商学精要: The Role of Accountants and Accounting Information

Chapter Overview

Every organization relies on accounting information and financial statements in order to gauge business activity over periods of time. Accounting information can be thought of as a measuring stick of an organization’s performance in specific periods of time.

This chapter unfolds with a discussion of the role of accountants and an explanation of the types of accountants in the U.S. business system—public accountants, private accountants, management accountants, and forensic accountants. In addition, the chapter discusses the accounting equation as well as the three basic financial statements, showing how they reflect the activity and financial condition of a business. It also looks at the key standards and principles for reporting financial state¬ments and describes how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business. Finally, the chapter ends with a discussion of the role of ethics in accounting—a subject that has received much press in recent years.

Learning Objectives

1. Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

2. Explain how the accounting equation is used.

3. Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

4. Explain the key standards and principles for reporting financial statements.

5. Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

6. Discuss the role of ethics in accounting.

7. Describe the purpose of the International Accounting Standards Board and explain why it exists.

LIST OF IN-CLASS ACTIVITIES: AUTHOR’S CHOICE
Activity Description Time Limit
1. Ice-Breaker: Do You Use Accounting?  Students think about ways in which they use accounting in their personal lives. 20 min.
2. Class Discussion: Interpreting Financial Statements Students determine in which financial statement specific pieces of information are included. 20 min.
3. Small-Group Discussion: Annual Reports Students review financial information from annual reports of real companies. 45 min.
4. Class Discussion: Choose an Investment  Students calculate financial ratios and interpret their results.  30 min.

CHAPTER OUTLINE
Learning Objective 1
Explain the role of accountants and distinguish between the kinds of work done by public accountants, private accountants, management accountants, and forensic accountants.

What Is Accounting and Who Uses Accounting Information?
Accounting is a comprehensive system for collecting, analyzing, and communicating financial information that is used to prepare financial statements and management reports. Bookkeeping is just one phase of accounting—the recording of transactions. Because businesses engage in thousands of transactions, ensuring consistent, dependable financial information is mandatory. This is the job of the accounting information system (AIS)—an organized procedure for identifying, measuring, recording, and retaining financial information so that it can be used in accounting statements and management reports. Users of accounting information include business managers, employees and unions, investors and creditors, tax authorities, and government regulatory agencies.

Who Are Accountants and What Do They Do?
The controller manages a firm’s accounting activities. As chief accounting officer, the controller ensures that the AIS provides the reports and statements needed for planning, controlling, decision making, and other management activities.

A.  Financial versus Managerial Accounting

1. Financial Accounting. A firm’s financial accounting system is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies.

2.  Managerial Accounting. Managerial (management) accounting serves internal users. Managers at all levels need information to make departmental decisions, monitor projects, and plan future activities.

B. Certified Public Accountants (CPAs)
Certified public accountants (CPAs) offer accounting services to the public. They are licensed by a state after passing an exam prepared by the American Institute of Certified Public Accountants (AICPA), which also provides technical support and discipline in matters of ethics.

1.   The “Big Four” Public Accounting Firms. The “Big Four” Public Accounting Firms,    Deloitte Touche Tohmatsu (U.S.) Ernst & Young (United Kingdom),  PricewaterhouseCoopers, PwC (United Kingdom), KPMG (Netherlands) account for one- half of the total revenue generated by accounting firms active in the United States.

2.  CPA Services. Most CPA firms provide auditing services, tax services, and management services.

a. Auditing. An audit examines a company’s AIS to determine whether financial reports reliably represent its operations; an audit must follow generally accepted accounting principles (GAAP), which are the guidelines governing the content and form of financial reports.
b.  Tax Services. Tax services include assistance not only with tax-return preparation, but also with tax planning.

c.  Management Advisory Services. Management advisory services range from personal financial planning to planning corporate mergers.

3.  Noncertified Public Accountants. This category includes accountants who do not take the  CPA exam, who are preparing for it, or who are waiting for state certification.

4.  The CPA Vision Project. The CPA Vision Project is a profession-wide program that was established to assess the future of accounting; a prime reason for the project is the disturbing decline in the number of young people who have entered the profession in recent years. The CPA Vision Project identifies core competencies for accounting that will be necessary for the future CPA.

C. Private Accountants and Management Accountants
Private accountants are hired as salaried employees of a firm who perform day-to-day
activities. Management accountants provide services to support managers in various
activities. Many hold the certified management accountant (CMA) designation.

