Accounting information Should we buy stock in a company? Should we extend a line

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Accounting information

Should we buy stock in a company? Should we extend a line of credit to a company? Should we continue with current operations or change how we do business? These are the types of questions investors, bankers, and managers ask themselves. All of these require useful accounting information in order to make accurate financial decisions. In accordance with generally accepted accounting principles (GAAP), a company's financial statements must contain accounting information that fairly presents a company's financial position and its operations.

How do you know whether accounting information is useful in making decisions? Review each of the accounting concepts below that describe the qualitative characteristics of accounting information. The Qualitative Characteristics of Accounting Information

(Comparability - Conservatism - Consistency - Materiality - Relevance - Faithful Representation - Understandability)

In each of the following scenarios, which accounting concept is being violated?

1. The accountant for a large company determined that a $100 printer should be treated as a long-term asset and depreciated over its useful life.

2. You read today that a potential borrower was named the defendant in a large lawsuit. You decided not to investigate any further since the lawsuit is not reported in the financial statements.

3. Your company has decided to change its method of accounting for depreciation of equipment. This is the third time the method has been changed in the last five years.

4. The bank has asked for financial statements prior to making a loan. One of the divisions of your company is new this year and not yet profitable. Because it is new, you decide not to include the results of its operations in the income statement you give to the bank.

5. Because of recent technological breakthroughs in microprocessor development, your company’s current inventory could be purchased on the market for significantly less than its cost. However, the accountants have decided not to write down the value of the inventory on the books.

The financial statements

Financial statements are critical in making informed decisions. Click on each financial statement for a description of each, and indicate which statement to look at for each desired action.

Types of Financial Statements: Income statement - Statement of retained earnings - Balance sheet - Statement of cash flows

Desired Action Financial Statement

1. Compare revenues with expenses and analyze profitability

2. Determine what percentage of a company's assets were financed by suppliers, lenders and other creditors.

3. Determine how much cash was spent this year on new equipment.

4. Determine the percentage of this year's earnings that were paid out in dividends

APPLY THE CONCEPTS: Construct the income statement

When constructing the income statement, it is important to understand the matching principle. This principle is applied by associating the revenue of a period with all of the costs necessary to generate that revenue. Coldwater Co. has compiled the following account balances from its general ledger on May 31, 2014 (the last day of its fiscal year).

- Account balances

Use the information given to prepare Coldwater’s income statement for 2014.

APPLY THE CONCEPTS: Construct the balance sheet

The balance sheet, also known as the statement of financial position, shows the company’s assets and the claims against those assets in the form of liabilities and stockholders' equity. Unlike the income statement that shows a company's financial performance over a given interval of time, the balance sheet is a snapshot of its financial position at a given point in time.

Construct Coldwater’s balance sheet as of December 31, 2014.

Account Amount Cash $62,460 Accounts receivable 136,125 Supplies 13,995 Prepaid insurance 25,030 Equipment 421,110 Accounts payable 63,865 Notes payable 73,940 Capital stock 150,075 Retained earnings (beginning balance) 278,420 Dividends 46,560 Fees earned 233,400 Service revenue 155,680 Advertising expense 14,460 Wages expense 169,300 Interest expense 15,410 Utilities expense 6,375 Rent expense 44,555 Coldwater Co. Income Statement For the Year Ended May 31,2014 Total revenues Expenses Total expenses

Explanation / Answer

Coldwater Co. Income Statement For the year Ended May 31,2014. Particulars Amount($) Service revneue 155680 Fees earned 233400 Total Revenue (A) 389080 Advertising expense 14460 Wages Expenses 169300 Interest Expense 15410 Utilities expense 6375 Rent Expense 44555 Total Expense (B) 250100 Net Profit 138980 Coldwater Co. Statement of Retained Earnings For the year ended May 1,2014 Beginning Balance 278420 Add: Net Profit 138980 Less: Dividend paid 46560 Ending Balance 370840 Coldwater Co. Balance Sheet May 31,2014 Assets: Equipment 421110 Cash 62460 Accounts receivable 136125 Supplies 13995 Prepaid insurance 25030 Total Assets 658720 Liabilities Capital Stock 150075 Retained Earnings 370840 Notes Payable 73940 Accounts payable 63865 Total Liabilities 658720

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