CH A P T ER 1
INT RODUCTION TO BUSINESS ACTIVITIES AND OVERVIEW OF FINANCIAL STA TE MENTS AND THE REPORTING PROCESS
Questions, Exercises, and Problems: Answers and Solutions
1 1 Th e firs t qu es t ion a t th e en d of each ch apt er a sk s th e s tu den t to review th e i m port an t ter m s an d concept s di scu s s ed in th e ch apter. S tu den t s m ay wish to con su lt th e glos s ary a t th e en d of th e book in addi t ion to th e defin it ion s an d discu s s i on s in th e ch ap ter.
1.2 Setting Goals and Strategies: Al th ough a ch arit a b le organ iz a t i on mu s t ob t a in su fficien t resources t o fund i t s op era tion s, i t wou ld not pursu e profit s or weal th increa se s a s goal s. A ch arit a b le organ iz a t i on wou ld direct i t s effort s toward providing services t o i t s con s t i tu encie s.
Fin ancing: A ch ari t a b le organ iz a t ion m ay ob t a in so m e or a l l of i t s fin ancing from don a t ion s (con tribu t ion s). A ch arit a b le organ iz a t ion doe s not i s su e com m on s t ock or oth er form s of s h areholders’ equ i ty, nor does i t h ave ret ain ed earn ings.
Investing: Si m i l ar to bu s in es s fir m s, ch arit a b le organ iz a t i on s acqu ire productive capaci ty (for examp le, bu ildings) t o carry ou t th eir activi t ie s.
Operations: A ch ari t a b le organ iza t i on might prepare fin ancia l s t a t e m en t s th a t co mp are inflows (for exam ple, con trib u tion s) with ou tflows. Wh ile th e se s t a t e men t s m igh t a ppe ar s i m i l ar to i ncome s t a t e m en t s, th ere wou ld be n o calcu la t ion of net income becau se th e purpose of th e ch arit a b l e organ iza t ion i s to provide services to i t s cons t i tu en t s, n ot seek profi t s.
1.3 Th e b al ance sh eet sh ows a s s e t s, l i a b i li t i e s an d, sh areholders’ equ i ty a s o f a s pecific da t e ( th e b a l ance sh eet d a t e), s i m il ar to a sn ap sh o t. Th e incom e s t a t e m en t an d s t a t e m en t of ca sh flows report ch anges in a s s e t s an d li a b i l i t ie s over a period of ti me, s i m i l ar to a m o t ion picture.
1 4 Th e au di tor evalu a te s th e accoun ting sys t e m, inclu ding i t s a b i l i ty to record tran s ac t ion s properly an d i t s opera t ion al effect ivenes s, an d al s o de ter min es wheth er th e fin ancial report s prepared by th e firm’s m an ager s conform to th e requ iremen t s of th e appl ica b le au th ori t a t ive gu idance The au di tor provides an au dit op in ion tha t reflect s h i s profe s s ion a l conclu sion s. For mo s t pu blicly traded fir m s in th e U.S. th e au ditor a l s o provides a s ep ara t e op in ion on th e effect ivenes s of th e firm’s in tern a l con trols over fin ancial reporting.
1.5 M an agemen t, under th e overs igh t of th e firm’ s govern ing board, prepare s th e fin ancia l s t a t e m en t s.
1.6 Employees an d su ppliers of goods su ch a s raw m a t eri a l s or merch an di se often provide th e services or goods before t hey are paid. Th e firm h a s th e ben efit of con su m ing or u sing th e goods or s ervices before i t tran sfers ca sh t o th e emp loyees an d su pplier s. The length of th e fin ancing period i s th e nu mber of days be tween when th e employee s an d su ppliers provide good s an d services an d when th e firm p ay s ca sh t o th o se e m p loyees an d su ppl ier s.
