“Understanding Accounting and Financial Statements”. Accounting can be an involved process, but none the less is essential for the manager to understand. The purpose of this module is four-fold:
- To provide assistance in understanding some of the basic accounting principles and practices.
- Provide hands on practice.
- Provide real life examples
INSTRUCTIONS:
Watch three entertainin
Wheatley List of Accounts
PREPARING FINANCIAL STATEMENTS | |
As the accountant for Wheatley International, it is your job to prepare the company’s income statement and balance sheet. Use the accounts listed below to construct the statements. Assume that the tax rate is 25%. | |
List of Accounts for | |
WHEATLEY INTERNATIONAL | |
Accounts Receivable | $120,600 |
Land | $1,500,000 |
Notes Receivable | $61,200 |
Insurance Expenses | $54,000 |
Accounts Payable | $45,000 |
Interest Expenses | $24,600 |
Common Stock | $1,896,000 |
Depreciation | $400,000 |
Net Sales | $1,053,000 |
Ending Inventory | $126,600 |
Notes Payable (Long‑Term) | $210,000 |
Beginning Inventory | $154,800 |
Retained Earnings | $1,459,800 |
Advertising Expense | $90,000 |
Cash | $72,000 |
Salaries | $180,000 |
Short-Term Notes Payable | $15,600 |
Merchandise Purchased (for Inventory) | $316,800 |
Buildings | $1,050,000 |
Rent | $13,800 |
Utilities | $8,400 |
Equipment & Vehicles | $1,066,000 |
Goodwill | $90,000 |
Bonds Payable | $60,000 |
Wheatley Income Statement
The formula for the balance sheet is assets equal liabilities plus stockholders’ equity. To prepare a balance sheet, add the assets and liabilities. The difference between the two is stockholders’ equity. For the income statement, you subtract cost of goods sold from net sales (revenue). Then you subtract expenses to get gross income. From that, you subtract the income tax of 25% to get net income. (Note: The format of these statements may be slightly different from the format taught in an accounting course. The exact format is less important than understanding the overall concepts.) | |
WHEATLEY INTERNATIONAL | |
INCOME STATEMENT | |
FY 201X | |
REVENUES | |
Net Sales | $1,053,000 |
COST OF GOODS SOLD | |
Beginning Inventory | |
Merchandise Purchased | + |
Cost of Goods Available for Sale | $471,600 |
Less: Ending Inventory | – |
Cost of Goods Sold | $345,000 |
GROSS PROFIT (GROSS MARGIN) | |
OPERATING EXPENSES | |
Selling Expenses | |
Salaries | |
Advertising | |
Total Selling Expenses | $270,000 |
General Expenses | |
Insurance | |
Interest Expense | |
Rent | |
Utilities | |
Total General Expenses | |
Total Operating Expenses | |
NET PROFIT (INCOME) BEFORE TAXES | |
Less: Income Tax Expenses (25%) | |
NET INCOME (PROFIT) AFTER TAXES | $252,900 |
Wheatley Balance Sheet
Complete the balance sheet. (Fill in the gray highlighted areas) | ||
WHEATLEY INTERNATIONAL | ||
Balance Sheet | ||
December 31, 201X | ||
ASSETS | ||
Current Assets | ||
Cash | $72,000 | |
Accounts Receivable | ||
Notes Receivable | ||
Inventory | ||
Total Current Assets | ||
Fixed Assets | ||
Land | ||
Buildings | ||
Equipment & Vehicles | ||
Depreciation | – | $400,000 |
Total Fixed Assets | ||
Other Assets | ||
Goodwill | $90,000 | |
Total Other Assets | ||
TOTAL ASSETS | $3,686,400 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
Current Liabilities | ||
Accounts Payable | $45,000 | |
Short-Term Notes Payable | ||
Total Current Liabilities | $60,600 | |
Long‑Term Liabilities | ||
Notes Payable (Long-Term) | ||
Bonds | ||
Total Long‑Term Liabilities | $270,000 | |
Total Liabilities | ||
Owner’s Equity | ||
Common Stock | ||
Retained Earnings | $1,459,800 | |
Total Owners’ Equity | ||
TOTAL LIABILITIES AND | ||
STOCKHOLDERS’ EQUITY | $3,686,400 |
Acme Inc. Questions
You are considering investing in Acme Incorporated. The company has provided you with the balance sheet and income statement for the previous year. The current price of one share of stock is $46.25. Earning per share last year was $1.86. | |
Questions | |
1 | Calculate the requested financial ratios |
(IMPORTANT EXPLAIN WHAT THESE NUMBERS MEAN IN RELATION TO ACME) | |
a. | Current ratio |
b. | Debt-to-equity ratio |
c. | Return on sales (use net income AFTER taxes) |
d. | Return on equity (use net income AFTER taxes) |
e. | Earnings per share (use net income AFTER taxes) |
2 | Would you invest in Acme Incorporated? Why or why not? |
Acme Income Statement
ACME INCORPORATED | ||
STATEMENT OF INCOME | ||
FY 201X | ||
REVENUES | ||
Net Sales | $4,090,970 | |
Other Income | + | $104,227 |
Total Revenue | $4,195,197 | |
COST OF GOODS SOLD | $2,673,129 | |
GROSS PROFIT (GROSS MARGIN) | $1,522,068 | |
OPERATING EXPENSES | ||
Total Selling Expenses | $333,300 | |
