Deck 14: Money and the Financial System

Question 1

The income statements of all corporations are in the same format. True or false? Discuss.

Answer 1

An income statement is one of the financial statement of the company and showcases the company's revenues and expenditure during a specific period. It indicates how the revenues are transformed into the net income and net profit.
This is false that income statements of all the corporations are not in the same format. There are multiple types of statements which can be classified as income statements which are called as the statement of operations, profit and loss statements that record all the revenues and expenses of the company during an accounting year, and an operating statement which includes company's assets, liabilities and shareholder's equity.
To conclude, an income statement provides important information into various areas of a business. It contains a company's daily operations, the competence of its management, the possible improvement areas that are hampering the profits, and also whether the company is performing in terms with industry peers.

Question 2

The Accounting Function at Goodwill Industries International Inc.
Goodwill Industries International Inc. consists of a network of 165 independent, communitybased organizations located throughout the United States and Canada. The mission of this nonprofit is to enhance the lives of individuals, families, and communities "through learning and the power of work." Local Goodwill stores sell donated goods and then donate the proceeds to fund job training programs, placement services, education, and more. Despite its nonprofit status, Goodwill establishments are in many ways run similar to forprofit businesses. One of these similarities involves the accounting function.
Like for-profit firms, nonprofit organizations like Goodwill must provide detailed information about how they are using the donations that are provided to them. Indeed, fraud can occur just as easily at a nonprofit organization as for a for-profit company, making it necessary for nonprofits to reassure stakeholders that they are using their funds legitimately. Additionally, donors want to know how much of their donations is going toward activities such as job creation and how much is going toward operational and administrative expenses. It sometimes surprises people that nonprofits use part of the funds they receive for operational costs. Yet such a perspective fails to see that nonprofits must also pay for electricity, rent, wages, and other services.
"We have revenue and support for the revenue pieces, and then we have direct and indirect expenses for our program services, and then we have G and A, general administrative services. And we have what's called the bottom line, or other people call net profit. We have what's called net change in assets. The concept is pretty much the same as far as accounting," says Jeff McGraw, CFO of Goodwill.
Goodwill creates the equivalent of a balance sheet and income statement. Yet because Goodwill is a nonprofit entity, its financials are known by the names statement of financial position and statement of activities. These financials have some differences compared to financial statements of for-profit companies. For instance, Goodwill's statement of financial position does not have shareholder's equity but instead has net assets.
The organization's financials are audited, and stakeholders can find the firm's information in form 990 through Goodwill's public website (form 990 is the IRS form for nonprofits).
Because Goodwill sells goods at its stores, the company must also figure in costs of goods sold. In fact, most of the organization's revenue comes from its store activities. In the most recent year, the retail division or sale of donated goods and contributed goods generated $3.53 billion. The contracts division generated $636 million, which provides custodial, janitorial, and lawn maintenance service contracts to government agencies. Grants from foundations, corporations, individuals, and government account for $148 million. The fact that Goodwill is able to generate much of its own funding through store activities and contracts is important. Many nonprofits that rely solely on donated funds find it hard to be sustainable in the long run, particularly during economic downturns.
Remember that even though nonprofits are different from for-profit companies, they must still make certain that their financial information is accurate. This requires nonprofit accountants to be meticulous and thorough in gathering and analyzing information. Like all accountants, accountants at Goodwill record transactions in journals and then carefully review the information before it is recorded in the general ledger. The organization uses trial balances to ensure that everything balances out, as well as advanced software to record transactions, reconcile any discrepancies, and provide an idea of how much cash the organization has on hand.
Finally, Goodwill uses ratio analysis to determine the financial health of the company. For instance, the common ratio allows Goodwill to determine how much revenue it brings in for every dollar it spends on costs. The organization also uses ratio analysis to compare its results to similar organizations. It is important for Goodwill to identify the best performers in its field so that it can generate ideas and even form partnerships with other organizations. By using accounting to identify how best to use its resources, Goodwill is advancing its mission of helping others. 12
What are some similarities between the type of accounting performed at Goodwill compared to accounting at for-profit companies?