1.7 Accoun t s receivable represen t a m oun t s owed by cu s to mer s for goods an d s ervices th ey h ave a lready received. Th e cu s to m er, th erefore, h as th e ben efit of th e goods an d services before i t pays ca sh. The length of th e fin ancing period i s th e nu m ber of days be tween when th e cu s to mer receives th e good s an d services an d when th e cu s to m er pays ca sh to th e s e ller of th ose goods an d services
1.8 Bo th kin ds of cap aci ty represen t inves t m e n t s in long-lived a s s e t s, wi th u sefu l lives (or service lives) th a t can extend for several or m any years. Th ey differ in th a t l an d, bu ildings, an d equ ip men t represen t physica l capi t a l, wh ile pa t en t s an d licen se s repres en t in t angible or in tel lec tu al capi t a l
1 9 A ca len dar year en ds on Decem ber 3 1 A fi s cal year en ds on a da t e th a t i s de ter min ed by th e firm, perh aps b a s e d on i t s bu s in es s m ode l (for example, m any ret a i lers ch oose a fi sc a l year en d th a t i s clo se to th e en d of J anu ary). A fir m can choose th e calen dar year a s i t s f i sc al year, an d m any do Bo t h calen dar years an d fisca l years h ave 12 mon th s.
1 1 0 M o s t f irm s report th e a moun t s in th eir fin ancial s t a t e m en t s u s ing th e currency of th e coun try where th ey are incorpora ted an d conduct mo s t of th eir bu s in es s act ivi tie s. So m e firm s u se a differen t currency.
1 1 1 A curren t i te m i s expected t o re su lt in a ca sh receip t ( a s s e t s su ch a s accoun t s receivab le) or a ca sh paymen t (li a b i li t i e s su ch a s accoun t s paya ble) wi th in approxi m a t ely on e year or le s s. A n oncurren t i t e m i s expected t o gen erate ca sh over periods longer th an a year (a s s e t s, such a s factory bu ildings th a t will be u sed t o produce goods for s a le over m any years) or u se ca sh over period s longer th an a year (lia b il i t i e s su ch a s long t erm de b t ). U ser s of fin ancial s t a t e m en t s wou ld likely be in tere s t ed in th i s d i s t inct ion becau se th e di s t in ction provides in forma t i on a bou t sh ortt erm ca sh flows sep ara t e ly from long-term ca sh flows.
1.1 2 Hi s t orical a m oun t s reflect th e a m oun t s a t which i te m s en tered th e firm’ s b a l ance sh eet, for examp le, th e acqu is i t i o n cos t of inven tory. Hi s t orical a m oun t s reflect econ omic con dit ion s a t th e t i m e th e firm o b t a in ed a s s e t s or ob t a in ed fin ancing. Curren t a m oun t s reflect valu es a t th e b a l ance sh ee t d a t e, so th ey reflect curren t economic condi tion s. For examp le, th e h is t orical a m oun t for inven tory i s th e a m o un t th e firm p a id t o o b t a in th e inven tory, an d th e curren t a m oun t for inven tory i s th e a m oun t for wh ich th e firm cou ld replace th e inven tory today.
1.1 3 An income s t a t e m en t connect s two succes s ive ba l ance sh eet s th rough i t s effect on ret a in ed earn ings. Net income th a t i s n ot p ai d to sh areh olders a s dividen ds increa se s ret a in ed earn ings. A s t a t e m en t of ca sh flows connect s two succes s ive ba l ance sh eet s b ecau se i t e xpla in s th e ch ange in ca sh (a b a l ance sh eet accoun t) from opera t ing, fin ancing, an d inves t ing act ivit ie s. Th e s t a t e men t of ca sh flows a l s o sh ows th e rela t ion be tween net income an d ca sh flows from opera t ion s, an d ch anges in a s s e t s an d li a b i li t i e s th a t involve ca sh flows.
