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Chapter 12 The Role of Accounting in Business

A New Form of GPS: The Gregarious People Seeker

Things are moving so fast we really don’t know what’s going to happen.

Naveen Selvadurai, cofounder of Foursquare

Let’s say that you’re doing your economics homework, trying to calculate the effect of the recession on room rates in Fort Lauderdale.This vignette is based on the following sources: Diane Brady, “Social Media’s New Mantra: Location, Location, Location,” Bloomberg BusinessWeek, May 6, 2010, (accessed May 13, 2010); Arik Hesseldahl, “Foursquare Tries Broadening Its Appeal,” Bloomberg BusinessWeek, April 19, 2010, (accessed May 13, 2010); Foursquare, (accessed May 13, 2010). For some reason, you get a sinking feeling that your friends are out somewhere having fun without you. What’s a quick way to find out where they are and what they’re up to? If you’re signed up, you can “check in” with the Foursquare app on your smartphone, tablet PC, or whatever device you use to connect to a wireless network. Foursquare is a mobile social network, and in addition to the handy “friend finder” feature, you can use it to find new and interesting places around your neighborhood to do whatever you and your friends like to do. It even rewards you for doing business with sponsor companies, such as local restaurants.

Foursquare, which has been getting a lot of buzz lately, was started in 2009 by two young entrepreneurs, Dennis Crowley and Naveen Selvadurai. It’s already attracted more than a million users, and Crowley and Selvadurai are understandably enthusiastic about their prospects. Not everybody, however, is as optimistic as they are. Right now, Foursquare is bringing in money and growing, but let’s face facts—it’s a start-up and it’s barely two years old. Among the experts who pay attention to the business of software apps, Foursquare has both optimists and skeptics, and, as usual, there a lot of people who think that Crowley and Selvadurai should take the money and run—that is, sell out to a larger company and move on.

Clearly, Crowley and Selvadurai have some questions to answer and—at some point, if not necessarily right now—decisions to make. This is where they’ll have to rely on an accountant, because they’ll need somebody with a knowledge of accounting to help them ask and answer the right questions and formulate and make the right decisions: How much revenue are we bringing in? Can we increase it? What are our expenses? Will they continue to get higher or can we cut them? How much money are we actually making? Are we operating at a profit or a loss? How much do we have invested in the company? How much debt do we have? Can we pay our bills on time? If we need more money, where can we get it? How much cash do we have on hand? How much cash comes in each month and how much goes out? How long will it last? How much is our business really worth? If we decide to sell it, how much should we ask for it? Is it a good idea to put more of our own money into the venture? What are the odds that Foursquare will succeed?

In this chapter, we’ll learn how to gather, summarize, and interpret accounting information and how to use it in making business decisions like the ones facing Crowley and Selvadurai.