Answer 2

The only difference between for profit and nonprofit in terms of accounting is the source of funding. Nonprofits receive funds also in the form of donations.
Hence, the financial statements of nonprofits would be very similar to for profits except that it would have an extra category in sources of funds i.e. donations.
Also, the concept of accounting remains the same, barring the terminology. For example net profit in for profit's accounting statement would have a counterpart by the name of bottom line in nonprofit's accounting statement.

Question 3

Which accounts appear under "current liabilities"?

Answer 3

Current liabilities are a company's short term monetary obligation that is due within one year or within the normal accounting year. These liabilities are written under a different section of a company's balance sheet and allow the accountant to reduce it from the current assets in order to determine working capital.
The accounts which come under current liabilities are accounts payable, wages payable, income taxes payable, interest payable, deferred revenues, customer deposits, notes payable during the year. Current liabilities can differ from company to company or as per the various government regulations.
Investigators and leasers regularly utilize the current proportion. The present proportion quantifies the company's capacity to pay its pending monetary obligations or commitments. The amount, which is calculated by isolating current assets by current liabilities, shows how well an organization deals with its asset report to take care of its temporary obligations and payables. It reflects speculators and examiners whether the company has sufficient current resources on its monetary record to fulfil or take care of its current obligation and different expenses.

Question 4

Deloitte Partners with New Profit Inc. to Drive Social Innovation
Deloitte LLP is one of the largest consulting firms in the world, specializing in financial advisory, risk management, and audit and tax services. The organization has a far-reaching reputation for being one of the most philanthropic firms in the world. It is therefore no surprise that it has established a multimillion- dollar partnership with New Profit Inc. to promote and support social innovation initiatives.
New Profit Inc. is a social innovation nonprofit and venture philanthropy fund, investing in social entrepreneurs whose ideas promise to contribute to a greater social good. Areas of interest include education, workforce development, public health, and community development because they facilitate social mobility and enact powerful systemic change by providing better opportunities for children, families, and communities. Deloitte shares these values and has committed to providing pro bono consulting services to New Profit as well as to those in New Profit's portfolio. As one of the largest employers with top talent, Deloitte recognizes that human and intellectual capital is its most valuable asset, and it has based its corporate citizenship strategy-Impact Imperative-around this.
This collaboration between a large public financial firm and a small private organization is a profound example of social responsibility that has the potential to affect many people for the better. 9
How is Deloitte contributing to New Profit Inc.'s mission?

Question 5

Together, the income statement and the balance sheet answer two basic questions. What are they?

Question 6

Discuss the internal uses of accounting statements.

Question 7

What are the five basic ratio classifications? What ratios are found in each category?

Question 8

Companies Investigate Ways to Integrate Financial Information and Sustainability Costs
Most people believe that financial statements such as income statements and balance sheets provide the entire picture of a firm's financial standing. In reality, however, this is not the case. It has been estimated that about 80 percent of a firm's value is not found on the balance sheet. One of the least understood areas involves sustainability. For instance, how much does violating an environmental law truly cost a firm, not only monetarily but also regarding its reputation? Some socially responsible businesses have adopted a triple bottom line approach in which the organization reports its financial results, its impact on society, and its impact on the planet. Yet, even these companies find it difficult to take three different dimensions and add them up to provide an overall report.
A pilot program consisting of 75 global companies is investigating ways to overcome these challenges. This program, monitored by the International Integrated Reporting Council, seeks to create an integrated reporting model giving investors the opportunity to receive a holistic view of the company's operations and business strategies. Integrated reporting combines both financial and nonfinancial information. Companies testing this program include Microsoft, Unilever, Clorox, and Coca-Cola. Although most of these firms already develop sustainability or social responsibility reports, these reports are separate from the company's financial information. Such an endeavor requires the active participation of both company financial officers and accountants. Integrated reporting may become the new norm for investor reports-stock exchanges such as NASDAQ are beginning to require more information on a firm's corporate governance and environmental activities. 5
What is the purpose of the Integrated Reporting Council?

Question 9

Why are debt ratios important in assessing the risk of a firm?