1 1 4 Th e U S Securit ie s an d Exch ange Co m m i s s i on (SEC) i s th e govern men t agency th a t en forces th e securi tie s l aw s of th e Un ited S t a t e s, including th o se th a t app ly to fin ancial reporting Th e Fin ancia l Accoun ting
S t an d ard s Bo ard (F A S B) i s th e privat e- sector fin ancial accoun ting s t an dard s e t t er in th e Un ited S t a t e s. Th e In tern at ion al Accoun ting
S t an d ard s B o ard (IA S B) i s a priva te- s ector fin ancial accoun ting s t an dard s e t t er th a t pro mu lga te s accoun ting s t an da rds. More th an 10 0 coun trie s requ ire or permi t th e u se of IFR S, or s t an dard s b a s ed on or adap t ed fro m IFR S, for so m e or al l firm s in th ose coun trie s. Nei th er th e FA S B n or th e IAS B h a s any enforcemen t powers.
1.1 5 U.S. GA A P mu s t be u sed by U. S. SEC regis tran t s an d m ay be u sed by o th er firm s a s well. In tern a tion al F in ancia l R eport ing S t an dard s (IFR S ) m ay be u sed by non-U.S. firm s th a t li s t and trade th eir securit ie s in th e
Un ited S t a t e s, an d th ese firm s m ay al so u s e U.S. GAA P.
1 1 6 Th e purpose of th e IA S B’ s an d F A S B’ s concep tu al fra m eworks i s t o gu ide s t an dard- se t t ing decis ion s of th e two Bo ards For exa mp le, th e conceptu a l fra mework specifie s th e purpose of fin ancial report ing an d th e qu al i t a t iv e ch aracteri s t ic s of fin ancial in form a t ion tha t wou ld serve th a t purpose. F A S B an d IA S B bo ard me m b er s u se th i s conceptu al s tructure a s th ey con sider so lu tion s to accoun ting is su e s.
1.1 7 Th e accru al b a s i s of accoun ting i s b a s ed o n a s s e t s an d li a b il i t ie s, n ot on ca sh receipt s an d di s burse m en t s. It provide s a be t t er b a s i s for me a su ring performance becau se i t i s b a s ed on revenues (in flows of a s s e t s fro m cu s to m ers), n ot ca sh receipt s fro m cu s t o m ers, an d on expen se s (ou tflows o f a s s e t s from genera ting revenues), not ca sh paymen t s. It m a tch es revenues with th e cos t s a s s ocia t ed wi th earning th os e revenues an d i s n ot sen s i t ive t o th e ti m ing of expendi tures.
1.1 8 (Pa l m er Co ldga te, a con su mer product s f irm; unders t an ding th e ba l ance sh ee t.) (a moun t s in mi l lion s of U S $)
a. Property, plan t, an d equ ip men t, net = $3,01 5.2 m il l ion.
b. Noncurren t a s s e t s = $ 6,49 3.5 (= $ 3,01 5.2 + $ 2,2 7
+
4 4.8 + $ 3 6 1.5).
c. Long-ter m deb t = $3,2 2 1.9 mi l lion.
d Curren t a s s e t s – Curren t li a b i l i t ie s = $ 3,6 1
m i l lion.
e. Yes, th e firm h a s been profi t a b le s in ce i t s incept ion. We kn ow th i s becau se i t s Re t a in ed Earn ings, $ 1 0,6 2 7.5 m il l ion, i s po s i t ive. The firm m ay h ave h ad a lo s s in on e or more prior years; cu mu la t ively, i t h as h ad pos i t ive income.
f. To t a l Li a bi l i t ie s/To t a l A s s e t s = $7,8 2 5.8/$ 1 0,1 1 2.0 = 77.4%.
g. To t a l A s s e t s = Tot a l Lia b i li t i e s + Sh areholders’ Equ ity $ 1 0,1 1 2.0 = $ 7,8 2 5.8 + $ 2,2 8 6.2
1 1 9 (C apcion, a paper an d packaging firm; unders t an ding th e income s t a t e m en t ) (amoun t s in th ou s an ds of euros )
a Co s t of goods sold = €1,3 3 1,2 9 2 1 th ou san d
b. S e l ling and di s tri bu t ion expen se s = €1 7 2,0 3 3.4 th ou s an d.
c. Gros s m argin percen tage = 23.4% (= €4 0 5,66 7.1/€1,73 6,9 5 9.2).
d. Operat ing profi t = €16 9,4 1 8.2 th ou s an d.