D. Forensic Accountants.
Forensic accountants may be called on for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements. Forensic accounting is the use of accounting for legal purposes.

1. Investigative Accounting. Investigative accounting involves the investigation of a trail of financial transactions behind a suspected crime.

2. Litigation Support. Forensic accountants assist in the application of accounting evidence for judicial proceedings by preparing and preserving evidence for judicial proceedings.

a.  Certified Fraud Examiners. The Certified Fraud Examiner (CFE) designation is administered by the Association of Certified Fraud Examiners; the CFE’s activities focus specifically on fraud-related issues.

E. Federal Restrictions on CPA Services and Financial Reporting: Sarbox
The Sarbanes–Oxley Act (2002) was enacted to restore public trust in corporate accounting practices; Sarbox restricts the kinds of nonaudit services that CPAs can provide.

1.  Sarbox Compliance Requirements. The CFO and CEO must pledge that the company’s finances are correct and must vouch for the methods and internal controls used to get those numbers; Sarbox covers numerous provisions related to financial reporting.

KEY TEACHING TIPS
• Remind students that accounting is a comprehensive system for collecting, analyzing, and communicating financial information, whereas bookkeeping is the recording of transactions.

• Point out that the controller manages a firm’s accounting activities.

• Make sure students keep these two points separate: Financial accounting is concerned with external information users; managerial accounting serves internal users.

• Make sure students understand the role of a CPA, who offers accounting services to the public and who is licensed by a state after passing an exam.

• Reinforce that generally accepted accounting principles (GAAP) are accounting guidelines governing the content and form of financial reports.

• In contrast to what students learned about the CPA, they should remember that private accountants perform day-to-day activities; most are management accountants who support managers in the organization.

• Students often see the work of forensic accountants as being especially interesting. You may want to spend some time discussing these accountants to pique their interest.

QUICK QUESTIONS

• Who uses accounting information and for what do they use it?

• Outside of the company, who might have an interest in a company’s financial situation?

• What types of services do CPAs perform?

• What has occurred in the business environment that has prompted the need for forensic accountants and certified fraud examiners?

• The Sarbanes–Oxley Act of 2002 (Sarbox) is a critical piece of federal legislation enacted to restore public trust in corporate accounting practices. What are some of Sarbox’s provisions?

Use In-Class Activity 1: Ice-Breaker: Do You Use Accounting?
Time Limit: 20 minutes
 
Learning Objective 2:
Explain how the accounting equation is used.

The Accounting Equation
Underlying all record-keeping procedures is the most basic tool of accounting—the accounting equation.

The accounting equation states that Assets – Liabilities = Owners’ Equity.

A. Assets and Liabilities
An asset is any economic resource that is expected to benefit a firm or an individual who owns it; a liability is a debt that the firm owes to an outside organization.

B. Owners’ Equity
Owners’ equity refers to the amount of money that owners would receive if they sold all assets and paid all debts.

KEY TEACHING TIPS

• Make sure that students understand the accounting equation:

Assets – Liabilities = Owners’ Equity

• An asset is any economic resource that is expected to benefit a firm that owns it; a liability is a debt that the firm owes. What are some examples of assets and liabilities found in organizations?

• Make sure students understand that owners’ equity is the money owners would receive if they sold all a company’s assets and paid all its liabilities.

QUICK QUESTION

• In what way(s) do businesses benefit from intangible assets?
 
Learning Objective 3:
Describe the three basic financial statements and show how they reflect the activity and financial condition of a business.

Financial Statements
Accountants summarize the results of a firm’s transactions and issue reports to help managers make informed decisions. Among the most important reports are financial statements, which fall into three broad categories—balance sheets, income statements, and statements of cash flows.

A. Balance Sheets
Balance sheets display a firm’s financial condition at one point in time. They supply information about assets, liabilities, and owners’ equity.

1. Assets. An asset is any economic resource that a company owns and from which it expects to get some future benefit.

a. Current Assets. Current assets include cash and assets that can be converted into cash within a year. The act of converting something into cash is called liquidating. Assets are normally listed in order of liquidity—the ease of converting them into cash.

b. Fixed Assets. Fixed assets, including land, buildings, and equipment, have long-term use or value. Accountants use depreciation to spread the cost of an asset over the years of its useful life.

c. Intangible Assets. Intangible assets have monetary value in the form of expected benefits. These usually include the cost of obtaining rights or privileges, such as patents, trademarks, copyrights, and franchise fees. Goodwill is the amount paid for an existing business beyond the value of its other assets.  