Question 10

Form a group of three or four students to perform an industry analysis. Each student should analyze a company in the same industry, and then all of you should compare your results. The following companies would make good group projects:
Automobiles: Fiat Chryslesr, Ford, General Motors
Computers: Apple, Hewlett-Packard, Dell
Brewing: MillerCoors, Molson Coors, The Boston Beer Company
Chemicals: DuPont, Dow Chemical, Monsanto
Petroleum: Chevron, ExxonMobil, BP
Pharmaceuticals: Merck, Lilly, Amgen
Retail: Sears, JCPenney, Macy's, The Limited

Question 11

If Fastow's claim that he received approval from accountants, lawyers, and directors for his financial structures is true, does this make him less liable for the fraud? Why or why not?

Question 12

Exploring the Secrets of Accounting
You have just been promoted from vice president of marketing of BrainDrain Corporation to president and CEO! That's the good news. Unfortunately, while you know marketing like the back of your hand, you know next to nothing about finance. Worse still, the "word on the street" is that BrainDrain is in danger of failure if steps to correct large and continuing financial losses are not taken immediately. Accordingly, you have asked the vice president of finance and accounting for a complete set of accounting statements detailing the financial operations of the company over the past several years.
Recovering from the dual shocks of your promotion and feeling the weight of the firm's complete accounting report for the very first time, you decide to attack the problem systematically and learn the "hidden secrets" of the company, statement by statement. With Mary Pruitt, the firm's trusted senior financial analyst, by your side, you delve into the accounting statements as never before. You resolve to "get to the bottom" of the firm's financial problems and set a new course for the future-a course that will take the firm from insolvency and failure to financial recovery and perpetual prosperity.
Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company's financial ratios might you expect to be especially poor?

Question 13

The Accounting Function at Goodwill Industries International Inc.
Goodwill Industries International Inc. consists of a network of 165 independent, communitybased organizations located throughout the United States and Canada. The mission of this nonprofit is to enhance the lives of individuals, families, and communities "through learning and the power of work." Local Goodwill stores sell donated goods and then donate the proceeds to fund job training programs, placement services, education, and more. Despite its nonprofit status, Goodwill establishments are in many ways run similar to forprofit businesses. One of these similarities involves the accounting function.
Like for-profit firms, nonprofit organizations like Goodwill must provide detailed information about how they are using the donations that are provided to them. Indeed, fraud can occur just as easily at a nonprofit organization as for a for-profit company, making it necessary for nonprofits to reassure stakeholders that they are using their funds legitimately. Additionally, donors want to know how much of their donations is going toward activities such as job creation and how much is going toward operational and administrative expenses. It sometimes surprises people that nonprofits use part of the funds they receive for operational costs. Yet such a perspective fails to see that nonprofits must also pay for electricity, rent, wages, and other services.
"We have revenue and support for the revenue pieces, and then we have direct and indirect expenses for our program services, and then we have G and A, general administrative services. And we have what's called the bottom line, or other people call net profit. We have what's called net change in assets. The concept is pretty much the same as far as accounting," says Jeff McGraw, CFO of Goodwill.
Goodwill creates the equivalent of a balance sheet and income statement. Yet because Goodwill is a nonprofit entity, its financials are known by the names statement of financial position and statement of activities. These financials have some differences compared to financial statements of for-profit companies. For instance, Goodwill's statement of financial position does not have shareholder's equity but instead has net assets.
The organization's financials are audited, and stakeholders can find the firm's information in form 990 through Goodwill's public website (form 990 is the IRS form for nonprofits).
Because Goodwill sells goods at its stores, the company must also figure in costs of goods sold. In fact, most of the organization's revenue comes from its store activities. In the most recent year, the retail division or sale of donated goods and contributed goods generated $3.53 billion. The contracts division generated $636 million, which provides custodial, janitorial, and lawn maintenance service contracts to government agencies. Grants from foundations, corporations, individuals, and government account for $148 million. The fact that Goodwill is able to generate much of its own funding through store activities and contracts is important. Many nonprofits that rely solely on donated funds find it hard to be sustainable in the long run, particularly during economic downturns.
Remember that even though nonprofits are different from for-profit companies, they must still make certain that their financial information is accurate. This requires nonprofit accountants to be meticulous and thorough in gathering and analyzing information. Like all accountants, accountants at Goodwill record transactions in journals and then carefully review the information before it is recorded in the general ledger. The organization uses trial balances to ensure that everything balances out, as well as advanced software to record transactions, reconcile any discrepancies, and provide an idea of how much cash the organization has on hand.
Finally, Goodwill uses ratio analysis to determine the financial health of the company. For instance, the common ratio allows Goodwill to determine how much revenue it brings in for every dollar it spends on costs. The organization also uses ratio analysis to compare its results to similar organizations. It is important for Goodwill to identify the best performers in its field so that it can generate ideas and even form partnerships with other organizations. By using accounting to identify how best to use its resources, Goodwill is advancing its mission of helping others. 12
What are some differences between the type of accounting performed at Goodwill compared to accounting at for-profit companies?

