Accounting in Action Part 3

BYP 1-1 FINANCIAL REPORTING PROBLEM (a) PepsiCo’s total assets at December 31, 2005 were $31,727 million and at December 25, 2004 were $27,987 million. (b) PepsiCo had $1,716 million of cash and cash equivalents at December 31, 2005. (c) PepsiCo had accounts payable (and other current liabilities) totaling $5,971 million on December 31, 2005 and $5,599 million on December 25, 2004. (d) PepsiCo reports net sales for three consecutive years as follows: 2003 2004 2005 $26,971 million $29,261 million $32,562 million (e) From 2004 to 2005, PepsiCo’s net income decreased $134 million from $4,212 million to $4,078 million. 1-40 BYP 1-2 (a) 1. 2. 3. 4. COMPARATIVE ANALYSIS PROBLEM (in millions) Total assets Accounts receivable (net) Net sales Net income PepsiCo $31,727 $ 3,261 $32,562 $ 4,078 Coca-Cola $29,427 $ 2,281 $23,104 $ 4,872 (b) PepsiCo’s total assets were approximately 8% greater than Coca-Cola’s total assets, and PepsiCo’s net sales were 41% greater than Coca-Cola’s net sales. In addition, PepsiCo’s accounts receivable were 43% greater than Coca-Cola’s and represent 10% of its net sales. Coca-Cola’s accounts receivable amount to 9.9% of its net sales. Both PepsiCo’s and Coca-Cola’s accounts receivable are at satisfactory levels, being comparable to a 30-day collection period. Coca-Cola’s net income was 119.5% of PepsiCo’s. It appears that these two companies’ operations are comparable in some ways, with Coca-Cola’s operations slightly more profitable. 1-41 BYP 1-3 EXPLORING THE WEB (a) The field is normally divided into three broad areas: auditing, financial/ tax, and management accounting. (b) The skills required in these areas: People skills, sales skills, communication skills, analytical skills, ability to synthesize, creative ability, initiative, computer skills. (c) The skills required in these areas differ as follows: People skills Sales skills Communication skills Analytical skills Ability to synthesize Creative ability Initiative Computer skills Auditing Medium Medium Medium High Medium Low Medium High Financial and Tax Medium Medium Medium Very High Low Medium Medium High Management Accounting Medium Low High High High Medium Medium Very High (d) Some key job functions in accounting: Auditing: Work in audit involves checking accounting ledgers and financial statements within corporations and government. This work is becoming increasingly computerized and can rely on sophisticated random sampling methods. Audit is the bread-and-butter work of accounting. This work can involve significant travel and allows you to really understand how money is being made in the company that you are analyzing. It’s great background! Budget Analysis: Budget analysts are responsible for developing and managing an organization’s financial plans. There are plentiful jobs in this area in government and private industry. Besides quantitative skills many budget analyst jobs require good people skills because of negotiations involved in the work. 1-42 BYP 1-3 (Continued) Financial: Financial accountants prepare financial statements based on general ledgers and participate in important financial decisions involving mergers and acquisitions, benefits/ERISA planning, and long-term financial projections. This work can be varied over time. One day you may be running spreadsheets. The next day you may be visiting a customer or supplier to set up a new account and discuss business. This work requires a good understanding of both accounting and finance. Management Accounting: Management accountants work in companies and participate in decisions about capital budgeting and line of business analysis. Major functions include cost analysis, analysis of new contracts, and participation in efforts to control expenses efficiently. This work often involves the analysis of the structure of organizations. Is responsibility to spend money in a company at the right level of our organization? Are goals and objectives to control costs being communicated effectively? Historically, many management accountants have been derided as “bean counters.” This mentality has undergone major change as management accountants now often work side by side with marketing and finance to develop new business. Tax: Tax accountants prepare corporate and personal income tax statements and formulate tax strategies involving issues such as financial choice, how to best treat a merger or acquisition, deferral of taxes, when to expense items and the like. This work requires a thorough understanding of economics and the tax code. Increasingly, large corporations are looking for persons with both an accounting and a legal background in tax. A person, for example, with a JD and a CPA would be especially desirable to many firms. (e) Junior Staff Accountant $36-63,000 1-43 BYP 1-4 DECISION MAKING ACROSS THE ORGANIZATION (a) The estimate of the $6,100 loss was based on the difference between the $25,000 invested in the driving range and the bank balance of $18,900 at March 31. This is not a valid basis for determining income because it only shows the change in cash between two points in time. (b) The balance sheet at March 31 is as follows: CHIP-SHOT DRIVING RANGE Balance Sheet March 31, 2008 Assets Cash ......................................................................................................... Caddy shack .......................................................................................... Equipment .............................................................................................. Total assets................................................................................... Liabilities and Owner’s Equity Liabilities Accounts payable ($150 + $100) ............................................ Owner’s equity Mary and Jack Gray, Capital ................................................... Total liabilities and owner’s equity .............................. $18,900 8,000 800 $27,700 $ 250 27,450 $27,700 As shown in the balance sheet, the owner’s capital at March 31 is $27,450. The estimate of $2,450 of net income is the difference between the initial investment of $25,000 and $27,450. This was not a valid basis for determining net income because changes in owner’s equity between two points in time may have been caused by factors unrelated to net income. For example, there may be drawings and/or additional capital investments by the owner(s). 