2. Liabilities. Current liabilities are debts that must be paid within one year. Accounts payable are unpaid bills to suppliers for materials as well as wages and taxes that must be paid in the coming year. Long-term liabilities are debts that are not due for at least a year.

3.  Owners’ Equity. Owners’ equity is broken down into paid-in capital and retained earnings. Paid-in capital is additional money invested in the firm by its owners. Retained earnings are net profits kept by a firm rather than paid out as dividend payments to stockholders.

B. Income Statements
The income statement is sometimes called a profit-and-loss statement because its description of revenues and expenses results in a figure showing the firm’s annual profit or loss.

1. Revenues. Revenues are funds that flow into a business from the sale of goods or services.

2. Cost of Revenues (Cost of Goods Sold). The cost of revenues section shows the costs of obtaining the revenues from other companies during the year. Cost of goods sold are costs of obtaining materials to make products sold during the year.

a. Gross Profit. Gross Profit is calculated by subtracting the cost of revenues from revenues obtained by selling the firm’s products.

  b.  Operating Expenses. Operating expenses are resources that must flow out of a        company if it is to earn revenues.

3. Operating and Net Income. Operating income compares the gross profit from operations against operation expenses. Net income (net profit or net earnings) is calculated by subtracting income taxes from operating income.

C. Statements of Cash Flows
Required of all firms whose stock is publicly traded, the statement of cash flow shows a company’s yearly cash receipts and cash payments. This statement shows cash flows from operating, investing, and financing activities.

D. The Budget: An Internal Financial Statement
A budget is a detailed statement of estimated receipts and expenditures for a period of time in the future.

KEY TEACHING TIPS

• Reinforce that financial statements include the summaries of a firm’s transactions and help managers make informed decisions; financial statements include balance sheets, income statements, and statements of cash flows. Go over each of the financial statements carefully with students.

• Make sure that students understand the distinction between current assets and fixed assets and that they can provide examples of each.

• Make sure students understand the difference between current liabilities and long-term liabilities and that they can provide examples of each.

• Explain that owners’ equity can be broken down into paid-in capital and retained earnings, and explain each of those concepts.

• Reinforce that you can find the company’s revenues and expenses in the income statement (or profit-and-loss statement). Revenues – Expenses = Profit (or Loss). Also point out the main areas of the income statement: revenues, cost of revenues, and operating expenses.
 
• Reinforce that revenues are the funds that flow into a business from the sale of goods or services; the cost of revenues (or the cost of goods sold) are the costs of obtaining materials to make products sold during the year.

• Point out that a statement of cash flows describes yearly cash receipts and cash payments; it includes cash flows from operations, investing, and financing activities.

QUICK QUESTIONS

• What are some examples of operating expenses?

• Who might be interested in the information revealed in a statement of cash flows? Why?

• What might be included in a budget for a typical house¬hold in the United States?

HOMEWORK

Using a Budget
Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as homework. This assignment asks students to interview an accountant and ask how the firm uses budgets.

At-Home Completion Time: 1 hour

Use In-Class Activity 2: Class Discussion: Interpreting Financial Statements
Time Limit: 20 minutes

Use In-Class Activity 3: Small-Group Discussion: Annual Reports
Time Limit: 45 minutes
 
Learning Objective 4:
Explain the key standards and principles for reporting financial statements.

Reporting Standards and Practices
Spelled out in GAAP, these practices and principles cover a range of issues.

A. Revenue Recognition and Activity Timing
Revenue recognition is the formal recording and reporting of revenues in financial statements, which takes place after the earnings cycle is completed.

B.  Full Disclosure
This indicates that financial statements should not include just numbers; they should include management’s interpretation and explanation of those numbers.

KEY TEACHING TIP

Remind students that full disclosure requires that financial statements include both the “numbers” and management’s interpretations/explanations of those numbers.

Learning Objective 5:
Describe how computing financial ratios can help users get more information from financial statements to determine the financial strengths of a business.

Analyzing Financial Statements
Financial statements provide data, which can reveal trends and be applied to various ratios.

