Managing Operations Across the Supply Chain 2nd
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Chapter 1
Accounting in Business
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable information to help them make better decisions. Examples include information for people making investments, loans, and business plans.
2. Technology reduces the time, effort, and cost of recordkeeping. There is still a demand for people who can design accounting systems, supervise their operation, analyze complex transactions, and interpret reports. Demand also exists for people who can effectively use computers to prepare and analyze accounting reports. Technology will never substitute for qualified people with abilities to prepare, use, analyze, and interpret accounting information.
3. External users and their uses of accounting information include: (a) lenders, to measure the risk and return of loans; (b) shareholders, to assess whether to buy, sell, or hold their shares; (c) directors, to oversee their interests in the organization; (d) employees and labor unions, to judge the fairness of wages and assess future employment opportunities; and (e) regulators, to determine whether the organization is complying with regulations. Other users are voters, legislators, government officials, contributors to nonprofits, suppliers and customers.
4. Business owners and managers use accounting information to help answer questions such as: What resources does an organization own? What debts are owed? How much income is earned? Are expenses reasonable for the level of sales? Are customers’ accounts being promptly collected?
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch, Southwest Airlines, CitiCorp, Humana, Charles Schwab, and Prudential. Businesses offering products include Nike, Reebok, Gap, Apple Computer, Ford Motor Co., Philip Morris, Coca-Cola, Best Buy, and Circuit City.
6. The internal role of accounting is to serve the organization’s internal operating functions. It does this by providing useful information for internal users in completing their tasks more effectively and efficiently. By providing this information, accounting helps the organization reach its overall goals.
7. Accounting professionals offer many services including auditing, management advice, tax planning, business valuation, and money management.
8. Marketing managers are likely interested in information such as sales volume, advertising costs, promotion costs, salaries of sales personnel, and sales commissions.
9. Accounting is described as a service activity because it serves decision makers by providing information to help them make better business decisions.
10. Some accounting-related professions include consultant, financial analyst, underwriter, financial planner, appraiser, FBI investigator, market researcher, and system designer.
11. Ethics rules require that auditors avoid auditing clients in which they have a direct investment, or if the auditor’s fee is dependent on the figures in the client’s reports. This will help prevent others from doubting the quality of the auditor’s report.
12. In addition to preparing tax returns, tax accountants help companies and individuals plan future transactions to minimize the amount of tax to be paid. They are also actively involved in estate planning and in helping set up organizations. Some tax accountants work for regulatory agencies such as the IRS or the various state departments of revenue. These tax accountants help to enforce tax laws.
13. The objectivity concept means that financial statement information is supported by independent, unbiased evidence other than someone’s opinion or imagination. This concept increases the reliability and verifiability of financial statement information.
14. This treatment is justified by both the cost principle and the going-concern assumption.
15. The revenue recognition principle provides guidance for managers and auditors so they know when to recognize revenue. If revenue is recognized too early, the business looks more profitable than it is. On the other hand, if revenue is recognized too late the business looks less profitable than it is. This principle demands that revenue be recognized when it is both earned (when service or product provided) and can be measured reliably. The amount of revenue should equal the value of the assets received or expected to be received from the business’s operating activities covering a specific time period.
16. Business organizations can be organized in one of three basic forms: sole proprietorship, partnership, or corporation. These forms have implications for legal liability, taxation, continuity, number of owners, and legal status as follows:
*Proprietorships and partnerships that are set up as LLCs provide limited liability
17. (a) Assets are resources owned or controlled by a company that are expected to yield future benefits. (b) Liabilities are creditors’ claims on assets that reflect obligations to provide assets, products or services to others. (c) Equity is the owner’s claim on assets and is equal to assets minus liabilities. (d) Net assets refer to equity.
18. Equity is increased by investments from the owner and by net income (which is the excess of revenues over expenses). It is decreased by withdrawals by the owner and by a net loss (which is the excess of expenses over revenues).
by
19. Accounting principles consist of (a) general and (b) specific principles. General principles are the basic assumptions, concepts, and guidelines for preparing financial statements. They stem from long-used accounting practices. Specific principles are detailed rules used in reporting on business transactions and events. They usually arise from the rulings of authoritative and regulatory groups such as the Financial Accounting Standards Board or the Securities and Exchange Commission.
