ACC 100 Chapter Notes - Chapter 2: Financial Transaction, Financial Statement, Lawn Mower

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7 Nov 2016

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Chapter 2 the accounting equation and transaction analysis. Financial information is important because both the business and stakeholders need this information to meet their objectives. For example, the business might need a bank for a loan and for this they need to provide financial information. The bank needs to look at the financial information to see whether they want to invest in the business or not (if they do they will make more money if it is successful). Businesses are involved in many business activities everyday and when all the activities are recorded it is call financial data. The difference between financial data and financial information is that financial information is the final product of data processing. Once data has been categorized, analyzed, and formatted for presentation purposes, it becomes information which can be used for decision making. In business, the process of changing financial data into financial information is carried out (cid:271)y the a(cid:272)(cid:272)ou(cid:374)ti(cid:374)g syste(cid:373).

Related Questions

Scenario: Your team has been hired to provide financial analysis for a start-up company, Bobble in Style, which produces customized bobble heads. The bobble heads are made out of less rigid materials and are more true to life than those of competitors.

The company inventors, Mr. and Mrs. Lee, are going to pitch their idea to Shark Tank in a few months, but first they need to have a better understanding of the business financials. The Leeâs are already creating and selling their product from their home-based office and work area. They know what costs are involved with making the bobble heads on a small scale, but they donât have an understanding of financial figures beyond basic costs. They need you to make sense of various financial figures for them. The Project: There are several financial analysis tasks involved with this project, which are outlined below (#1-8). Once you have worked through each task, you will need to produce a PowerPoint presentation to introduce and highlight your findings. Your PowerPoint presentation should include a title slide, an executive summary slide(s), subsequent slides that illustrate your findings, any additional recommendations that you would like to make, and a conclusion slide. The PowerPoint presentation should be approximately 15-25 slides in length. Include notes in the presentation as needed. You will also need to create a written executive summary (one page in length). Your final submission will include the PowerPoint presentation, the executive summary, and an Excel file with relevant calculations.

1. Financial Statements: Develop an Income Statement for 20XX, Cash Flow Statement for 20XX, and Balance Sheet as of the end of 20XX based on the data provided below for year 20XX. All sales are collected when the sale is made and all expenses are paid when the expense is incurred. Explain the purpose of each financial statement. a. Income Statement Data for 20XX: â¢ Units produced and sold = 420 â¢ Sales ($80 per unit selling price) = $33600 â¢ Cost of goods sold ($30 per unit, all variable costs) = $12600 â¢ Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves) â¢ Advertising fees =$2000 â¢ Bank fees = $150 â¢ Phone/internet = $1200 â¢ Shipping ($3 per unit) = $1260 â¢ Utilities = $900 â¢ Office supplies = $800 â¢ Interest expense on note payable = $350 â¢ Depreciation expense (straight line) = $800 â¢ Income tax rate = 26 %

b. Other Financial Data for 20XX: â¢ Proceeds from sale of equipment = $3000. The equipment originally cost $1000 and had accumulated depreciation of $200. â¢ Purchase of equipment = $1600 (The machine is purchased on the last day of 20XX so no depreciation expense is recorded.) â¢ Repayment of note payable = $5000 â¢ Consider any data relevant from the income statement.

c. Balance Sheet Data for Beginning of 20XX: â¢ Cash and cash equivalents = $10000 â¢ Accounts receivable = $0 (Cash is received at time of sale) â¢ Raw materials inventory = $10500 â¢ Equipment = $5000 (This includes the $1000 cost of the equipment sold in 20XX). â¢ Accumulated depreciation = $1,000 (This includes the accumulated depreciation of 200 for the equipment sold in 20XX. â¢ Accounts payable = $0 (Cash is paid at the time of purchase.) â¢ Note payable = $5000 (This is the note payable which is repaid in 20XX) â¢ Common stock = $15000 â¢ Retained earnings = $4500 2. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.

a. Net Profit Margin

b. Quick Ratio c. Debt-to-Equity Ratio 3. Cost Classification: The Leeâs have provided you with the following costs and relevant information that are assumed for year 20XY. A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.

