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1.4 End-of-Chapter Exercises

Questions

  1. James Watkins is signing up for classes at his college for the upcoming semester and is thinking of taking a course in financial accounting. What is financial accounting?
  2. What decisions are often associated with financial accounting?
  3. How does financial accounting differ from managerial accounting?
  4. Who are some of the most likely users of the information provided by financial accounting?
  5. Betsy Ligando and Cynthia Zvyvco are planning to start a business where they will sell greeting cards in a leased space at the local shopping center. A friend told them that they should create their business as a corporation. What is a corporation?
  6. From question 5, assume that the owners choose not to incorporate their business. What type of business will they create and what risks are involved?
  7. From question 5, assume that the owners decide that their business will be created as a corporation. How does a business become a corporation?
  8. What are the advantages of operating a business as a corporation?
  9. What purpose does a board of directors serve in a corporation?
  10. Tyrone Waters works part time during the school year and has saved up cash amounting to $2,000. He wants to invest that money in the capital stock of a business such as Walmart. Why would Waters use his money to buy ownership shares of this business?
  11. An investor in the capital stock of a business will often look at available financial accounting information in a different way than a creditor or lender. How do the needs of these two groups differ?
  12. What is financial information?
  13. What is a dividend? Who makes the decision for a business corporation to distribute a dividend? Why is a dividend distributed?
  14. Daisy Miller owns one hundred shares of the capital stock of Aground International, a business organization with its headquarters in her hometown. The company mails her a copy of its latest annual report. What is the purpose of the annual report?
  15. Jimi Tattaro puts $500 into a savings account and closes it out one year later by removing all $515 that is now in the account. He also spent $600 to invest in the capital shares of the YxWho Corporation. He sold those shares one year later for $638. Before the sale, he received a $4 cash dividend from YxWho. What is the annual return on each of these investments?

True or False

  1. ____ Financial accounting information is generated primarily to help with decisions made inside a business or by some other organization.
  2. ____ Typically, a business operated as a sole proprietorship will be able to raise money from issuing capital shares easier than will a business operated as a corporation.
  3. ____ Employees have no reason to be interested in any financial accounting information provided by their employer.
  4. ____ Most investors in the capital stock of a business want to be involved in the daily operations.
  5. ____ The board of directors of a corporation is elected by its shareholders.
  6. ____ Investors who hold investments in capital stock for longer than a year may enjoy a tax benefit.
  7. ____ In analyzing a business, creditors are most interested in the possibility that the corporation’s stock price might decline.
  8. ____ Corporations that report earning additional profits are required by law to pay dividends to their shareholders.
  9. ____ Purchasing the capital stock of a business is typically a riskier investment than opening a savings account.
  10. ____ Financial information is communicated in monetary terms but may be explained verbally.
  11. ____ Most businesses report their financial accounting information as part of an annual report released to owners and other interested parties.
  12. ____ Accountants are the primary users of the information provided by financial accounting.
  13. ____ An entity that loans money to a business is referred to as a “shareholder.”

Multiple Choice

  1. Ramon Sanchez is a loan officer at Washington Bank. He is in the process of deciding whether or not to loan money to Medlock Corporation. Which of the following would have the most influence on Sanchez when making this decision?

    1. Medlock generated positive cash flows last year.
    2. Medlock paid dividends last year.
    3. Medlock’s stock price increased last year.
    4. The number of stockholders in Medlock increased last year.

  2. Which of the following is not a reason for an investor to purchase capital stock in a relatively large corporation?

    1. To receive dividend payments
    2. To sell the stock for a gain if the share price increases
    3. To earn a return on their investment
    4. To participate in the day-to-day operations of the business

  3. Which of the following is not a decision that is normally made using financial accounting information?

    1. An investor decided to acquire shares of the capital stock of Rayburn Corporation.
    2. A credit analyst at Mayfield Corporation rejected a request for credit from Rayburn Corporation.
    3. A Rayburn Corporation manager decided to increase the quantity of widgets produced each month for sales purposes.
    4. A loan officer at Fairburn Bank chose to grant a loan request made by Rayburn Corporation so the company could expand.

  4. Which of the following individuals is most likely to have a say in the policy decisions made by a large corporation?

    1. A stockholder
    2. A member of the board of directors
    3. An employee
    4. A creditor

  5. Leon Williams is an investor in Springfield Corporation. On January 1, Year One, he purchased 150 shares of the corporation’s capital stock at a price of $45 per share. On October 15, Year One, Springfield distributed a cash dividend of $1.50 per share to its stockholders. On December 31, Year One, Springfield’s stock is selling for $47 per share. What is the annual rate of return on William’s investment during Year One, rounded to one decimal point?

    1. 3.3 percent
    2. 4.4 percent
    3. 5.5 percent
    4. 7.8 percent

  6. At the beginning of the current year, the capital stock of the Ajax Corporation was selling for $24 per share, but, by the end of the year it was selling for $35 per share. Which of the following individuals is the least likely to pay significant attention to this jump in stock price?

    1. The vice president in charge of advertising working on the budget for this coming year
    2. The loan officer at the bank who granted Ajax a loan late last year
    3. Chair of the board of directors
    4. Head of a local investment advisory company

  7. Which of the following is least likely to be found in the financial information provided in the annual report of a large corporation?

    1. The amount of cash dividends paid in each of the last three years.
    2. The total amount of debt owed by the corporation.
    3. The rationale for deciding to rent a new airplane rather than buying it.
    4. The amount of cash held by the business at the end of the year.

