Acc301 Essentials of Accounting: Week 1 (E1-3, P1-3A, BYP1-7, E2-1, P2-4A, BYP2-9)

Acc301 Essentials of Accounting
Week 1

E1-3
The Mill Run Golf & Country Club details the following accounts in its financial statements.

Instructions
a) Classify each of the above accounts as an asset (A), liability (L), stockholders’ equity (SE), revenue (R), or expense (E) item.
b) Classify each of the above accounts as a financing activity (F), investing activity (I), or operating activity (O). If you believe a particular account doesn’t fit in any of these activities, explain why.

P1-3A
On June 1 Eckersley Service Co. was started with an initial investment in the company of $26,200 cash. Here are the assets and liabilities of the company at June 30, and the revenues and expenses for the month of June, its first month of operations:
Cash 4,600 Notes payable 12,000
Accounts receivable 4,000 Accounts payable 500
Revenue 7,000 Supplies expense 1,000
Supplies 2,400 Gas and oil expense 600
Advertising expense 400 Utilities expense 300
Equipment 29,000 Wage expense 1,400
In June, the company issued no additional stock, but paid dividends of $2,000.

Instructions
(a) Prepare an income statement and a retained earnings statement for the month of June and a balance sheet at June 30, 2010.
(b) Briefly discuss whether the company's first month of operations was a success.
(c) Discuss the company's decision to distribute a dividend.

BYP1-7
Diane Wynne is the bookkeeper for Bates Company, Inc. Diane has been trying to get the company's balance sheet to balance. She finally got it to balance, but she still isn't sure that it is correct.
BATES COMPANY, INC.
Balance Sheet
For the Month Ended December 31, 2010
Assets Liabilities and Stockholders' Equity
Equipment 20,500 Common stock 12,000
Cash 10,500 Accounts receivable (6,000)
Supplies 2,000 Dividends (2,000)
Accounts payable (5,000) Notes Payable 14,000
Retained Earnings 10,000
Total assets $28,000 Total liabilities and stockholders' equity $28,000

Instruction:
Explain to Diane Wynne in a memo (a) the purpose of a balance sheet, and (b) why this balance sheet is incorrect and what she should do to correct it.

E2-1:
The following are the major balance sheet classifications.
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Common stock (CS)
Intangible assets (IA) Retained earnings (RE)

Instructions
Classify each of the following financial statement items taken from Remington Corporation's balance sheet.
Classify financial statement items by balance sheet classification.

P2-4A:
Comparative financial statement data for Bedene Corporation and Groneman Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2010.
Bedene Corporation Groneman Corporation
2010 2010
Net sales 1,900,000 620,000
Cost of goods sold 1,175,000 340,000
Operating expenses 303,000 98,000
Interest expense 9,000 3,800
Income tax expense 85,000 36,000
Current assets 407,200 190,336
Plant assets (net) 532,000 139,728
Current liabilities 66,325 40,348
Long-term liabilities 108,500 29,620
Cash from operating activities 138,000 36,000
Capital expenditures 90,000 20,000
Dividends paid 36,000 15,000
Average number of shares outstanding 100,000 50,000

Instructions
(a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2010.
(b) Comment on the relative liquidity of the companies by computing working capital and the current ratios for each company for 2010.
(c) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2010.

BYP2-9
A May 20, 2002, Business Week story by Stanley Holmes and Mike France entitled "Boeings's Secret" discusses issues surrounding the timing of the disclosure of information at the giant airplaine manufacturer. To summarize, on December 11, 1996, Boeing closed a deal to acquire another manufacturer, McDonnell Douglas.
Boeing paid for the acquisition by issuing shares of its own stock to the stockholders of McDonnell Douglas. In order for the deal not to be revoked the value of Boeing’s stock could not decline below a certain level for a number of months after the deal.
The article suggests that during the first half of 1997 Boeing suffered significant cost overruns because of severe inefficiencies in its production methods. Had these problems been disclosed in the quarterly financial statements during the first and second quarter of 1997, the company’s stock most likely would have plummeted, and the deal would have been revoked. Company managers spent considerable time debating when the bad news should be disclosed. One public relations manager suggested that the company’s problems be revealed on the date of either Princess Diana’s or Mother Teresa’s funeral, in the hope that it would be lost among those big stories that day. Instead, the company waited until October 22 of that year to announce a $2.6 billion write-off due to cost overruns. Within one week the company’s stock price had fallen 20%, but by this time the McDonnell Douglas deal could not be removed.

Instructions:
(a) Explain who are the stakeholders in this situation?
(b) Evaluate the ethical issues?
(c) What assumptions or principles of accounting are relevant to this case?
d.) Do you think it is ethical to try to "time" the release of a story so as to diminish its effect?
e.) What would you have done if you were the chief executive officer of Boeing?
f) Boeing's top management maintains that it did not have an obligation to reveal its problems during the first half of 1997, and that it wouldn't do anything differently today. What implications does this have for investors and analysts who follow Boeing's stock?
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