B. Explain the importance of distinguishing between variable and fixed costs.

C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information. a. Cost of goods sold of $35 per unit b. Labor = $400/month â¢

One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month. c. Advertising fees = $3,000 d. Bank fees = $200 e. Phone/internet = $150 per month f. Shipping = $3 per unit g. Utilities = $100 per month h. Office Supplies = $900 i. Conference Exhibitor Fee = $3000 j. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

4. Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42000. It is expected that the new piece of equipment will lead to cash flows of $17000, $29000, and $40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.

5. Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled in December of 20XY. They want to be prepared for this. Based on the budgeted income statement calculated above for 20XY, create a new budgeted income for 20XZ assuming that the production and sales is double the level of 20XY

. 6. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one yearâs time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?

7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)

8. Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit and the total contribution margin?

Joe Murphy retired a few years ago at the age of 48, having built up a substantial retirement portfolio through a range of entrepreneurial activities. He moved to the Snowy Mountains to follow his dream of a peaceful mountain life. However, after a few months, Murphy became restless and opened a ski equipment store. This single store soon grew into a chain of four outlets spread from the Snowy Mountains to the Victorian Alps. As Murphy put it, âI can't believe how fast we've expanded. It's basically been uncontrolled growthâgrowth that has occurred in spite of what we've doneâ. Although business was profitable, the chain did have its share of problems. Sales tended to be seasonal, with a slowdown once the snow had disappeared. Murphy therefore added fishing and camping equipment to his product line. The need to finance required inventories seemed to be bulging and left cash balances at very low levels, occasionally giving rise to short-term bank loans. Part of Murphy's business focused on skiing trips, which were arranged through local ski lodges, and included ski hire, lessons and lift passes. Reports from the company's financial accounting system seemed to indicate that this part of the business was losing money because of increasing costs, but Murphy could not be sure. âThe traditional income statement is not too useful in assessing the problemâ, he noted. âAlso, my gut feeling is that we are not dealing with the best suppliers in terms of quality, delivery reliability and prices.â Additional complications were caused by an increasingly competitive marketplace, with many former customers now buying equipment through the internet. Murphy was not sure what to do. The company's accountant was very good at keeping the books and preparing the financial statements and tax return, but she did not understand the way the business really worked.

Required:

1 Describe the types of information that Murphy needs to run his business more effectively.

2 Murphy approaches the accountant to seek her help in gathering and analysing this information, but she responds: âYou must be jokingâI'm an accountant. My job is to look after the money side of the business!â Do you agree with this statement?

3 What actions would you recommend that Murphy takes?

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Question 1

Identify the item below that is not one of the four different types of data processing activities.

		deleting
		reading
		creating
		using

Question 2

All of the following are advantages of an ERP system except

		ERPs permit manufacturing plants to receive new orders in real time.
		in an ERP, data input is captured or keyed once.
		it takes considerable experience and training to use an ERP system effectively.
		ERPs permit management to gain greater visibility into every area of the enterprise.

Question 3

Sam Jones has been the controller of Downtown Tires for 25 years. Ownership of the firm recently changed hands and the new owners are conducting an audit of the financial records. The audit has been unable to reproduce financial reports that were prepared by Sam. While there is no evidence of wrongdoing, the auditors are concerned that the discrepancies might contribute to poor decisions. Which of the following characteristics of useful information is absent in the situation described above?

		relevant
		reliable
		complete
		timely
		understandable
		verifiable
		accessible

Question 4

An ERP system might facilitate the purchase of direct materials by all of the following except

		preparing a purchase order when inventory falls to reorder point.
		routing a purchase order to a purchasing agent for approval.
		communicating a purchase order to a supplier.
		selecting the best supplier by comparing bids.