Profit before t ax = €17 0,8 6 3.9 th ou s an d. Difference equ al s € 1,4 4 5.7 th ou s an d (= €1 6 9,4 1 8.2 – € 1 7 0,8 6 3.9). Th e i te m s th a t con s t i tu te th i s d ifference are n onopera t ing sources of income (expen se).
e Effective tax ra te = €54,2 8 9 9/€17 0,8 6 3 9 = 3 1 8%
f Profit = €1 1 6,5 7 4 0 th ou san d
1.2 0 ( Se ller Red bu d, a re t ai ler; unders t an ding th e s t a t e m en t of ca sh flow s.) (a m oun t s in th ou san ds of U S $)
a. C a sh in flow from opera t ing activi tie s = $ 6 1 4,5 3 6 th ou s an d.
b. C a sh in flow from inves t ing act ivit ie s = $1 0 1 ,69 8 th ou s an d.
c. C a sh u sed in fin ancing act ivit ie s = $ 7 0 5,5 3 1 th ou s an d ou tflow.
d. Ne t ca sh flow equ al s $ 1 0,7 0 3 th ou s an d (=
–$ 7 0 5,5 3 1).
e. Ch ange in ca sh ba l ance equ al s $ 1 0,7 0 3 th ou san d (= $ 2 2 4,0 8 4 –$ 2 1 3,3 8 1). Th e increa se wa s a t tri bu t a b l e to th e n et ca sh in flow during th e year of th e sa m e a m oun t, $1 0,7 0 3 th ou s an d
1 2 1 (EuroTel, a co m mun ica t ion s fir m; b a l ance sh ee t rel a t ion s ) (a moun t s in m i l lion s of euros [€]) ShareCurrent Noncurrent Current Noncurrent holders’ Assets +
1.2 2 (GoldR an, a m in ing comp any; ba l ance s heet rel a t ion s.) (a moun t s in m i l lion s of Sou th African ran d [R])
1 2 4 (Au to C o, an au to m o t ive m anufacturer; income s
2 5 (
a
1.2 6 (Delvico, an Indian firm; ret a in ed earn ings rela t ion s.) (a moun t s in m i l lion s of Indian rupees [R s])
Retained Retained Earnings Earnings Start o f Net Dividends = End o f Y ear + Inco m e – Declared Y ear
1.2 7 (B argain Purch a se, a ret a iler; ca sh flow rela t ion s.) (a moun t s in m il l ion s of U S $ ) Cash at Cash Flo w Cash Flo w Cash Flo w Cash at Start fro m fro m fro m End o f o f Year + Operations + Investing + Financing = Y ear $ 8 1 3 + $ 4,1 2 5 + $( 6,1 9 5) + $ 3,7
= ? C a sh a t en d of year = $2,45 0 mi l lion
1 2 8 (Bu enco, an Argen tin ean firm; ca sh flow rela t i on s ) (a moun t s in m i ll ion s of Argen tin ean peso s [P s]) Cash at Cash Flo w Cash Flo w Cash Flo w Cash at End o f fro m fro m fro m End o f Y ear + Operations + Investing + Financing = Y ear
Th e net ca sh ou tflow for inves t ing for th e year = Ps( 3 3 6,8 5 1) mi l lion
1 2 9 (Ken ton Li mi t ed; prepara
1 3 0 (Heckle Group;
1.3 1 (Hews t on, a m anufacturing firm; accru al versu s ca sh b a s i s of accoun ting.) (a m oun t s in U S $) a. Ne t Income = S a le s Revenue – Expen se s =
Ne t C a sh Flow = Ca sh Inflows – C a sh Ou tflows =
b. C a sh collect ion s m ay be le s s th an revenues for a t le a s t two rea son s. Fir s t, cu s to m er s m ay h ave purch ased on credi t an d h ave not yet p a id. S econ d, th e firm m ay h ave collected ca sh from cu s t o mer s who purch ased on credi t l a s t year, bu t ca sh collect ion s re m ain le s s th an ca sh collecte d on new credit s a le s.