A. Solvency Ratios: Borrower’s Ability to Re-Pay Debt
Solvency ratios provide measures of the firm’s ability to meet its debt obligations.

1. The Current Ratio and Short-Term Solvency. Short-term solvency ratios measure a company’s liquidity and its ability to pay immediate debts. The most commonly used of these is the current ratio, which measures a company’s ability to meet current obligations out of current assets.

2. Long-Term Solvency. Long-term solvency is calculated by dividing debt—total liabilities—by owners’ equity; this ratio illustrates the extent to which a firm is
financed through borrowed money.

a.  Leverage. Leverage refers to the ability to make otherwise unaffordable investments by borrowing funds.

B. Profitability Ratios: Earnings Power for Owners
Profitability ratios are used for measuring potential earnings.

1.  Earnings per Share. This ratio is calculated by dividing net income by the number of shares outstanding; this determines the size of the dividend that a firm can pay shareholders.

C. Activity Ratios: How Efficiently Is the Firm Using Its Resources?
Activity ratios reveal the efficiency with which firms have used resources; an example is when annual sales revenues can increase without an increase in operating costs.

KEY TEACHING TIPS

• Reinforce that the current ratio measures a company’s ability to meet current obligations out of current assets. The formula is Current Assets/Current Liabilities.

• Reinforce that long-term solvency indicates a company’s ability to repay debts in future years; the formula is Total Liabilities/Owners’ Equity.

• Point out earnings per share determines the size of the dividend a firm can pay shareholders; this can be determined using the formula Net Income/Share of Stock.

QUICK QUESTIONS

• What do solvency ratios measure?

• How can high debt be desirable for a company?

Use In-Class Activity 5: Class Discussion: Choose an Investment
Time Limit: 30 minutes

HOMEWORK

Interview a Manager
Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as homework. This assignment asks students to interview the manager of a local retailer, wholesale business, or manufacturing firm about the role of ethics in that company’s accounting practices.

At-Home Completion Time: 1 hour

 
Learning Objective 6:
Discuss the role of ethics in accounting.

Bringing Ethics into the Accounting Equation

A. Why Accounting Ethics?
The purpose of accounting ethics is to maintain public confidence in business institu¬tions, financial markets, and the products and services of the accounting profession.

1. AICPA’s Code of Professional Conduct. The code of professional conduct for public accountants in the United States is maintained and enforced by the AICPA; the following areas are included: responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services.

2. Violation of Accounting Ethics and GAAP. The majority of recent accounting wrongdoing has related to the six ethics-related areas.

3.  Ethics Means Doing the Right Thing. Ethics remains an area where one person who is willing to “do the right thing” can make a difference.

KEY TEACHING TIP

It is critical that students recognize the purpose of ethics in accounting: to maintain public confidence in business institutions, financial markets, and the products and services of the accounting profession

QUICK QUESTIONS

• What are the six ethics-related areas outlined by the AICPA in its Code of Professional Conduct?

• What is the connection between the Sarbanes–Oxley Act of 2002 and the recent widespread violations of accounting ethics?

HOMEWORK

Business Plan
Now is a good time to assign the Part 5 of the business plan project. In this section, students consider their IT needs and costs and complete a balance sheet and income statement for their business.

At-Home Completion Time: 3 to 5 hours
Learning Objective 7:
Describe the purpose of the International Accounting Standards Board and explain why it exists.

A. International Accounting Standards Board
Established in 2001 and housed at London, England, the International Accounting Standards Board (IASB) is an independent, nonprofit organization responsible for developing a set of global accounting standards, and for gaining the support and cooperation of the world’s various accounting organizations to implement those standards.

B. Why One Set of Global Practices?
Although more than 100 countries have adopted IASB’s accounting practices, nearly 40 others, including China, Canada, and the United States, continue to use their national GAAPs. Twenty-two U.S.-based global companies such as Google, Caterpillar, and Microsoft may prepare different financial reports using local accounting practices for each country in which they conduct business.

1. Example Areas Targeted for Aligning U.S. GAAP and IASB
Among the many differences between the practices of U.S. GAAP and IASB—some reports identify more than 400 such discrepancies—the following examples illustrate some discrepancies and proposals for convergence toward universal standards in financial reporting.

a. In valuing assets
b. In revenue recognition
c. In de-valuing of financial assets

2. Timetable for Implementation
The U.S. Securities and Exchange Commission has targeted 2015 as the earliest date that U.S. companies will be required to use IASB procedures for financial reporting.

