ACC201 CASE, SLP and TD Homework

Module 1 - Home

Financial Statements

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

•Case ◦The student should be able to differentiate between the income statement and the balance sheet.

•SLP ◦The student should be able to categorize income statement and balance sheet accounts.

•Discussion ◦The student should be able to differentiate the income statement from a cash flow statement.

Module Overview

In this course, we will learn about financial statements and their role in an organization. The main purpose of financial accounting is to communicate information to external stakeholders about a firm’s performance.

To make the information comparable and reliable, financial statements have to be prepared in accordance with accounting standards. CPAs attest to the fair presentation of the statements as part of the auditing process. Third parties make decisions based on the information provided, so the process is important.

First, you should review the Course Background Information. This will provide you the information you need to participate in the four modules. Be sure you are comfortable with the background information before you begin work on the modules. If you have any questions, do not hesitate to contact your professor.

Here are some guidelines to help you in this course.

•Remember that this is a case oriented course and that most cases do not have a single correct answer. However, some answers may have more merit than others. The important thing for you to remember is that your understanding of the issues is much more important than any single numerical answer.

•Do not fall behind. Much of this course is cumulative. That is, the concepts in module n are necessary to understand the concepts in module n+1. If you feel you are falling behind, contact your professor IMMEDIATELY!

•An understanding of the background materials and the issues in the case early in the module will help you in the remainder of the module.

•When approaching the case solutions, be sure to understand clearly what the professor is requesting in that case and respond to those issues in your solution. Many times students write excellent responses to issues that are outside of the assignment.

Next, please see the discussion below for a review of the components of the traditional Income Statement. If you are not familiar with this explanation, please read background materials before doing Case and SLP assignments.

First, consider the distribution of Revenue into Cost of Goods Sold and Gross Profit (or Margin) on Sales. Remember that Revenue represents all cash and receivables received from the sale of goods or services. Cost of Goods Sold represents the historical cost or providing those goods or services. Gross Profit on Sales represents the Revenue remaining after deducting Cost of Goods Sold. Gross Profit on Sales can be increased either by increasing Revenue or decreasing Cost of Goods Sold (or a combination of both).

The rectangle above represents total Revenue. Note how it is divided into cost of Goods Sold and Gross Profit on Sales. To increase Gross Profit on Sales, one can increase Revenue (the total rectangle) or reduce Cost of Goods Sold.

Now consider the distribution of Gross Profit on Sales:

The rectangle above represents total Gross Profit on Sales (the blue section of the first rectangle). It is further divided into Operating Expenses (including Taxes) and Net Income. Once Gross Profit on Sales has been established (through Revenue and Cost of Goods Sold) Net Income can be increased by reducing Operating Expenses.

Put another way, Revenue is divided into three ultimate elements: Cost of Goods Sold, Operating Expenses, and Net Income.