Question 5

Antia Carmie is the largest collector and retailer of Japanese fans in the St. Louis area. Antia uses computer technology to provide superior customer service. The store's database system was designed to make detailed information about each Japanese fan easily accessible to her customers. Accordingly, the fan price and condition are provided for each fan, along with many pictures of each fan. In Antia's database, the price of the Japanese fans is a(n)

		entity.
		attribute.
		field.
		record.

Question 6

Which of the following is not considered a source document?

		A copy of the company's shipping document.
		A copy of the company's ledger.
		A copy of the company's sales journal.
		A copy of the company's financial statements.

Question 7

In an ERP system, the module used to record data about transactions in the disbursement cycle is called

		financial.
		order to cash.
		customer relationship management.
		purchase to pay.

Question 8

Baggins Incorporated identifies new product development and product improvement as the top corporate goals. An employee developed an innovation that will correct a shortcoming in one of the company's products. Although Baggins current Return on Investment (ROI) is 12%, the product innovation is expected to generate ROI of only 10%. As a result, awarding bonuses to employees based on ROI resulted in

		goal conflict.
		information overload.
		decreased value of information.
		goal congruence.

Question 9

________ are examples of activities that constitute inbound logistics.

		Activities that transform inputs into final products or services
		Activities that provide post-sale support to customers
		Activities that consist of receiving, storing, and distributing the materials used as inputs by the organization to create goods and/or services it sells
		Activities that help customers to buy the organization's products or services

Question 10

In which transaction cycle would information for inventory purchases be most likely to pass between internal and external accounting information systems?

		the revenue cycle
		the expenditure cycle
		the human resources / payroll cycle
		the financing cycle

Question 11

The collection of customer payment is part of which transaction cycle?

		the human resources cycle
		the production cycle
		the revenue cycle
		the expenditure cycle

Question 12

Which of the following is an example of source data automation?

		POS (point-of-sale) scanners in retail stores
		a bill of lading
		a subsidiary ledger
		a utility bill

Question 13

All of the following are guidelines for developing a good coding system except

		be as sophisticated as possible to promote usage.
		be consistent with its intended use.
		be flexible to allow for growth.
		be consistent with the company's organization structure.

Question 14

What is a key decision that needs to be made with regards to borrowing money from lenders?

		the location
		pro forma income statement
		how much capital to acquire
		job descriptions

Question 15

Identify the false statement below.

		A service company does not have an inventory system.
		Retail stores do not have a production cycle.
		Financial institutions have installment-loan cycles.
		Every organization should implement every transaction cycle module.

Question 16

The chart of accounts of a fast-food restaurant would probably include

		a list of customers.
		a list of financial statement accounts.
		a list of vendors.
		a list of employees.

Question 17

Which statement below regarding the AIS is false?

		Traditionally, most AIS have been designed so that both financial and operational data are stored in a manner that facilitates their integration in reports.
		The AIS must be able to provide managers with detailed and operational information about the organization's performance.
		Both traditional financial measures and operational data are required for proper and complete evaluation of performance.
		The AIS was often just one of the information systems used by an organization to collect and process financial and nonfinancial data.

Question 18

In Petaluma, California, electric power is provided to consumers by Pacific Power. Each month Pacific Power mails bills to 186,000 households and then processes payments as they are received. What is the best way for this business to ensure that payment data entry is efficient and accurate?

		well-designed paper forms
		turnaround documents
		source data automation
		sequentially numbered bills

Question 19

Data must be converted into information to be considered useful and meaningful for decision making. There are seven characteristics that make information both useful and meaningful. If the same information can be reproduced by two independent and knowledgeable people, it is representative of the characteristic of

		verifiability.
		truthful.
		relevance.
		reliability.

Question 20

		entity.
		attribute.
		field.
		record.

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ACC 100 Chapter Notes - Chapter 2: Financial Transaction, Financial Statement, Lawn Mower

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