 IN-CLASS ACTIVITIES

In-Class Activity 1: Ice-Breaker
Do You Use Accounting?

Activity Overview:
This activity asks students to think about the ways in which they use accounting in their personal lives.

Time Limit: 20 minutes

What to Do:
1. Ask students to make a list of ways in which they use accounting in their personal lives. They might want to consider the following questions when making up their lists: (15 minutes)

a. How do you keep track of what money is coming in?

b. How do you keep track of what money is going out?

c. How do you budget your money?

d. How do you plan for unexpected expenditures?

e. What types of “tools” do they use to keep track of their financial information?

f. At later points in your life, do you think you will account for your money differently? If so, how?

2. Ask students to share any relevant information that might benefit other students in the class. (5 minutes)

Don’t Forget:
Everyone has his or her own unique way of keeping track of their financial situation; some will be more effective than others.

Wrap Up:
Remind students that we are all accountants to a certain degree. Bring the exercise to a close by briefly outlining accounting and previewing the types of accountants discussed in the chapter.
 
In-Class Activity 2: Class Discussion
Interpreting Financial Statements

Activity Overview:
This activity asks students to determine in which financial statement specific pieces of information are included.

Time Limit: 20 minutes

What to Do:
1.  In advance, make a list of revenues, expenses, assets, debts, etc.

2.  Ask students to account for each item on a balance sheet or income statement as you reveal the item; for each item, ask, “Where would this go?” (20 minutes)

Don’t Forget:
Another alternative is to ask students to individually write down their answers and then discuss each item revealed and the rationale for including it in either the balance sheet or income statement.

Wrap-Up:
Wrap up the activity by providing a brief overview of the accounting equation, followed by a brief overview of the roles of the financial statements.

In-Class Activity 3: Small-Group Discussion
Annual Reports

Activity Overview:
This activity gives students a chance to review actual financial information from annual reports of real companies.

Time Limit: 45 minutes

What to Do:
1.  In advance, ask students to bring a copy of a recent annual report to class. Make it clear that many companies post their annual reports online, so they can access the information they need on the Web. You may also want to bring a supply of annual reports in case students can’t get to them.

2.  Divide students into groups of two and ask each group to review one of the annual reports. In particular, ask students to identify financial information that has been discussed in this chapter and discuss whether that information coincides with what has been presented in this chapter. (30 minutes)

3.  Reassemble the class as a whole and ask each group to reveal the financial status of their selected company. (15 minutes)

Don’t Forget:
Remind students to also pay attention to the opinion of each company’s auditing firm as revealed in the annual report.

Wrap-Up:
Remind students of the use of the annual report, such as how potential investors in a corporation interpret such data prior to making a stock purchase.

 
In-Class Activity 4: Class Discussion
Choose an Investment

Activity Overview:
This activity asks students to calculate financial ratios and interpret the results.

Time Limit: 30 minutes

What to Do:
1. Ahead of time, ask students to bring an annual report of a corporation of their choice to class.

2. Divide the class into groups of two, asking each group to calculate the following ratios/information based on information they find in the annual report (15 minutes):
a. Current ratio
b. Long-term solvency
c. Earnings per share

3. Ask each group to discuss the following questions (15 minutes):
a. What is the company’s ability to meet currency obligations out of current assets?
b. Is the company likely to be able to repay debts in future years?
c. What might be the size of the dividend that the firm can pay share¬holders?

Don’t Forget:
Information needed to calculate the above figures should be present in any financial statement. You may want to bring a supply of annual reports in case students can’t get to them, or make it clear that many companies post their annual reports online so students can access the information they need on the Web.

Wrap-Up:
Bring the activity to a close by providing a brief overview of short- and long-term solvency, as well as what earnings per share indicate.

