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TUI University

Chris Nailon

Module #1 Case Assignment

ACC 501 Accounting for Decision Making

Dr. Annette Hebble ± FL

March 24, 2011

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¢ith this case assignment

Part I. Search the course background information, the Internet and/or the Cyber Library.
Discuss each of the following terms. Your discussion should expand on the definition as given
in the course terms. Explain why this concept is important to financial statements.

A. Generally Accepted Accounting Principles.

B. Double Entry Accounting.

C. Historical Cost.

D. Accrual Basis vs. Cash Basis Accounting.

E. Current Assets and Liabilities vs. Non-Current Items.

Part II. Refer to the following three sets of annual reports which contain the financial statements.
You may find the financial data independent of the annual report for Google. (Make sure you
use the latest financial statements -- for the year 2007, or later if available). First read an
overview of the company so you are familiar with the company, its products/services and
markets and then review the annual report and supplemental financial statements.

1. SAMSUNG (http://www.samsung.com/us/index.html)

http://www.samsung.com/us/aboutsamsung/ir/financialinformation/annualre
port/IR_Annual2007.html
http://www.samsung.com/us/aboutsamsung/ir/financialinformation/annualre
port/downloads/2007/10_SEC_07AR_E_FinancialStatement.pdf
2. Lockheed Martin (http://www.lockheedmartin.com/)

http://www.lockheedmartin.com/investor/general_information/annual_repor ts.html
http://phx.corporate-ir.net/phoenix.zhtml?c=83941&p=irol-contact
3. RTL Group (http://www.rtlgroup.com)

RTL Group Annual Report and Financials

http://www.rtlgroup.com/www/htm/annualreport.aspx
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Locate the following on each of the statements:

The Balance Sheet

The Income Statement

The Statement of Cash Flows

Describe the general organization of each of the three sets of financial statements. ¢hich is more
useful in your opinion for each of the three companies: Net Income or Cash from Operating
Activities?

Predict companies' future trends using Net Income or Cash Flows. Reach one additional
conclusion about each company from the additional information you find in the annual report.
Since a several of these companies are conglomerates, discuss how you can find out relevant
information about individual segments, such as the IDOLS segment of the RTL Group's
Fremantle Media North America.

THINK ABOUT!

1. The cash from operating activities is compared to the company's net income. If the cash
from operating activities is consistently greater than the net income, the company's net
income or earnings are said to be of a "high quality". If the cash from operating activities
is less than net income, a red flag is raised as to why the reported net income is not
turning into cash.

2. Some investors believe that "cash is king". The cash flow statement identifies the cash
that is flowing in and out of the company. If a company is consistently generating more
cash than it is usin g, the company will be able to increase its dividend, buy back some of
its stock, reduce debt, or acquire another company. All of these are perceived to be good
for stockholder value.

3. Some financial models are based upon cash flow.

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¢ith this paper is designed will be a two part discussion first part being a review of the

basic accounting information that one could find for publicly held corporations. ¢hile the

second part of this report will be a review of three fairly large corporations with an basis

assessment of each utilizing some basis accounting terms. Financial accounting statements are

summaries of monetary data about an enterprise and are used in an attempt to help make

informed decisions in the present and future. Financial statements portray the effects of

transactions and other events by grouping them into broad classes (or elements) according to

their economic characteristics. The three basic financial statements are the balance sheet, the

income statement and the cash flow statement. There are many different entities that utilize

financial statements. Financial statements may be drawn up for private individuals, non-profit

organizations, manufacturers and service industries.

Three major groups that take advantage of the usefulness of financial statements are large

corporations, investors and the government. Financial statements play a decisive role in each of

these entities financial decisions. Corporations decide how much credit to extend to customers

and how much should be distributed to investors in dividends. Investors use a company's

financial statements to decide whether or not it would prove advantageous to invest their money,

and if so, how much. The government uses financial statements to determine how much an entity

is required to pay in taxes.

