Accounting Concept Rigas Family Case Worksheet

Rev.Confirming PagesCHAPTER 1
S1-4 Ethical Decision Making: A Real-Life Example
LO 1–2, 1–3, 1–4
In June 2005, John Rigas, the 80-year-old founder and former chief executive officer (CEO)
of Adelphia Communications was sentenced to 15 years in jail for defrauding investors
and lenders of over a billion dollars. His son, the former chief financial officer (CFO), was
sentenced to 20 years in jail. To understand the charges, you need to first understand a bit
about Adelphia’s history. Adelphia started as a one-town cable company in 1952 and, at
the time the fraud accusations were made public, had grown into the sixth-largest cable
television provider in the country. With the company starting as a family-owned business,
Adelphia’s operations were always a central part of the personal lives of the Rigas family
members. However, the extent to which their personal lives were mixed in with the business activities was never clear to stockholders—at least, not nearly as clear as when they
were reported in an article in the August 12, 2002, issue of Fortune. Below the following
questions we present a table from that article, which summarizes how the Rigas family
allegedly used over $1.2 billion of Adelphia’s money—money that ultimately belonged to
Adelphia’s stockholders.
Adelphia Communications
1.
2.
3.
4.
1
Skills Development Cases
What is the accounting concept that the Rigas family is accused of violating?
Based on the information provided in the following table, can you determine which of the
family’s dealings are clearly inappropriate and which are clearly appropriate?
As a stockholder, how might you attempt to ensure that this kind of behavior does not occur
or, at least, does not occur without you knowing about it?
Aside from Adelphia’s stockholders, who else might be harmed by these actions committed
by the Rigas family?
Family Assets, Sort Of
Some of the notable ways the Rigas family used Adelphia shareholder dollars.
On the Receiving End
Who’s behind the Entity
Dobaire Designs
Wending Creek Farms
SongCatcher Films
Eleni Interiors
Adelphia paid this company, owned by Doris Rigas (John’s wife), for design services.
Adelphia paid John Rigas’s farm for lawn care and snowplowing.
Adelphia financed the production of a movie by Ellen Rigas (John’s daughter).
The company made payments to a furniture store run by Doris Rigas and owned
by John.
Adelphia began developing a ritzy golf club.
The Golf Club at Wending
Creek Farms
Wending Creek 3656
Praxis Capital Ventures
Niagara Frontier Hockey LP
Highland 2000
How Much?
$371,000
$2 million
$3 million
$12 million
$13 million
The company bought timber rights that would eventually revert to a Rigas
family partnership.
Adelphia funded a venture capital firm run by Ellen Rigas’s husband.
Adelphia underwrote the Rigas’s purchase of the Buffalo Sabres hockey team.
Adelphia guaranteed loans to a Rigas family partnership, which used the funds
to buy stock.
Total
$26 million
$65 million
$150 million
$1 billion
$1,271,371,000
S1-7 Preparing an Income Statement and Balance Sheet
LO 1–2
Electronic Arts is a leading developer and publisher of interactive entertainment software for personal computers and advanced entertainment systems made by Sony, Nintendo, and Microsoft.
Assume that the company is revising its methods for displaying its financial statements, and the
controller in the accounting department has asked you to create electronic worksheets that they
can use as their standard format for financial statement reporting. The controller has provided you
with an alphabetical list of statement categories and account names (below), with corresponding
balances (in millions) as of September 30. She has asked you to use a spreadsheet program to create two worksheets that organize the accounts into a properly formatted balance sheet and income
statement, and then use formulas to compute amounts marked by a ? below.
Electronic Arts Inc.
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Rev.Confirming Pages
2
CHAPTER 1
Accounts Payable
Accounts Receivable
Assets
Cash
Contributed Capital
Cost of Goods Sold Expense
Expenses
Income Tax Expense
Inventories
Skills Development Cases
$ 171
328
2,412
986
284
9
367
Liabilities
Net Income
Notes Payable
Other Assets
Other Expenses
Other Liabilities
Promotion Expense
Property and Equipment
Retained Earnings
?
$ 12
283
1
587
107
364
1,998
Revenue
Sales Revenue
Selling Expense
Stockholders’ Equity
Total Assets
Total Expenses
Total Liabilities
Total Liabilities and
Stockholders’ Equity
Total Stockholders’ Equity
$675
223
?