Question 14

Deloitte Partners with New Profit Inc. to Drive Social Innovation
Deloitte LLP is one of the largest consulting firms in the world, specializing in financial advisory, risk management, and audit and tax services. The organization has a far-reaching reputation for being one of the most philanthropic firms in the world. It is therefore no surprise that it has established a multimillion- dollar partnership with New Profit Inc. to promote and support social innovation initiatives.
New Profit Inc. is a social innovation nonprofit and venture philanthropy fund, investing in social entrepreneurs whose ideas promise to contribute to a greater social good. Areas of interest include education, workforce development, public health, and community development because they facilitate social mobility and enact powerful systemic change by providing better opportunities for children, families, and communities. Deloitte shares these values and has committed to providing pro bono consulting services to New Profit as well as to those in New Profit's portfolio. As one of the largest employers with top talent, Deloitte recognizes that human and intellectual capital is its most valuable asset, and it has based its corporate citizenship strategy-Impact Imperative-around this.
This collaboration between a large public financial firm and a small private organization is a profound example of social responsibility that has the potential to affect many people for the better. 9
What benefits do both organizations receive through this partnership?

Question 15

Financial Analysis
Background
The income statement for Western Grain Company, a producer of agricultural products for industrial as well as consumer markets, is shown below. Western Grain's total assets are $4,237.1 million, and its equity is $1,713.4 million. Consolidated Earnings and Retained Earnings Year Ended December 31


Task
Calculate the following profitability ratios: profit margin, return on assets, and return on equity. Assume that the industry averages for these ratios are as follows: profit margin, 12 percent; return on assets, 18 percent; and return on equity, 25 percent. Evaluate Western Grain's profitability relative to the industry averages. Why is this information useful?

Question 16

What is a budget?

Question 17

Deloitte Partners with New Profit Inc. to Drive Social Innovation
Deloitte LLP is one of the largest consulting firms in the world, specializing in financial advisory, risk management, and audit and tax services. The organization has a far-reaching reputation for being one of the most philanthropic firms in the world. It is therefore no surprise that it has established a multimillion- dollar partnership with New Profit Inc. to promote and support social innovation initiatives.
New Profit Inc. is a social innovation nonprofit and venture philanthropy fund, investing in social entrepreneurs whose ideas promise to contribute to a greater social good. Areas of interest include education, workforce development, public health, and community development because they facilitate social mobility and enact powerful systemic change by providing better opportunities for children, families, and communities. Deloitte shares these values and has committed to providing pro bono consulting services to New Profit as well as to those in New Profit's portfolio. As one of the largest employers with top talent, Deloitte recognizes that human and intellectual capital is its most valuable asset, and it has based its corporate citizenship strategy-Impact Imperative-around this.
This collaboration between a large public financial firm and a small private organization is a profound example of social responsibility that has the potential to affect many people for the better. 9
Do you believe Deloitte should be investing so many resources in philanthropy? Why or why not?

