Chapter 03 - Basic Accounting Concepts: The Income Statement3-1CHAPTER 1 THE NATURE AND PURPOSE OF ACCOUNTINGChanges from Twelfth EditionThe chapter has been updated. ApproachOn the first day, the usual objective is to create interest in the subject, to set the scene, and to give an overview of the course. The first part of the chapter does this. The second part of the chapter gives a fairly specific introduction to the nature of financial accounting. Instructors probably may want to bring in material from their own reading or experience to make the introductory points.CasesThe cases are intended to get the student to start thinking like accountants and users of accounting information, without knowledge of any of the techniques. Ribbons an Bows gives students an opportunity to construct a simple set of financial statements. Kim Fuller can be used as a springboard for any type of discussion: uses of information by various parties, the cost of record-keeping, or even the development of a complete accounting system. Baron Coburg illustrates practically all of the basic accounting concepts, without naming them. It is a difficult case, but enlightening, even for those with some prior accounting training.ProblemsProblem 1-1CHARLES COMPANY BALANCE SHEET AS OF DECEMBER 31, -. AssetsLiabilities and Owners Equity Cash.$ 12,000Bank loan.$ 40,000 Inventory.95,000Owners Equity Other assets.13,000Owners equity.80,000Total assets$120,000Total liabilities and owners equity.$120,000This problem can be used to explain certain accounting presentation conventions. For example, the use of double lines to underscore a total, the position of the dollar sign at the top of a column of numbers, and the dating of the balance sheet.The purpose of this problem is to illustrate the equality of the basic accounting equation: assets equal liabilities plus owners equity.Chapter 03 - Basic Accounting Concepts: The Income Statement3-2Problem 1-2The missing numbers are:Year 1Noncurrent assets $410,976 Noncurrent liabilities.240,518Year 2Current assets $ 90,442 Total assets288,456 Noncurrent liabilities.78,585Year 3Total assets$247,135 Current liabilities.15,583 Total liabilities and owners equity.247,135Year 4Current assets $ 69,090 Current liabilities.17,539The basic accounting equation isAssets = Liabilities + Owners equityThe instructor might want to explain how this equation is used (as it is in this problem) to calculate “plug” numbers when managers construct projected balance sheets. The manager does not have to complete every balance because the manager can plug certain balances.The instructor may also draw attention to the other equations illustrated in the problem. These include:Current assets + Noncurrent assets = Total assetsCurrent liabilities + Noncurrent liabilities = Total liabilitiesPaid-in capital + Retained earnings = Owners equity.Later in the course the instructor should explain that the additional paid-in capital account is a special account to record the excess of capital received over par value in common stock issuances. At this stage in the course it is better to simply use a descriptive term, like paid-in capital, to describe capital received from stockholders. Also it avoids the use of the term common stock, which some students many not understand.Chapter 03 - Basic Accounting Concepts: The Income Statement3-3Problem 1-3The missing numbers are:Year 1Gross margin$9,000 Tax expense.1,120Year 2Sales.$11,968 Profit before taxes.2,547Year 3Cost of goods sold$2,886 Other expenses6,296Other accounting equations such as the following are also illustrated by this problem:Gross margin = Sales - Cost of goods soldProfit before taxes = Gross margin - Other expensesNet income = Profit before taxes - Tax expenseThe instructor may want to point out to the students that ratios are often used by managers to construct projected financial statements. Year 4 is an example of this application.In order to estimate Year 4, the key ratios to compute are:Year 1Year 2Year 3Average Sales. 100.0% 100.0% 100.0% 100.0% Gross margin . 75.0 75.0 75.0 75.0% Profit before taxes. 23.3 21.3 20.5 21.7% Net income 14.0 12.8 12.2 13.0% Tax rate 40.0 40.0 40.0 40.0Year 4Sales.$10,000 Cost of goods sold 2,500 Gross margin (75% of sales).$ 7,500 Other expenses 5,330 Profit before taxes (21.7% of sales).$ 2,170 Tax expense.870 Net income (13% of sales).$ 1,300The basic accounting equation used is: Net income = Revenues ExpensesChapter 03 - Basic Accounting Concepts: The Income Statement3-4Chapter 03 - Basic Accounting Concepts: The Income Statement3-5Problem 1-4The explanation of these 11 transactions is:1.Owners invest $20,000 of equity capital in Acme Consulting.2.Equipment costing $7,000 is purchased for $5,000 cash and an account payable of $2,000.3.Supplies inventory costing $1,000 is bought for cash.4.Salaries of $4,500 are paid in cash.5.Revenues of $10,000 are earned, of w