Each decision as stated above does not always require the same financial statement,

however. A balance sheet would be used in the decision-making process for assessing a

competing firm and determining a customer's credit limit. It provides the user with data about

available resources as well as the claims to those resources. An income statement would prove
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useful in determining credit extension to customers, distribution of dividends, taxes and

investment opportunities. It provides the user with data about the profitability of the enterprise

detailing sources of revenue and the expenses which reduce profit. A cash flow statement

would be a useful tool in each instance because it gives a brief description of how much cash is

coming in, going out and to where exactly. It reports cash flows from investing, financing, or

operating activities. Although each one is unique in its own respect, each financial statement is a

necessary tool in making any financial decision.

þ

Knowing these accounting terms is crucial if you are a business owner or a bookkeeper.

New businesses require an accounting basis. This is necessary so that each business can

determine its bottom line and comply with various regulations regarding the recording and

reporting of income. To have a better understanding of basis accounting principles one most

have working knowledge of those terms. A few of those terms are defined and examined below.

1) Generally Accepted Accounting Principles is considered to be widely accepted set of

rules, conventions, standards, and procedures for reporting financial information, as
established by the Financial Accounting Standards Board. GAAP are imposed on
companies so that investors have a minimum level of consistency in the financial
statements they use when analyzing companies for investment purposes. Companies are
expected to follow GAAP rules when reporting their financial data via financial
statements. If a financial statement is not prepared using GAAP principles, potential
investors should be concerned! (cite)

2) Double Entry Accounting means that money must come from somewhere---it doesn't just
"appear." Double-entry accounting is a method of record-keeping that lets you track just
where your money comes from and where it goes. First of all if you have double entry
system and your accounts are up to date then you can easily make trial balance and know
what your position is in terms of assets, liabilities and equity. Secondly the most
important advantage is it prevents fraud which can be easily done in single entry system.
In double entry system alterations are easily caught. (cite)

3) Historical Cost an approach to accounting using asset values based on the actual amount
on money paid for assets with no inflation adjustment. This approach is said to use the
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accounting principle of historical cost. It contrasts with approaches such as current cost
accounting. The term historical cost may also be used to refer to a particular cost
calculated in this way. Although the use of historical cost accounting excludes routine
adjustments for inflation, the cost still needs several adjustments when calculating the
book value. The most important of these are depreciation, depletion and impairment.
(cite)

4) Accrual Basis vs. Cash Basis Accounting a cash method and the accrual method
(sometimes called cash basis and accrual basis) are the two principal methods of keeping
track of a business's income and expenses. In most cases, you can choose which method
to use. Learning how they work and the advantages and disadvantages of each so you can
choose the better one for your business. In a nutshell, these methods differ only in the
timing of when transactions, including sales and purchases, are credited or debited to
your accounts. (cite)

5) Current Assets and Liabilities vs. Non-Current Items ¢ith current liabilities are those
debts which are due and payable within 1 year. Non-Current Liabilities are those which
fall due in more than 1 Year. A long term loan payable over 5 years is both a current and
noncurrent liability. The portion payable within 1 year is current while the remaining
portion payable from year 2 to 5 is noncurrent. Current assets are things a business owns
that are likely to be used up or converted into cash within one business cycle--usually
defined as one year. The most common line items in this category are cash and cash
equivalents, short-term investments, accounts receivable, inventories, and other various
current assets. (cite)

`
  

Good accounting is often obtained by hiring good accountants or

CPAs and/or having well-placed accounting procedures and systems. Most businessman and

company owners stop here, thinking that good CPAs and good systems are all they need. 






 

   . Accountants prepare the financial reports of their

clients or their companies. But who¶s the ones really responsible for the financial reports? So, I

think if you are a member of the management or the Board, take the time to learn the basics of

accounting so that next time you see the financial reports, you at least know what it is you are

reading. It¶s not all alien-sounding and alien-looking to you. Also, it makes it easier for your

accountant and you to talk about the report.