Question 18

Companies Investigate Ways to Integrate Financial Information and Sustainability Costs
Most people believe that financial statements such as income statements and balance sheets provide the entire picture of a firm's financial standing. In reality, however, this is not the case. It has been estimated that about 80 percent of a firm's value is not found on the balance sheet. One of the least understood areas involves sustainability. For instance, how much does violating an environmental law truly cost a firm, not only monetarily but also regarding its reputation? Some socially responsible businesses have adopted a triple bottom line approach in which the organization reports its financial results, its impact on society, and its impact on the planet. Yet, even these companies find it difficult to take three different dimensions and add them up to provide an overall report.
A pilot program consisting of 75 global companies is investigating ways to overcome these challenges. This program, monitored by the International Integrated Reporting Council, seeks to create an integrated reporting model giving investors the opportunity to receive a holistic view of the company's operations and business strategies. Integrated reporting combines both financial and nonfinancial information. Companies testing this program include Microsoft, Unilever, Clorox, and Coca-Cola. Although most of these firms already develop sustainability or social responsibility reports, these reports are separate from the company's financial information. Such an endeavor requires the active participation of both company financial officers and accountants. Integrated reporting may become the new norm for investor reports-stock exchanges such as NASDAQ are beginning to require more information on a firm's corporate governance and environmental activities. 5
Why do you think NASDAQ is beginning to require more information on a firm's corporate governance and environmental activities?

Question 19

Why are accountants so important to a corporation? What function do they perform?

Question 20

Why do you think Fastow believes companies today are engaging in accounting and financial manipulation that is worse than Enron's?

Question 21

Companies Investigate Ways to Integrate Financial Information and Sustainability Costs
Most people believe that financial statements such as income statements and balance sheets provide the entire picture of a firm's financial standing. In reality, however, this is not the case. It has been estimated that about 80 percent of a firm's value is not found on the balance sheet. One of the least understood areas involves sustainability. For instance, how much does violating an environmental law truly cost a firm, not only monetarily but also regarding its reputation? Some socially responsible businesses have adopted a triple bottom line approach in which the organization reports its financial results, its impact on society, and its impact on the planet. Yet, even these companies find it difficult to take three different dimensions and add them up to provide an overall report.
A pilot program consisting of 75 global companies is investigating ways to overcome these challenges. This program, monitored by the International Integrated Reporting Council, seeks to create an integrated reporting model giving investors the opportunity to receive a holistic view of the company's operations and business strategies. Integrated reporting combines both financial and nonfinancial information. Companies testing this program include Microsoft, Unilever, Clorox, and Coca-Cola. Although most of these firms already develop sustainability or social responsibility reports, these reports are separate from the company's financial information. Such an endeavor requires the active participation of both company financial officers and accountants. Integrated reporting may become the new norm for investor reports-stock exchanges such as NASDAQ are beginning to require more information on a firm's corporate governance and environmental activities. 5
Why might it be important to include sustainability and other factors in a firm's financial reports?

Question 22

Exploring the Secrets of Accounting
You have just been promoted from vice president of marketing of BrainDrain Corporation to president and CEO! That's the good news. Unfortunately, while you know marketing like the back of your hand, you know next to nothing about finance. Worse still, the "word on the street" is that BrainDrain is in danger of failure if steps to correct large and continuing financial losses are not taken immediately. Accordingly, you have asked the vice president of finance and accounting for a complete set of accounting statements detailing the financial operations of the company over the past several years.
Recovering from the dual shocks of your promotion and feeling the weight of the firm's complete accounting report for the very first time, you decide to attack the problem systematically and learn the "hidden secrets" of the company, statement by statement. With Mary Pruitt, the firm's trusted senior financial analyst, by your side, you delve into the accounting statements as never before. You resolve to "get to the bottom" of the firm's financial problems and set a new course for the future-a course that will take the firm from insolvency and failure to financial recovery and perpetual prosperity.
Discuss the limitations of ratio analysis.

Question 23

Go to the library or the Internet and get the annual report of a company with which you are familiar. Read through the financial statements, then write up an analysis of the firm's performance using ratio analysis. Look at data over several years and analyze whether the firm's performance is changing through time.