c. C a sh paymen t s m ay be le s s th an expen ses for a t le a s t two rea s on s. Fir s t, th e firm m ay h ave received goods and services from su ppl ier s, bu t n ot yet pai d for th ose i te m s (i.e., th e am oun t s are to be paid in th e
1 3 1 c con tinued next year). Secon d, th e firm m ay h ave accrued expen se s th i s year th a t will be p a id in ca sh in fu ture period s; an exa m p le wou ld be th e accru al of in tere s t expen se on a bon d th a t will be pa id th e next year.
1 3 2 (DairyLa m b, a New Z eal an d firm; accru al versu s ca sh b a s i s of accoun ting ) (a m oun t s in mi ll ion s of New Zeal an d dollars ) Calculation o f net inco me:
..................................................................................
o f net ca sh flo w:
3 (Co m pu terCo, a S ingapore m anufacturer; b al an ce sh eet rela t i on s.) (a m oun t s in mi ll ion s of S ingapore dollar s [$ ]) Th e mi s s ing ite m s appe ar in boldfa ce type.
1 3 3 con tinued
1.3
.....................................................
.........................................
1 3 5 (Eas t on Home, a con su mer product s m an ufacturer; income s t a t e
1 3 6 (Yankee Fa sh ion, a clo th ing ret a i ler; income s t a t e men t
a t ion s ) (a m oun t s in mi ll ion s of U S $)
Th e mi s s ing ite m s appe ar in boldfa ce type.
1.3 7 (A B Brown, a Swedi sh firm; s t a t e m en t of cash flows rela
Sta tement o f Cash Flo ws (a mounts in millions o f Swedi sh kronor [ SEK ] )
1 3 8 (J ackson Corpora t ion; s t a t e men t of ca sh flows rela t ion s )
JACKSON CORPORATION
1 3 9 (Je t Aw ay Airlin es; preparing a ba
JE TA WA Y AIRLINES
Inco m e Statem ent (a mounts in thousands o f US$)
Fo r the Year Ended: Sept. 30,
1.4 0 (B lock’s Tax an d Bookkeeping Services; cash versu s accru al accoun ting.) (a m oun t s in U S $) a. Inco m e for July 2013: (1) Cash Basis Acco unting
1 4 0 con tinued
b. C a sh on Han d: Beginn ing Bal ance, Ju ly 1 $ 0 Fin ancing Sources an d (U se s):
Ren t .........................................................................
ipmen t Ren t a l .............................................................
Office Su pplie s Expen se .................................................... (3 7 0)
Th e en ding ba l ance in ca sh con ta in s th e effect s of bo th opera t ing ac tivi t ie s, wh ich h ave net ca sh flow of $(5,3 7 0), an d fin ancing ac tivi t ie s, wh ich h ave net ca sh flow of $6 0,0 0 0. Th e firm i s f in ancing i t s o pera t ing act ivit ie s wi th a b ank loan and with funds inves t ed by i t s own er; bo th of th ese s ources of funds represen t cla i m s on th e firm’s a s s e t s, not increa se s in net a s s e t s.