 ANSWERS FOR END OF CHAPTER ACTIVITIES

QUESTIONS FOR REVIEW

1. Business managers use accounting information to develop goals and plans, set budgets, and evaluate future prospects. Employees and unions use it to plan for and receive compensation and such benefits as health care, vacation time, and retirement pay. Investors and credi¬tors use accounting information to estimate returns to stockholders, determine growth prospects, and decide whether a firm is a good credit risk. Tax authorities use it to plan for tax inflows, determine the tax liabilities of individuals and businesses, and ensure that correct amounts are paid on time. Government regulatory agencies rely on it to fulfill their duties toward the public. (Learning Objective 1 – AACSB – application of knowledge)

2. The three types of services performed by CPAs are auditing services, tax services, and management services. (Learning Objective 1 – AACSB – application of knowledge)

3. Financial accounting is concerned with external information users—the firm’s external stakeholders: consumer groups, unions, stockholders, suppliers, creditors, and government agencies. Managerial accounting serves internal users.
 (Learning Objective 1 – AACSB – application of knowledge)

4. Forensic accountants may be called on—by law enforcement agencies, insurance companies, law firms, and business firms—for both investigative accounting and litigation support in crimes against companies, crimes by companies, and civil disagreements.
 (Learning Objective 1 – AACSB – application of knowledge)

5. The balance sheet reflects a firm’s financial condition at one point in time by supplying detailed information about the firm’s assets, liabilities, and owners’ equity. The income statement reflects a firm’s profit or loss by comparing the firm’s revenues with its expenses. The statement of cash flows describes a company’s yearly cash receipts and cash payments.
 (Learning Objective 2 – AACSB – application of knowledge)

QUESTIONS FOR ANALYSIS

6. Balance sheets and statements of cash flow both provide a piece of the picture. Balance sheets reveal profitability and the relationship of assets to liabilities and owners’ equity for a given date; while statements of cash flows reveal the firm’s operations through analysis of cash flows.  (Learning Objective 2, 3 – AACSB – application of knowledge, reflective thinking)

7.  You should encourage students to carefully examine their current assets and liabilities, fixed assets, and long-term debt.  Many students will have never completed a balance sheet and will be surprised by their net worth. Additionally, remind students that they should annually review their financial statements.
     (Learning Objective 3 – AACSB – application of knowledge, reflective thinking)

8.   Answers will vary but students will probably note the large numbers of countries that have to  agree, the impact, cost of implementation, tax laws, shareholder impact, etc.
     (Learning Objective 2 – AACSB – application of knowledge, reflective thinking)

APPLICATION EXERCISES

9. Answers will vary, but students will probably recognize that firms sometimes develop budgets from scratch, but more often by using previous years’ data. Budgets usually provide control for company spending or resource allocation.
     (Learning Objective 3 – AACSB – application of knowledge, reflective thinking)

10. Answers will vary, though most managers will attest that ethics are an extremely important consideration in their company’s accounting practices. Likely all those managers interviewed will mention their recipes for ensuring internal ethical practices.
      (Learning Objective 6 – AACSB – application of knowledge, reflective thinking)

BUILDING A BUSINESS: CONTINUING TEAM EXERCISE 15- 11- 15
(Learning objectives 1, 2, 3 - AACSB interpersonal relations and teamwork, analytical and reflective thinking, application of knowledge)

In this assignment, the team will have the opportunity to see how they will use the three main financial statements, how choices impact their cash flow statement, understand the role financial data plays in creating a successful business, the role financial documents play in obtaining credit, and who will on the team will be responsible for creating and maintaining the necessary data.

BUILDING YOUR BUSINESS SKILLS: PUTTING THE BUZZ IN BILLING
(Learning objectives 4, 5 - AACSB analytical and reflective thinking, application of knowledge)

16. An electronic system could eliminate much of the handling required by a paper system. It would also virtually eliminate postage and paper, and it would reduce human error.

17. Most businesses that you deal with would benefit from increased speed and accuracy, but those that provide goods and services that require manual processing would experience reduced demand for their products.

18. The high costs are short term, while savings from the elimination of paper, postage, handling, and error will accumulate over time. Large capital expenditures reflected in the long-term liabilities on the income statement will not affect the current ratio.

19.  Answers will vary, but students should note that they would likely receive at least a handful  of complaints from each customer group during the transition process. Long-run business customers would be more likely than individual customers to convert completely to the new system.

EXERCISING YOUR ETHICS: GIVE AND TAKE WITH ACCOUNTING CLIENTS
(Learning objective 6 - AACSB – Ethical understanding and reasoning, reflective thinking)

20. Katrina completed the work according to accepted accounting standards. The ethical issues is that she has maintain the accounting standards but by doing so, she will possibly lose a major client.