Question 24

The Accounting Function at Goodwill Industries International Inc.
Goodwill Industries International Inc. consists of a network of 165 independent, communitybased organizations located throughout the United States and Canada. The mission of this nonprofit is to enhance the lives of individuals, families, and communities "through learning and the power of work." Local Goodwill stores sell donated goods and then donate the proceeds to fund job training programs, placement services, education, and more. Despite its nonprofit status, Goodwill establishments are in many ways run similar to forprofit businesses. One of these similarities involves the accounting function.
Like for-profit firms, nonprofit organizations like Goodwill must provide detailed information about how they are using the donations that are provided to them. Indeed, fraud can occur just as easily at a nonprofit organization as for a for-profit company, making it necessary for nonprofits to reassure stakeholders that they are using their funds legitimately. Additionally, donors want to know how much of their donations is going toward activities such as job creation and how much is going toward operational and administrative expenses. It sometimes surprises people that nonprofits use part of the funds they receive for operational costs. Yet such a perspective fails to see that nonprofits must also pay for electricity, rent, wages, and other services.
"We have revenue and support for the revenue pieces, and then we have direct and indirect expenses for our program services, and then we have G and A, general administrative services. And we have what's called the bottom line, or other people call net profit. We have what's called net change in assets. The concept is pretty much the same as far as accounting," says Jeff McGraw, CFO of Goodwill.
Goodwill creates the equivalent of a balance sheet and income statement. Yet because Goodwill is a nonprofit entity, its financials are known by the names statement of financial position and statement of activities. These financials have some differences compared to financial statements of for-profit companies. For instance, Goodwill's statement of financial position does not have shareholder's equity but instead has net assets.
The organization's financials are audited, and stakeholders can find the firm's information in form 990 through Goodwill's public website (form 990 is the IRS form for nonprofits).
Because Goodwill sells goods at its stores, the company must also figure in costs of goods sold. In fact, most of the organization's revenue comes from its store activities. In the most recent year, the retail division or sale of donated goods and contributed goods generated $3.53 billion. The contracts division generated $636 million, which provides custodial, janitorial, and lawn maintenance service contracts to government agencies. Grants from foundations, corporations, individuals, and government account for $148 million. The fact that Goodwill is able to generate much of its own funding through store activities and contracts is important. Many nonprofits that rely solely on donated funds find it hard to be sustainable in the long run, particularly during economic downturns.
Remember that even though nonprofits are different from for-profit companies, they must still make certain that their financial information is accurate. This requires nonprofit accountants to be meticulous and thorough in gathering and analyzing information. Like all accountants, accountants at Goodwill record transactions in journals and then carefully review the information before it is recorded in the general ledger. The organization uses trial balances to ensure that everything balances out, as well as advanced software to record transactions, reconcile any discrepancies, and provide an idea of how much cash the organization has on hand.
Finally, Goodwill uses ratio analysis to determine the financial health of the company. For instance, the common ratio allows Goodwill to determine how much revenue it brings in for every dollar it spends on costs. The organization also uses ratio analysis to compare its results to similar organizations. It is important for Goodwill to identify the best performers in its field so that it can generate ideas and even form partnerships with other organizations. By using accounting to identify how best to use its resources, Goodwill is advancing its mission of helping others. 12
How can Goodwill use ratio analysis to improve its operations?

Question 25

Even if Fastow did not believe what he was doing was illegal, how did his activities qualify as accounting fraud?

Question 26

Discuss the external uses of financial statements.

Question 27

Exploring the Secrets of Accounting
You have just been promoted from vice president of marketing of BrainDrain Corporation to president and CEO! That's the good news. Unfortunately, while you know marketing like the back of your hand, you know next to nothing about finance. Worse still, the "word on the street" is that BrainDrain is in danger of failure if steps to correct large and continuing financial losses are not taken immediately. Accordingly, you have asked the vice president of finance and accounting for a complete set of accounting statements detailing the financial operations of the company over the past several years.
Recovering from the dual shocks of your promotion and feeling the weight of the firm's complete accounting report for the very first time, you decide to attack the problem systematically and learn the "hidden secrets" of the company, statement by statement. With Mary Pruitt, the firm's trusted senior financial analyst, by your side, you delve into the accounting statements as never before. You resolve to "get to the bottom" of the firm's financial problems and set a new course for the future-a course that will take the firm from insolvency and failure to financial recovery and perpetual prosperity.
Describe the three basic accounting statements. What types of information does each provide that can help you evaluate the situation?

Question 28

Describe the accounting process and cycle.