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þ`¢ith regard to the ongoing debt between which form is more useful to organizations

the Net Income form or Cash from Operating Activities form. My thoughts would be that

companies can generate cash in several different ways, the statement of cash flows is separated

into three sections: cash flows from operating activities, from investing activities, and from

financing activities. The cash flows from operating activities section comes first and tells you

how much cash the company generated from its core business, as opposed to peripheral activities

such as investing or borrowing. This is the area you should focus most of your attention on

because it paints the best picture of how well a firm's business operations are producing cash that

will ultimately benefit shareholders.

¢hile the Net Income data is taken directly from a company's income statement. Net

income is the starting point of how much cash a company provides from its operations. However,

there are plenty of items on the income statement that affect income but don't affect cash flow, so

all the remaining items are adjustments to net income that help you reconstruct how much actual

cash was generated by the business.

This saying is popular because cash is the lifeblood of the business. ¢ithout it, one

cannot pay bills, expand the business by purchasing assets. One cannot pay employees. As the

business owner, one can't even pay oneself! The cash flow statement is a key accounting report.

One could show the most fantastic performance according to the income statement, with huge

profits, and yet have nothing left in the bank. In this situation the business would not survive.

How could this occur? It could occur if all your sales have been made on credit. And it could

occur if additionally you weren't monitoring the cash flows of your business.


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SAMSUNG

a. ¢hich is more useful in your opinion for each of the three companies: Net
Income or Cash from Operating Activities?
b. companies' future trends
c. From a current asset stand-point SAMSUNG seems to be in the BEST position
when compared to the other three companies at the end 2007. Their cash on hand
plus their inventory on hand is greater than amount wrapped up in accounts
receivable. They appear to have resources available to operate.
d. All the '07, '08 financial figures are based on K-GAAP, while '09 figures are K-
IFRS based. Adopting IFRS is a global trend intended to increase the quality of
accounting. Standards and to enhance the transparency and public trust of
financial reporting. In line with this global trend, Korea announced its Roadmap
for a full adoption of IFRS on March 15, 2007. This has marked Korea with the
formal commitment for adopting a full IFRS, which are to be the national GAAP
in 2011(2009 for early-adopters)

Lockheed Martin
a. ¢hich is more useful in your opinion for each of the three companies:
Net Income or Cash from Operating Activities?
b. companies' future trends
c. From a current asset stand-point Lockhead-Martin I would offer them to
be in a SATISFACTORY position at the end 2007 when compared to the
other three companies. Their cash on hand plus their inventory on hand
seems okay for now! They seem to have a lot of resources wrapped up in
accounts receivable. Action needs to be taken to collect accounts
receivable.
d. conclusion
2) RTL Group
a. ¢hich is more useful in your opinion for each of the three companies:
Net Income or Cash from Operating Activities?
b. companies' future trends
c. From a current asset stand-point RTL Group I would offer they are in the
worst position at the end 2007 when compared to the other three
companies. Their cash on hand plus their inventory on hand is a quarter of
the accounts receivable. They too seem to have a lot of resources wrapped
up in accounts receivable. Action needs to be taken to collect accounts
receivable.
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Summary««««««««««Since a several of these companies are conglomerates, discuss

how you can find out relevant information about individual segments, such as the IDOLS
segment of the RTL Group's Fremantle Media North America.

Find a great deal of information regarding individual segments in the sustainability report

and the Information of Business segment sections of the financial reports. Details regarding these

segments can be obtained on the financial data by business segment. For example LOCKHEED-

Martin reports they have four individual segments. 1) Aeronautics, Electronic Systems,

Information Systems & Global Services, and Space systems. ¢hile the RTL Group is a rather

large organization with numerous segments a very in-depth break-down of each segment was

located in the RTL Group At a glance 2009 report. (www.rtlgroup.com/public).