1-44 BYP 1-4 (Continued) (c) Actual net income for March can be determined by adding owner’s drawings to the change in owner’s capital during the month as shown below: Owner’s capital, March 31, per balance sheet ........................... Owner’s capital, March 1................................................................... Increase in owner’s capital .............................................................. Add: Drawings.................................................................................... Net income............................................................................................. $27,450 25,000 2,450 1,000 $ 3,450 Alternatively, net income can be found by determining the revenues earned [described in (d) below] and subtracting expenses. (d) Revenues earned can be determined by adding expenses incurred during the month to net income. March expenses were Rent, $1,000; Wages, $400; Advertising, $750; and Utilities, $100 for a total of $2,250. Revenues earned, therefore, were $5,700 ($2,250 + $3,450). Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance ............................................... Less: Cash payments Caddy shack ................................................ Golf balls and clubs................................... Rent................................................................. Advertising ................................................... Wages............................................................. Drawings ....................................................... Cash balance before revenues .................................. Cash balance, March 31 ............................................... Revenues earned............................................................ 1-45 $25,000 $8,000 800 1,000 600 400 1,000 11,800 13,200 18,900 $ 5,700 BYP 1-5 To: From: COMMUNICATION ACTIVITY Lynn Benedict Student I have received the balance sheet of New York Company as of December 31, 2008. A number of items in this balance sheet are not properly reported. They are: 1. The balance sheet should be dated as of a specific date, not for a period of time. Therefore, it should be dated “December 31, 2008.” 2. Equipment should be shown as an asset and reported below Supplies on the balance sheet. 3. Accounts receivable should be shown as an asset, not a liability, and reported between Cash and Supplies on the balance sheet. 4. Accounts payable should be shown as a liability, not an asset. The note payable is also a liability and should be reported in the liability section. 5. Liabilities and owner’s equity should be shown on the balance sheet. Don Wenger, Capital and Don Wenger, Drawing are not liabilities. 6. Don Wenger, Capital and Don Wenger, Drawing are part of owner’s equity. The Drawing account is not reported on the balance sheet but is subtracted from Don Wenger, Capital to arrive at owner’s equity at the end of the period. 1-46 BYP 1-5 (Continued) A correct balance sheet is as follows: NEW YORK COMPANY Balance Sheet December 31, 2008 Assets Cash.................................................................................................................. Accounts receivable.................................................................................... Supplies........................................................................................................... Equipment....................................................................................................... Liabilities and Owner’s Equity Liabilities Notes payable ....................................................................................... Accounts payable................................................................................ Total liabilities ............................................................................. Owner’s equity Don Wenger, Capital ($26,000 – $2,000) ...................................... Total liabilities and owner’s equity....................................... 1-47 $ 9,000 6,000 2,000 25,500 $42,500 $10,500 8,000 18,500 24,000 $42,500 BYP 1-6 ETHICS CASE (a) The students should identify all of the stakeholders in the case; that is, all the parties that are affected, either beneficially or negatively, by the action or decision described in the case. The list of stakeholders in this case are:  Steve Baden, interviewee.  Both Baltimore firms.  Great Northern College. (b) The students should identify the ethical issues, dilemmas, or other considerations pertinent to the situation described in the case. In this case the ethical issues are:  Is it proper that Steve charged both firms for the total travel costs rather than split the actual amount of $296 between the two firms?  Is collecting $592 as reimbursement for total costs of $296 ethical behavior?  Did Steve deceive both firms or neither firm? (c) Each student must answer the question for himself/herself. Would you want to start your first job having deceived your employer before your first day of work? Would you be embarrassed if either firm found out that you double-charged? Would your school be embarrassed if your act was uncovered? Would you be proud to tell your professor that you collected your expenses twice? 1-48 BYP 1-7 (a) ALL ABOUT YOU: THE ETHICS OF FINANCIAL AID Answers to the following will vary depending on students’ opinions. (1) This does not represent the hiding of assets, but rather a choice as to the order of use of assets. This would seem to be ethical. (2) This does not represent the hiding of assets, but rather is a change in the nature of assets. Since the expenditure was necessary, although perhaps accelerated, it would seem to be ethical. (3) This represents an intentional attempt to deceive the financial aid office. It would therefore appear to be both unethical and potentially illegal. (4) This is a difficult issue. By taking the leave, actual net income would be reduced. The form asks the applicant to report actual net income. However, it is potentially deceptive since you do not intend on taking unpaid absences in the future, thus future income would be higher than reported income. (b) Companies might want to overstate net income in order to potentially increase the stock price by improving investors’ perceptions of the company. Also, a higher net income would make it easier to receive debt financing. Finally, managers would want a higher net income to increase the size of their bonuses. (c) Sometimes companies want to report a lower income if they are negotiating with employees. For example, professional sports teams frequently argue that they can not increase salaries because they aren’t making enough money. This also occurs in negotiations with unions. For tax accounting (as opposed to the financial accounting in this course) companies frequently try to minimize the amount of reported taxable income. (d) Unfortunately many times people who are otherwise very ethical will make unethical decisions regarding financial reporting. They might be driven to do this because of greed. Frequently it is because their superiors have put pressure on them to take an unethical action, and they are afraid to not follow directions because they might lose their job. Also, in some instances top managers will tell subordinates that they should be a team player, and do the action because it would help the company, and therefore would help fellow employees. 1-49