20. Revenue (or sales) is the amount received from selling products and services.
21. Net income (also called income, profit or earnings) equals revenues minus expenses (if revenues exceed expenses). Net income increases equity. If expenses exceed revenues, the company has a net loss. Net loss decreases equity.
22. The four basic financial statements are: income statement, statement of owner’s equity, balance sheet, and statement of cash flows.
23. An income statement reports a company’s revenues and expenses along with the resulting net income or loss over a period of time.
24. Rent expense, utilities expense, administrative expenses, advertising and promotion expenses, maintenance expense, and salaries and wages expenses are some examples of business expenses.
25. The statement of owner’s equity explains the changes in equity from net income or loss, and from any owner contributions and withdrawals over a period of time.
26. The balance sheet describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time.
27. The statement of cash flows reports on the cash inflows and outflows from a company’s operating, investing, and financing activities.
28. Return on assets, also called return on investment, is a profitability measure that is useful in evaluating management, analyzing and forecasting profits, and planning activities. It is computed as net income divided by the average total assets. For example, if we have an average annual balance of $100 in a bank account and it earns interest of $5 for the year, then our return on assets is $5 / $100 or 5%. The return on assets is a popular measure for analysis because it allows us to compare companies of different sizes and in different industries.
29A . Return refers to income, and risk is the uncertainty about the return we expect to make. The lower the risk of an investment, the lower the expected return. For example, savings accounts pay a low return because of the low risk of a bank not returning the principal with interest. Higher risk implies higher, but riskier, expected returns.
30B. Organizations carry out three major activities: financing, investing, and operating. Financing provides the means used to pay for resources. Investing refers to the acquisition and disposing of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies.)
[39] Edward Moore published “The World.”
[40] His son Richard, then at Oxford.
[41] George Berkeley, born 1684, died 1753. Celebrated divine and author.
To this Mrs. Montagu rejoins—
“How happy was the Bishop of Cloyne’s exit, or rather entrance, one should call it into another, than departure out of this life, for it had none of the agonising pangs of farewell. I pity poor Mrs. Berkeley, who had so little preparation for so heavy a stroke. I hope the constant conversation and example of a man so eminent in every Christian virtue may have given her an uncommon degree of fortitude and patience. I have heard her temper and understanding highly commended. She had a perfect adoration of the Bishop.... Dr. Berkeley had formerly made his addresses to Mrs. Donnellan: what were her reasons for refusing him I know not, friends were consenting, circumstances equal, her opinion captivated, but perhaps aversion to the cares of a married life, and apprehensions from some particularities in his temper hinder’d the match; however their friendship always continued, and I have always heard her give him for virtues and talents the preference to all mankind.”
Mrs. Montagu continues that she had neither health nor spirits to read with pleasure. “The misfortunes I have suffered and those I have feared have worn me out; after the various turns of hope and fear on my poor Lydia’s account, I am at last in despair about her. Mr. Botham sent to us for a milch ass for her some days ago.” After a long lamentation on Lydia’s behalf, she ends, “I am that poor little selfish animal, a human creature, made more poor, more little, more selfish by the Vapours; in all Sir Hans’ Museum there is not so ugly a monster as a woman in Vapours.” Lydia becoming worse, Mrs. Montagu wrote to inform her sister, Mrs. Laurence Sterne, whose curious letter I give in full as a specimen of her style. Both she and her sister Lydia wrote large, legible hands, much alike.
“Sutton,[42] March ye 9th.
“D M ,
“I return you my sincere and hearty thanks for the Favour of your most welcome letter; which had I received in a more happy Hour, wou’d have made me almost Frantick with Joy; for being thus cruelly separated from all my Friends, the least mark of their kindness towards me, or Remembrance of me gives me unspeakable Delight. But the Dismal Account I receiv’d at the same time of my poor Sister, has render’d my Heart Incapable of Joy, nor can I ever know Comfort till I hear of her Recovery.