1.4 1 ( S t a t ion ery Plu s; ca sh b a s i s versu s accru al b a s i s accoun ting.) (a moun t s in U S $ ) a. Inco m e for Novem ber 2013: (1) Cash Basis Acco unting S a l e s ................................................................................ $ 2 3,0 0 0 Co s t of Merch andi se ....................................................... (2 0,0 0 0) Ren t ................................................................................. (9,0 0 0) S a l ar ie s ........................................................................... (1 0,0 0 0) U t i li t i e s .......................................................................... (4 8 0) Income (Los s ) $ (1 6,4 8 0)
(2) Ac crual Basis Acco unting
b. Inco m e for Dece m b er 2013:
(1) Cash Basis Acco unting
S
1 4 2 (A B C C o m p any; rela t i on s be tween n et incom e an d ca sh flows ) (a moun t s in US $) a
b. Th e ca sh flow proble m ari s e s b ecau se of a l ag be tween ca sh expendi tures incurred in producing goods an d ca sh collect ion s from cu s to m ers once th e firm se l l s th o se good s. For examp le, ca sh expendi tures during Febru ary ($ 1,50 0) are for goods produced during Febru ary an d so ld during M arch. C a sh i s n o t collec ted from cu s to m ers on th e se s a l e s, h owever, un til A pril ( $ 2,0 0 0). A growing firm mu s t generally produce more unit s th a n i t se l l s during a period if i t i s t o h ave su fficien t qu an ti t i e s of inven tory on h an d for fu ture s a le s. Th e ca sh n eeded for th i s h igher level of production m ay well exceed th e ca sh received from th e prior period’s s a l e s Thu s, a ca sh sh ort age develop s.
Th e difference be tween th e se ll ing price of goods s o ld an d th e cos t of th ose goods e qu al s n e t income for th e period A s long a s s e ll ing prices exceed th e cos t of th e good s, a po si t i ve net income resu l t s. A s th e nu mber of un it s s o ld increa s e s, n et incom e increa se s A fir m doe s not n eces s ari ly recognize revenues an d expen se s in th e s a m e period a s th e rela t ed ca sh receipt s an d expendi tures. Thu s, ca sh decrea s e s, even th ough net income increa s e s.
c. Th e income s t a t e m en t an d s t a t e m en t of ca sh flows provide inform a t i on a bou t th e profi t a b i li ty an d li qu idi ty, res pect ively, of a firm during a period. The fact th a t n et i ncome an d ca sh flows can m ove in oppo si t e d irect ion s h igh ligh t s th e need for in form a t ion from bo th s t a t e m en t s. A fir m with ou t su fficien t ca sh will n ot su rvive, even if i t opera t e s profi t a b ly. Th e b al an ce sh ee t in dica te s a fir m ’ s a s s e t an d equ ity pos i t i on a t a m o men t in t i m e Th e deteriora t ing ca sh po s i t ion i s eviden t from th e li s t ing of a s s e t s a t th e beginn ing of each m on th Examin ing th e ca sh receipt s an d d i s bu rse m en t s during each m on th, however, iden tifie s th e rea son s for t he deteriora t ion
4 2 con tinued
d. S tr a t egie s for deal ing with th e ca sh flow proble m cen ter around (a) reducing th e lag be tween ca sh ou tflows t o produce widget s an d ca sh inflows from th eir s a le, an d (b) increa s ing t he m argin be tween se ll ing prices an d production cos t s.
To reduce th e lag on collection of accoun t s receivable, A B C m igh t:
(1) Provide to cu s to m er s an incen tive to p ay fa s t er th an 30 d ays, such a s offering a di scoun t if cu s to m er s p ay m ore qu ickly or ch arge in teres t if cu s to m er s del ay paymen t.
(2) U s e th e accoun t s receivab le a s a b a s i s for e xtern al fin ancing, such a s borrowing from a b ank an d u sing th e receivable s a s coll a t era l or sel ling (factoring) th e receivab le s for im m edi a t e ca sh.
(3) S e l l on ly for ca sh, al th ough compe t i t io n m ay preclude th i s a l t ern a tive
To delay th e paymen t for widget s, A B C m igh t:
(1) Delay paying it s su ppl iers (increa se s accoun t s p ayab le) or borrow from a b an k u sing th e inven tory a s coll a t era l (increa se s b an k loan paya ble).
(2) Re duce th e holding period for inven torie s b y in s t i tu t ing a ju s t - int i m e inven tory sys t e m. Th i s a l t ern a tive requ ires ordering raw m a t eria l s on ly when needed in production an d m anufacturing widget s on ly to cu s t o mer orders. Dem an d appe ar s t o be su fficien tly predict a b le s o th a t oppor tun itie s for a ju s t -in -t i m e inven tory sys t e m see m a t tr ac t ive.