21. Aaron’s argument is that he is trying to reduce his tax bill and since the work was done towards the end of the year and the payment was possibly received in the current year, he does not see any problems with changing the dates and statements. Katrina’s position is that as a licensed professional prevents her from changing the financial statements.

22. Answers will vary, but most students will agree that Katrina completed the work correctly and that Aaron should not ask Katrina to change the returns. If Katrina explains the ethical requirements for CPAs, maybe Aaron will better understand her position.
 

TEAM EXERCISE: CONFIDENTIALLY YOURS 15- 23 - 27
AACSB – Ethical understanding and reasoning, interpersonal relations and teamwork, reflective thinking)

 This should be an interesting discussion since most students will focus on the company policy that does not restrict the Head Accountant from taking a position with a competitor. Many of the students will not perceive any ethical dilemma.

CASES:
WALL STREET
(Learning objective 1 - AACSB – Ethical understanding and reasoning, reflective thinking)

28. When choosing various fraud protection methods, costs and effectiveness would obviously be key factors.

29. If the article is correct that fraudulent activities increase during an economic downturn and fraudulent activity has become more sophisticated, then there are new opportunities for a CFE to probe electronic records and cash transfers.

30.  A CFE would have more expertise in pursuing and finding the fraud.

31. The training should include: asset theft, review of financial statements, checking documentation, inventory review, cash accounts, etc.

32.  “The broad scope of fraud—its costs, who commits it and how, and how it is detected— “ might affect the decision to investigate a fraud case.

FUTURE DIRECTIONS FOR THE MODERN ACCOUNTANT
(Learning objective 1, 6, 7 - AACSB – Ethical understanding and reasoning, reflective thinking)

33. This discussion applies to management accountants because of the internal focus and expectation of project management, consulting and evaluating strategic opportunities.

34. This article also applies to forensic accountants since they use accounting for legal purposes and this article discusses the additional competencies of “assessment of risks and threats”, etc. now required of the modern accountant.

35.  A CPA services and Sarbox could potentially conflict since the rules prevent a CPA from designing a financial system as well as auditing said system. 
36.  A modern accountant will still continue to rely on record keeping to enter and track transactions and conduct ratio analysis to ascertain the financial health of companies.

37. Many students will argue that today’s reporting requirements and the broader role of the modern accountant’ places a greater emphasis on ethics and the possibility of potential conflict.
 
PART 5: BUSINESS PLAN PROJECT
Managing Information

Assignment Overview:
The fifth part of the business plan project asks students to think about their business in terms of their business needs and costs. Specifically, students are asked to determine their IT needs and resources and are asked to complete a balance sheet and an income statement for their business. Many students find this part of the plan especially challenging, and will have trouble estimating their costs. Remind them that the values they calculate in this part of the plan are estimates, and there is no surefire method for accurately measuring how a business may perform. You may want to spend some class time going over each question in this part of the plan and create a list of sources that students can use when calculating their costs.

Files to Provide Students:
If you would like students to complete a balance sheet and an income statement for their businesses, a sample spreadsheet file is available for them to consult in the following pages. Full Business Plan templates are also available at www.mybizlab.com.

Part 5 Estimated At-Home Completion Time:
If done well, this section will require a minimum of 3 to 5 hours. Instructor feedback is critical in this part of the plan, as most students will need some direction in gathering information that will help answer the questions related to costs.

Homework Deliverable from Students:
The length of this section should be somewhat consistent, although some variance can be expected. You should expect about 4 to 5 pages in this section.

STUDENT BUSINESS PLAN PROJECT TEMPLATE
PART 5: MANAGING INFORMATION

IT RESOURCES
What kind of IT resources will your business require?
Hint: Think about the employees in your business and what they will need in order to do their jobs. What computer hard¬ware and software will they need? Will your business need a network and an Internet connection? What type of network? Refer to Chapter 13 for a discussion on IT resources you may want to consider.

CUSTOMER SERVICE
How will you use information technology to keep track of your customers and potential customers?
Hint: Many businesses—even small businesses—use data¬bases to keep track of their customers. Will your business require a database? What about other information systems? Refer to Chapter 13 for more information on these topics.