Total General Expenses | + | $306,036 |
Total Operating Expenses | $639,336 | |
NET INCOME BEFORE TAXES | $882,732 | |
Less: Income Tax Expenses (25%) | $220,683 | |
NET INCOME (PROFIT) AFTER TAXES | $662,049 |
Acme Inc Balance Sheet
ACME INCORPORATED | |
Balance Sheet | |
December 31, 201X | |
ASSETS | |
Current Assets | |
Cash | $280,928 |
Marketable Securities | $514,800 |
Accounts Receivable | $108,694 |
Notes Receivable | $855,771 |
Inventories | $218,156 |
Prepain Expenses and Other | $88,237 |
Total Current Assets | $2,066,586 |
Fixed Assets | |
Land | $510,000 |
Plant and Building | $304,096 |
Equipment & Vehicles | $218,500 |
Total Fixed Assets | $1,744,701 |
Other Assets | |
Goodwill, Net | $49,930 |
Total Other Assets | $49,930 |
TOTAL ASSETS | $3,861,217 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current Liabilities | |
Accounts Payable | $226,977 |
Accrued Expenses and Other | $380,496 |
Current Portion of Finance Debt | $382,579 |
Total Current Liabilities | $990,052 |
Long‑Term Liabilities | |
Notes Payable (Long-Term) | $228,772 |
Bonds | $380,000 |
Other Long‑Term Liabilities | $29,478 |
Total Long-Term Liabilities | $638,250 |
Total Liabilities | $1,628,303 |
Owner’s Equity | |
Common Stock | $389,538 |
(342,196 Shares Outstanding) | |
Retained Earnings | $1,843,377 |
Total Owners’ Equity | $2,232,915 |
TOTAL LIABILITIES AND | |
STOCKHOLDERS’ EQUITY | $3,861,217 |
Acme Inc Question Worksheet
Calculate the requested financial ratios. (Fill in the gray highlighted areas) | |
a. | Current ratio. The current ratio is the ratio of the firm’s current assets to its current liabilities, |
calculated as follows: | |
Current ratio = | |
Current assets | or |
Current liabilities | |
:1 | Show the ratio |
b. | Debt-to-equity ratio. The debt-to-equity ratio measures the degree to which the company |
is financed by borrowed funds that must be repaid. It is calculated as follows: | |
Debt-to-equity ratio = | |
$1,628,300 | Show percentage or decimal format (e.g. .346 or 35%) |
or | $2,232,815 |
or | % |
c. | Return on sales. Return on sales is calculated by comparing a company’s net income |
with its total sales, calculated as follows: | |
Return on sales = | |
or | |
% | |
d. | Return on equity. Return on equity measures how much was earned for each dollar invested |
by owners. It is calculated by comparing a company’s net income with its total owner’s equity: | |
Return on equity = | |
Net income | or |
Owners’ equity | $2,232,915 |
% | |
e. | Earnings per share. Earnings per share measures the amount of profit earned by a company |
for each share of common stock it has outstanding: | |
Earnings per share = | |
Net income | or |
Number of shares outstanding | $342,196 |
$1.935 per share |
Sheet3
g and informative video clips (3:30 minutes each) from The Center for Audit Quality (CAQ):
- “Fight Fraud – Accounting Ethics” Provides an explanation why businesses sometimes commit fraudulent accounting acts and the importance of ethics and leadership.
- “System of Investor Protection”: Understanding financial reporting and the team members in charge of ensuring reporting accuracy.
- “Sarbanes Oxley – The Audit Committee”: Understanding the significance of the Sarbanes Oxley Act of 2002 and audit committee responsibilities. (Video credit: CAQorg.com)
Watch the video clip (1:07 minutes) entitled “Goodbye Training Wheels”. This is an example of a term called “Innovation Transfer” which means “ The transfer of a new idea or method for solving a problem from one group or individual to another, typically from a process improvement consulting group to a client business. Innovation transfer is an important part of Six Sigma and other best practice deployment approaches.” In this case, I am using this example of the young boy in the video learning to ride his bicycle as an analogy of you learning accounting principles: sometimes you just need a little practice and for someone to steady the bike and before long you are peddling on your own!!
(You can read more about innovation transfer at Business Dictionary.com. “Training Wheel Video credit: Andrea Dorfman. Music: Iron and Wine)
Complete the Excel workbook entitled Chpt 15 Critical Thinking Exercise – Accounting. This workbook consists of two problems (each worth up to 50 points each totaling the possible 100 points you can earn). The two problems are:
- Wheatley International – Preparing a Financial Statement
- Acme Incorporated – Calculating Financial Ratios
Both problems are in the same Excel workbook and are listed in six (6) tabs at the bottom of the spreadsheet when you open the file. Complete the work in the gray answer boxes for each assignment