“Believe me, Dear Madam, you were never more mistaken than when you imagine that Time and Absence remove you from my Remembrance. I do assure you I do not so easily part with what affords me so great Delight, on the Contrary I spare no pains to improve every little accident that recalls you to my Remembrance, as the only amends which can be made me for those Unhappinesses my Situation deprives me of. As a proof of this I must inform you that about three weeks ago I took a long Ride Through very bad weather, and worse Roads, merely for the satisfaction of enjoying a Conversation with a Gentleman who though unknown to you had conceiv’d the highest opinion of you from the perusal of several of your Letters, for which he was indebted to Mrs. Clayton. Had this Gentleman nothing else to recommend him, it certainly would be Sufficient to have made me desirous of his acquaintance; but he is both a Man of Sense and good Breeding, so that I am not a little pleas’d with my new Acquaintance. Your Supposition of my Sister’s having Boasted to me of her Children is doubtless extremely Natural, I wish it had been as Just: But I can in three words inform you of all I know about ’em,—to wit their number and their Names, for which I am indebted to Johnny. Had my Lydia been so obliging as to have made them the Subject of her Letters, I shou’d by this time have had a tolerable Idea of them, by considering what she said with some abatement: but as it is I no more know whether they are Black, Brown or Fair, Wise, or other wise, Gentle, or Froward than the Man in the Moon. Pray is this strange Silence on so Interesting a Subject owing to her profound Wisdom or her abundant Politeness? But be it to which it will, as soon as she recovers her Health I shall insist on all the satisfaction she can give on this head. In the meantime
I rejoice to find they have your approbation and am truly thankful that Nature has done her part, which indeed is the most Material, though I frankly own I shall not be the first to Forgive any slights that Dame Fortune may be dispos’d to shew them.
“Your god-Daughter, as in Duty bound, sends her best Respects to you. I will hope that she may enjoy what her poor Mother in vain Laments, the want of a more intimate acquaintance with her Kindred.
“Be so good as to make Mr. Sterne’s and my compliments to Mr. Montagu, and Believe me, Dear Madam, “Your most affectionate Cousin, and oblig’d Humble Servant, “E. S .”
The godchild was Lydia Sterne, born December 1, 1747, then in her sixth year. The Sternes had lost their first child, also a Lydia, born in October, 1745.
Lydia Botham did not long survive; I do not know the exact day of her death, but West, writing on April 2, to Mrs. Montagu, says—
“I cannot conclude without thanking you, my dearest Cousin, for informing me of your health, about which I should have been under great alarms upon hearing of Lydia’s Death, of which your letter brought me the first intelligence. This kind attention to my happiness at a time when your heart was overflowing with sorrow is such a proof of your regard for me I shall always remember with gratitude.”
Though deeply lamented, Lydia’s sufferings, latterly from asthma, dropsy, and a complication of disorders, made her death more or less a release. Mr. Botham was now left a widower with five children.
Writing from London, the end of April, to Sarah Scott in John Street, Bath, where she and Lady Bab
were living, Mrs. Montagu says—
“I have been at Oratorios so crowded and plays so hot I have almost fainted, but first of all crowds and greatest of all mobs, I must in justice name Lady Bath’s[43] assembly, from whence at hazard of life and limb I broke away a little after one on Tuesday last. Her ladyship had happily gathered together eight hundred Christian souls, many of which had like to have perished by famine and other accidents. I suffered the most from the first of these; being ill, I had not eat a morsel of dinner, and there was not a biscuit nor a bit of bread to be got, and half the company got out through the stables and garden. The house was not empty till near 3 in the morning.”
Mrs. Montagu had for some time been expecting Miss Carter, the young daughter of Mr. Montagu’s faithful agent, to stay with her. She says—
“My little disciple[44] is very good, and takes to me wondrous well. I expect the eldest Miss Botham next week, you may suppose it was some denial not to choose the second, but I thought the other my duty rather, and the eldest would have been much grieved to be passed over.”
Writing to Mr. Montagu (who had gone to Sandleford on business, and to cure a bad cold) on May 3, his wife describes a Rout she had given. “I had rather more than an hundred visitants last night, but the apartment held them with ease, and the highest compliments were paid to the house and elegance of the apartments.”
Gilbert West from Wickham, on May 23, gives the following account of Mr. Pitt, whose health had been causing much anxiety to his friends—
“Had I answered your letter last night I should have given you a good account of Mr. Pitt, who was yesterday in better spirits than I have seen him in since he came hither, but I find by inquiring after him this morning that he has had a bad, that is, a sleepless night, which has such effect on his spirits that I am afraid we shall see him in a very different condition to-day. This has happened to him every other night since Friday last, so I am persuaded there is something intermitting in his case, of which neither the Physicians nor himself seem to be aware. I think he ought to go to town to consult with them, but to this he has so great an aversion that I question if he will comply with our request. Sir George Lyttelton, who saw him on one of his bad days, Saturday last, promised to come hither to-day, and his voice added to ours may possibly prevail....