COST OF DOING BUSINESS
What are the costs of doing business? Equipment, supplies, salaries, rent, utilities, and insurance are just some of these expenses. Estimate what it will cost to do business for one year.
Hint: Insert the costs associated with doing business in the table below. The list below provides some hints as to where you can get this information. Note that these are just estimates—just try your best to include accurate costs for the expenses you think will be a part of doing business.

HINTS FOR EACH EXPENSE IN THE TABLE:
Rent: Refer to the floor plan. How many square feet is your place of business? What is the “going rate” per square foot for office space in your community? A real estate agent or a local SBA representative (www.sba.gov) can also be helpful in answering this question.

Salaries: Refer to the organizational chart. How much will each employee earn? How many hours will each employee be needed on a weekly basis? Once you’ve determined the weekly cost, expand it to a monthly and a yearly cost.

Supplies: Refer to the floor plan. How much will all the computers, equipment, and furniture cost? What kinds of general office supplies will you need? Most prices for this information can be found on an office supply Web site, such as www.staples.com.

Advertising and Other Promotions: Refer to your marketing section. You have described how you wish to reach your customer—now you need to decide how much it will cost. If you are using television, contact the sales department at a local station. If you are using newspaper, contact their advertising department. Salespeople are usually happy to answer your questions.

Utilities: These amounts will vary, depending on your business and what utilities you will pay. If your business looks like an office, this cost may be similar to what a homeowner pays. However, if your business involves making a product, then the costs will be significant. An SBA representative can be a good resource.

Insurance: This value will be affected by the nature of the business. More equipment will usually mean higher insurance costs. Again, contact an SBA representative for feedback.

EXPECTED REVENUE
How much will you charge for your product? How many products do you believe you can sell in one year (or how many customers do you think your business can attract)? Multiply the price you will charge by the number of products you hope to sell or the amount you hope each customer will spend. This will give you an estimate of your revenues for one year.
Hint: You will use the amounts you calculate in the costs and revenues questions in this part of the plan in the accounting statements in the next part, so be as realistic as you can.

INCOME STATEMENT AND BALANCE SHEET
Create a balance sheet and an income statement (profit-and-loss statement) for your business.
This chapter has discussed income statements and balance sheets. This is a good opportunity to show students how to prepare a spreadsheet (see following pages) into which to put the financial information for an income statement and a balance sheet.
 

Income Statement (Profit-and-Loss Statement)
 June   July   Aug.   Sept.   Oct.   Nov.   Dec.  …… YEARLY
Revenue (Sales)                
Category 1                
Category 2                
Total Revenue (Sales)                
               
Cost of Goods Sold                
Category 1                
Category 2                
Total Cost of Goods Sold                
               
Gross Profit                
               
Expenses                
Rent Expense                
Salary/Wage Expenses                
Supplies Expense                
Advertising Expense                
Utilities Expense                
Telephone/Internet Expense                
Insurance Expense                
Interest from Loans (if applicable)                
Other Expenses (specify)                
Total Expenses                
               
Net Profit                

  Balance Sheet
Assets 
 
Current Assets 
Cash 
Cash Value of Inventory 
Prepaid Expenses (insurance) 
Total Current Assets 
 
Fixed Assets 
Machinery and Equipment 
Furniture and Fixtures 
Real Estate/Buildings 
Total Fixed Assets 
 
Total Assets 
 
 
Liabilities and Net Worth 
Current Liabilities 
Accounts Payable 
Taxes Payable 
Notes Payable (due within 12 months) 
Total Current Liabilities 
 
Long-Term Liabilities 
Bank Loans Payable (greater than 12 months) 
Less: Short-Term Portion 
Total Long-Term Liabilities 
 
Total Liabilities 
 
Owners’ Equity (Net Worth) 
 
Total Liabilities and Owners’ Equity 

ACTIVITIES ON MYBIZLAB - INSTRUCTOR TIPS

BizSkills: OBM & Financial Statements         
Instructor Tips        Available at: mybizlab.com

Brief Synopsis/Objectives: In this BizSkill, students play the owner of a struggling restaurant. They’re asked to figure out ways to turn the restaurant around. They must weigh the pros and cons of opening books, and listen to various suggestions from others about the best ways to improve the numbers.

At the end of the BizSkill, students should be able to answer the following questions:

How to Best Use This BizSkill: A great way to use this BizSkill is to assign it as homework before your first lecture on the chapter. Ask students to print out their feedback page, and then have them do the BizSkill again at the end of the week to see whether their scores have improved.