts payable Notes payable Capital stock Retained earnings Examples: Cash Accounts receivable Inventory 14 14

= + Balance Sheet - snapshot of financial position Liabilities Assets Owners’ Equity (or Stockholders' Equity) Stock Certificate 15 15

Winnebago Industries, Inc. Consolidated Balance Sheets A = L + SE Winnebago Industries, Inc. Consolidated Balance Sheets Assets August 31, 2002 August 25, 2001 A Current assets: Cash and cash equivalents $ 42,225 $102,280 Receivables, less allow. for doubtful accts. ($120 and $244, respectively) 28,616 21,571 Dealer financing receivables, less allow. for doubtful accts ($96 and $117, respectively) 37,880 40,263 Inventories 113,654 79,815 Prepaid expenses 4,314 3,604 Deferred income taxes 6,907 6,723 Total current assets 233,596 254,256 Property, plant and equipment, net 48,927 46,536 Investment in life insurance 23,602 22,223 Deferred income taxes 22,438 21,495 Other assets 8,514 7,412 $337,077 $351,922

Winnebago Industries, Inc. Consolidated Balance Sheets A = L + SE Winnebago Industries, Inc. Consolidated Balance Sheets Liabilities and Stockholders' Equity August 31, 2002 August 25, 2001 = L Current liabilities: Accounts payable, trade $ 44,230 $ 40,678 Income taxes payable 2,610 4,938 Accrued expenses 41,761 34,392 Total current liabilities 88,601 80,008 Postretirement health care and deferred compensation benefits 68,661 64,450 + SE Stockholders' equity: Capital stock common 12,944 12,943 Additional paid-in capital 25,740 22,261 Reinvested earnings 284,856 234,139 323,540 269,343 Less treasury stock, at cost 143,725 61,879 Total stockholders' equity 179,815 207,464 8 $337,077 $351,922

Income Statement Revenues $$$ Less: Expenses ($$) Net income $$ 16 16

Winnebago Industries, Inc. Consolidated Statements of Operations August 31, 2002 August 25, 2001 Revenues - Expenses = Net Income Revenues Net revenues $ 828,403 $ 675,927 Cost of manf. products 708,865 588,561 Gross profit 119,538 86,966 Selling, general and administrative expenses 38,341 31,892 Operating income 81,197 55,474 Financial income 2,859 3,754 Income before income taxes 84,056 59,228 Provision for taxes 29,385 15,474 Change in acctg. principle, net --- (1,050) Net Income $ 54,671 $ 42,704 Expenses Expenses Revenues Expenses

Statement of Retained Earnings Beginning retained earnings $$$ Add: Net income for the period $$ Deduct: Dividends for the period ($$) = Ending retained earnings $$$ 11 17 17

Winnebago Industries, Inc. Statement of Retained Earnings for 2002 Beginning balance, retained earnings $ 234,139 Add: Net income 54,671 Deduct: Cash dividends (3,954) Ending balance, retained earnings $ 284,856

Relationships among Financial Statements – Winnebago Industries Example Income Statement for 2002 Revenues $ xxx Less: Expenses xxx Net income $ 54,671 Statement of Retained Earnings for 2002 Beginning balance, retained earnings $ 234,139 Add: Net income 54,671 Deduct: Cash dividends (3,954) Ending balance, retained earnings $ 284,856 Balance Sheets 2002 2001 Total assets $ xxx $ xxx Liabilities xxx xxx Capital stock xxx xxx Retained earnings 284,856 234,139 Total liabilities & stockholders' equity $ xxx $ xxx

Financial Statement Assumptions Economic Entity Cost Principle Time Period Going Concern Monetary Unit 20 20

Economic Entity Concept Each entity has its own books, records and financial statements that are separate from owners No intermingling of personal and business assets and liabilities or income and expenses Business Books & Records Owners’ Books & Records 21 21

Cost Principle Record assets at cost paid to acquire them Continue to value assets at historical cost until sold More objective than market value 22 22

Going Concern Assume business will continue indefinitely into the foreseeable future Justifies use of historical cost 23 23

Monetary Unit How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.) Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements 24 24

Time Period Assumption Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year) Necessary to provide users with financial results on a timely basis Requires use of estimates 25 25

The Rules of the Game The rules GAAP The rule makers FASB The rule enforcers The CPA regulators GAAP FASB SEC AICPA 26 26

Where Accountants Work Private Business Nonbusiness Entities Public Accounting auditing tax services management consulting Educational Institutions 27 27

Ethical Dilemmas

Ethics Decision-Making Model Likely to occur when considering decision about accounting methods or disclosures and: There are conflicting rules There are no clear GAAP Fraud or other questionable actions have occurred Recognize dilemma Identify interested parties List alternatives Select best alternative

Ethics Decision-Making Model For each group (management, shareholders, investors, auditor, creditors, employees), identify potential: Benefits Harm Rights / claims Conflicting interests Responsibilities Recognize dilemma Identify interested parties List alternatives Select best alternative

Ethics Decision-Making Model Recognize dilemma Which alternative provides: The most useful and timely info? The most reliable info? Info that most accurately represents what it claims? Info that is free from bias? Identify interested parties List alternatives and evaluate Select best alternative

Ethics Decision-Making Model Recognize dilemma Which alternative best provides decision makers with: The most relevant info? The most reliable info? The most accurate info? The most neutral info? Identify interested parties List alternatives and evaluate Select best alternative

End of Chapter 1