Solution 227
With a proprietorship or partnership, the owner(s) have unlimited liability. That is, they may be required to use personal assets to satisfy business debts. The liability of a corporate shareholder, however, is limited to his or her investment in the business. Therefore, it would be safer for a wealthy individual to set up his/her business as a corporation.
S-A E 228
Your friend, James, made this comment: “My major is biology and I plan to research for cures for major illnesses. Therefore, I have no need to study accounting.” What is your response to James?
Ans: N/A, LO: 1, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 228
James, you are entering a dynamic profession and you have the opportunity to make important contributions to society. While science will be your profession and major concern, you will not be able to escape the need to understand accounting. Accounting staff and professionals will always be available to assist you. Here are some areas that will directly affect you:
As a manager, you will need to review accounting information (both internal and external) and make decisions. Budgets will be an important part of your research activities. As an employee, you will be concerned about the financial information of your employer. Thus, you will need to be able to read the company’s financial statements. Also, as an investor, you will be interested in the financial statements of other companies.
You will probably not be a preparer of the financial statements, but you do need an understanding of how they are prepared. You also need a good understanding of how to interpret the information on the financial statements.
S-A E 229
The information needs of a specific user of financial accounting information depends upon the kinds of decisions that user makes. Identify the major users of accounting information and discuss what questions financial accounting information answers for each group of users.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 229
The major users of accounting information are internal users and external users. Internal users are those who manage the business. External users are those outside the business who have either a present or potential financial interest.
Financial accounting information may answer the following questions for internal users:
1. Is cash sufficient to pay our debts?
2. Can we afford to give employee pay raises this year?
3. What is the cost of manufacturing each unit of product?
4. Which product line is the most profitable?
Questions answered by financial accounting information for external users include:
1. Is the company earning satisfactory income?
2. How does the company compare in size and profitability with competitors?
3. Will the company be able to pay its debts as they come due?
S-A E 230
The statement of cash flows for Nyland Corporation reveals the following information:
Net cash used by operating activities ($150,000)
Net cash used by investing activities ($200,000)
Net cash provided by financing activities
Issuance of common stock $100,000
Issuance of note payable 250,000 $350,000
Net change in cash $ 0
Provide three comments about this information. Make your comments concise yet thorough.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 230
Operating activities represent the ongoing activities of the company and are a result of its reason for being in business. The fact that this is a negative cash flow is a cause of concern. This may be a new company and future cash flows from operations will be positive.