“Mr. Pitt express’d a due sense of your goodness in inquiring so particularly after him, and that you may know how high you stand in his opinion, I must inform you that in a conversation with Molly he pronounced you the most perfect woman he ever met with.”
MR. PITT’S INSOMNIAMr. Pitt was recommended by his doctors to go to Tunbridge Wells to drink the waters. Accompanied by Mr. West, Mrs. West, and Miss West, he set off on May 26. West, writing to Mrs. Montagu, says—
“Tunbridge Wells, May 27, 1753.
“M C ! M F !
“Your kind letter which I received on coming from Chapel is the most agreeable thing I have met with at Tunbridge, where we arrived last night about 7, after only stopping at Sen’nocks, and dining at Tunbridge Town. It came very seasonably to relieve my spirits which were much sunk by the extreme dejection which appears to-day in Mr. Pitt, from a night passed entirely without sleep, notwithstanding all the precautions which were taken within doors to make it still and quiet, and the accidental tranquillity arising from the present emptiness and desolation of this place, to which no other invalids, except ourselves are yet arrived, or even expected to arrive as yet. He began to drink the waters to-day, but as they are sometimes very slow in their operations, I much fear both he and those friends who cannot help
sympathizing with him, will suffer a great deal before the wished-for effect will take place, for this Insomnium his Physicians have prescribed Opiates, a medicine which, in this case, though they may procure a temporary ease, yet often after recoil upon the spirits. He seems inclined to take Musk, and intends to talk with Molly about it. I think his Physicians have been to blame in giving all their attention to the disorder in his bowels, and not sufficiently regarding the Distemperature of his spirits, a Disease much more to be apprehended than the other; while he continues under this Oppression, I am afraid it will be impossible for me to leave him, as he fancies me of the greatest use to him as a friend, and a comforter, but I hope in God he will soon find some alteration for the better, of which I shall be glad to give you the earliest information. In the meantime I beg you will take care of your health, and as the most effectual means of establishing it, I most earnestly desire you will follow Mr. Montagu’s exhortations to repair forthwith to Tunbridge, as by so doing you will not only contribute to the regaining your own health, but to the comfort and felicity of some here who love you.... Kitty, Molly and Mr. Pitt desire their affectionate compliments. Molly begs you will communicate this account of Mr. Pitt to Sir G(eorge) L(yttelton).”
In West’s next letter, of May 30, he says—
RENT OF LODGINGS“I think Mr. Pitt is somewhat better, tho’ his spirits are too low to allow him to think so, and his nights are still sleepless without the aid of Opiates. I write this from the ‘Stone House’ to which we were driven by the noisy situation of our house at the foot of Mount Sion. How many pleasing ideas our present habitation recalls I leave you to judge, though there needs no such artificial helps to make you ever present to my memory.... Mr. Pitt is lodged in your room, and I in that which was Mr. Montagu’s dressing-room on the ground floor.”
The Montagus and Wests together had rented the “Stone House” the year before this. On May 31 West writes to say he is leaving Mr. William Lyttelton with Mr. Pitt, and will return to Wickham on Saturday, and dine with Mrs. Montagu at Hayes en route. He adds, “Mr. Pitt feels a little gout in his foot, which we hope will increase so as to be an effectual Remedy for all his disorders.”
On June 6, West, who had been commissioned to find a house for Mrs. Montagu, looks at the last two left on Mount Ephraim, a Mr. Spooner’s and a Mr. Sele’s; he decided on the latter, orders the chimney to be made higher, and a hovel put on it to stop smoking, and to order the owners to lie in the beds to air them!
“The price he told me was 4 guineas a week, or thirty-five guineas for the whole season, that is till Michaelmas, or a week or two over; for this price you are to have stabling for eight horses, and a coach house for two carriages.... Mrs. West will be obliged to you if you will bring her jewels with you.”
Mrs. Montagu arrived at Tunbridge on June 11, and on the 13th writes to her husband, then in London, to say
“my cough is much abated, and my appetite increased: the asses’ milk sits well on my stomach.... I have a constant invitation to dinner at the ‘White House’; Mr. Pitt is too ill to dine abroad, and the Wests cannot leave him, so as often as I am disposed for company, I dine there; the rest of my time passes in taking air and exercise, and now and then the relief of a book.”
“BEAU” NASH