  8. William Alexander invests money to become one of the owners of a local restaurant. He sells his interest three months later because he wants to invest in a bookstore. Which is the most likely legal structure for the restaurant?

    1. Sole proprietorship
    2. Partnership
    3. Standard operating business
    4. Corporation

Video Problems

Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.

  1. Your roommate is an English major. The roommate has just learned that you are taking a course in financial accounting. The roommate has never once considered taking a class in business and is mystified that you have chosen to spend your time learning this material. One evening, over pizza, you two are discussing your classes for the semester. The roommate wants to know why anyone could possibly benefit from a class in financial accounting. How would you respond?

    (click to see video)

  2. Your uncle has worked for a large office supply business for twenty years. They have approximately one hundred retail stores located across the country. He is responsible for a small team of employees who do the interior design work in each of these stores. One day he sends you the following e-mail: “As a reward for twenty years of service, my company has offered to sell me one thousand shares of their capital stock for $23 per share. That’s $23,000, and that is a lot of money. I’ve never been interested in this aspect of business. I understand you are taking a financial accounting course in college. What are capital shares? More importantly, how can I determine whether to spend $23,000 for these shares?”

    (click to see video)

Problems

  1. Explain how each of the following individuals might use the information provided by financial accounting about the Nguyen Company, which is located in Falls Church, Virginia.

    1. Bank loan officer considering loaning money to Nguyen Company
    2. Current employee of Nguyen Company
    3. Potential employee of Nguyen Company
    4. Current investor in Nguyen Company
    5. Potential investor in Nguyen Company
    6. A credit analyst of company wanting to sell inventory to Nguyen Company

  2. Mark each of the following with an (F) to indicate if it is financial information or an (N) to indicate if it is nonfinancial information.

    Metro Corporation has the following:

    1. ____ Cash of $4,000,000
    2. ____ A building that cost $50,000,000
    3. ____ 2,000 employees
    4. ____ Inventory with a cost of $16,000,000
    5. ____ 500 shares of capital stock
    6. ____ 1,000 trucks
    7. ____ Sales of merchandise for $45,000,000
    8. ____ 2,000 cans of beans for resale purposes
    9. ____ 2,000 cans of beans to be used in the employee cafeteria

  3. Assume that a person you know tells the following story: “I inherited $3,000 from a distant uncle. I took that money and invested it all in the capital shares of Ford Motor Co. I had looked at several other corporations including Intel, PepsiCo, Microsoft, and Google. Eventually, though, I put my money into Ford.”

    Answer the following questions:

    1. What is meant by “the capital shares of Ford Motor Co.?”
    2. Why would a person spend $3,000 to buy the capital shares of any business?
    3. Provide some possible reasons for this person to have invested in Ford rather than in those other corporations.
    4. In what way might the annual report of Ford Motor Co. have helped the person to make this decision?

Research Assignments

  1. The chapter introduced several forms of business, including a corporation, sole proprietorship, and partnership. Other forms of business exist as well. Do an Internet search to learn as much as you can about each of the following business forms:

    • Sole proprietorship
    • Partnership
    • Limited partnership
    • C corporation
    • S corporation
    • Limited liability corporation (LLC)

    For each of these legal forms, discuss the following issues: ease of organization and maintenance of form, number of people involved, government involvement, liability to owners, ease of exit, taxation, day-to-day management, and funding sources.

  2. A great amount of financial information is available on the Internet about most business corporations of any significant size. For example, visit http://www.google.com/finance/. In the “Get Quotes” box, type in “Starbucks Corporation.”

    Answer each of the following questions based on the information provided at this site:

    1. For what price is the capital stock issued by Starbucks currently selling?
    2. On what stock market or exchange are the shares of Starbucks bought and sold?
    3. For convenience, the names of corporations that are listed on stock markets have a ticker symbol. This symbol is a shorthand method of identifying the business. What is the ticker symbol for Starbucks?
    4. Investors are often interested in the movement of the price of a share of stock during recent months. What is the fifty-two week range in the price of Starbucks’ stock? Is the current price closer to the high or to the low in that range?
    5. Investors are also interested in comparing a business operation to other businesses in the same or related industry. Investors want to know how the company does in comparison to its chief competitors. List three corporations that may be competitors of Starbucks.
    6. Read the description of this business and list three things that you found most interesting.
    7. Provide the names of three officers and three members of the board of directors.

  3. The U.S. Department of Labor has a page on its Web site at http://www.bls.gov/oco/ocos001.htm that is titled “Accountants and Auditors.” Go to this site and read this page. Use that information to answer the following questions:

    1. In general, what functions do accountants perform?
    2. Briefly list the different types of accountants and what they do.
    3. What education is required to become an accountant or an auditor?
    4. What is a CPA?
    5. What are the typical requirements to become a CPA?
    6. What other certifications are available for accountants?
    7. What is the current job outlook for the accounting profession?

  4. Go to http://www.target.com/. At the Target Corporation Web site, scroll to the bottom of that page, find “Company Information,” and click on “Investors.” Then, click on “Annual Reports.” Click on the 2010 annual report and answer the following question:

    Starting on page 2, a two-page letter is included “to our shareholders” from the chairman, president, and CEO. Read that letter. Assume you are thinking about buying shares of the capital stock of Target. List two or three pieces of information that you found in this letter that you felt were especially relevant to your decision.