To increa se th e m argin be tween se l ling price an d m anufacturing cos t, A B C m igh t:
(1) Negoti a t e a lower purch ase price with su ppliers of raw ma t eri al s
(2) Su b s t i tu te more efficien t m anu facturing equ ipmen t for work n ow don e by emp loyees.
(3) Increa s e se ll ing prices.
1 4 2 d con tinued
Th e ca sh flow proble m i s sh ort- ter m becau se i t wil l n eu tral i ze i t s e lf by June Th i s n eu tral i z a t ion occurs becau se th e growth ra te in s a l e s i s declin ing (50 0 add i t ion al un it s so ld on top of an everincrea s ing s a le s b a s e). Thu s, th e firm n eed s a sh ort- ter m so lu t ion to th e ca sh flow proble m. If th e growth ra te were s t e a dy or increa s ing, A B C m igh t con sider ob t a in ing a more perm an en t s ource of ca sh, such a s i s su ing long-term deb t or com m on s tock.
1.4 3 (B a l ance sh eet an d income s t a t e m en t rela t i on s.)
a. Bu sh els of whea t are th e mo s t conven ien t i n th i s ca s e wi th th e given inform a t i on. Th is qu es t i on emph a s i ze s th e need for a com m on m e a su ring unit.
b. IVAN
AND IGOR
Co mparative Balance Sheets (a mounts in bushels o f whea t)
Liabilities and Owner’s Equity
t s Paya ble .... 3
To t a l Li a bi l i t ie s an d
Ques t ion s wil l likely ari se a s t o th e accoun ting en ti ty One view i s th a t th ere are two accoun ting en ti t ie s (Ivan an d Igor) to whom th e Re d- Be arded B aron h as en tru s t ed a s s e t s an d requ ired a periodic reporting on s t eward sh ip. The “ own er ” in owner ’ s equ ity in th i s ca se i s th e Red- Be arded B aron. An oth er view is tha t th e Red- Be arded Baron
1 4 3 b con tinued
i s th e accoun ting en ti ty, in wh ich case fin ancial s t a t e m en t s th a t com bin e th e fin ancial s t a t e m en t s for Ivan an d Igor are appropria t e. Iden tifying th e accoun ting en ti ty depen ds on th e in ten ded u se of th e fin ancial s t a t e m en t s. For purpose s of eval u at ing th e performance of Ivan an d Igor, th e accoun ting en ti t ie s are se para t e Ivan an d Igor. To a s s e s s th e ch ange in weal th of th e Red-Be arded B aron during th e period, th e com b in ed fin ancial s t a t e men t s reflect th e accoun ting en t i ty.
c.
IVAN AND IGOR
Co mparative Inco me Sta tement (a mounts in bushels o f whea t)
Ch ap t er 1 doe s n ot expose s tu den t s to th e concept of deprecia t ion. M o s t s tu den t s, h owever, grasp th e n eed t o record so me a m oun t of expen se for th e ox and th e plow.
d. (a m oun t s in bu sh el s of whea t)
IVAN IGOR Owner’s Equ ity, Beginn ing of Period...................... 1 6 2 1 0 1 Plu s Ne t Income .....................................................
Le s s Di s tri bu t ion s to Owner (2 0) (3 0)
Owner’s Equ ity, End of Period ............................... 35 6 19 3
e. We cannot co mp are th e a moun t s of n et income for Ivan an d Igor with ou t ad ju s t m en t becau se th e Re d- Be arded B aron en tru s t ed th e m with differen t a moun t s of resources. We mu s t rel a
a m oun t s to
Th e purpose of th i s qu e s t ion is t o get s tu den t s t o th ink abou t performance me a su remen t The in s tructo r m ay or m ay not wi sh to devote cl a s s t i m e a t th i s poin t d i scu s s ing wh ich ba s e i s m ore appropria t e.