?
?
?
?
Not knowing where to start, you e-mailed your friend Owen for advice on using a spreadsheet.
Owen’s detailed reply follows.
Required:
Follow Owen’s advice to create a balance sheet and income statement, with each statement saved on a
separate worksheet in a file called meEA.xls where the me part of the filename uniquely identifies you.
From:
To:
Cc:
Subject:
Owentheaccountant@yahoo.com
Helpme@hotmail.com
Excel Help
Hey pal. Long time, no chat. Here’s the scoop on creating those worksheets, with a screenshot
too. If you need more help, let me know and I’ll submit an application for your position there. §
1. Start-up Excel to open a new spreadsheet file. You’ll need only two worksheets for this
assignment, so delete the third worksheet by right-clicking on the Sheet3 tab at the bottom
of the worksheet and selecting Delete. While you’re at it, rename Sheet1 and Sheet2 to
Balance Sheet and Income Statement by double-clicking on the worksheet tabs and typing in
the new names.
2. Plan the layout for your reports. Use the first column as a blank margin, the second column
for account names and their headings, and the third column for the numbers corresponding
to each account name or total. If you want to apply the same format to all worksheets, begin
by right-clicking on the tab at the bottom of a worksheet and choosing Select All Sheets.
Next, resize the first column by clicking on the A at the top of that column, then from the
Home tab, in the Cells group, click on Format then Column Width . . . , and enter a width of 2.
Using this same procedure, resize columns B and C to 50 and 15, respectively.
3. Starting with cell B1, enter the company’s name. Enter the report name and date in cells B2
and B3. To merge cells so these headings span more than one column, select the cells to
be merged and then click on Format in the Cells group, select Format Cells . . . and click the
Merge Cells box in the Text Control section of the Alignment tab. Continue with the body of
the report in cell B5, entering any necessary amounts in column C.
4. To use formulas to compute subtotals and totals, the equals sign 5 is entered first into
the cell and is followed immediately by the formula. So, to add a series of amounts, say C7
through C11, use a formula like 5SUM(C7:C11), as shown in the screenshot below.
5. After you enter all the data and calculate totals, be sure to save the file. To do this, just click
on the Office button in the top left and choose Save As. . . .
6. If you need to print the worksheets, it might be best to highlight what you want printed, then
click on the Office button, choose Print . . . , and choose Selection in the Print What box.
7. Go to it, you accounting guru!
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Rev.Confirming Pages
CHAPTER 1
phi25370_ch01_online.indd 3
Skills Development Cases
3
09/10/12 9:17 AM
Chapter 1
Business Decisions and
Financial Accounting
PowerPoint Author:
Brandy Mackintosh, CPA, CA
© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
1-1
Learning Objective 1-1
Describe various organizational
forms and business decision
makers.
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Organizational Forms
1
Sole Proprietorship
Business organization owned by one person. The owner is
personally liable for all debts of the business.
Partnership
Business organization owned by two or more people. Each
partner is personally liable for all debts of the business.
Corporation
A separate legal entity. Owners of corporations
(stockholders) are not personally liable for debts of the
corporation.
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Organizational Forms
2
Source: IRS.gov.
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The Accounting System
Accounting is a system of analyzing, recording, summarizing, and
reporting the results of a business’s activities.
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Learning Objective 1-2
Describe the purpose, structure,
and content of the four basic
financial statements.
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The Basic Accounting Equation
Separate Entity Assumption
The financial reports of a business are assumed to include
the results of only that business’s activities.
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Assets
Resources the company controls and
expects to benefit from in the future.
Examples:
• Cash.
• Supplies.
• Furniture.
• Equipment.
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Liabilities
Measurable amounts that the company
expects to give up in the future to settle
what it presently owes to creditors.
Examples:
• Notes Payable.
• Accounts Payable.
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Stockholders’ Equity
Owners’ claims to the business resources.
Stockholders’ Equity
Common Stock
(equity paid in by stockholders)
Retained Earnings
(equity earned by the company)
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Revenues, Expenses, and Net Income
Revenues − Expenses = Net Income
Revenues
Sales of goods or
services to customers,
measured at the amount
the business charges the
customer.
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Expenses
The costs of doing
business necessary to
earn revenues, including
wages to employees,
advertising, insurance,
utilities, and supplies used
in the office.
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Dividends
Distributions of a company’s earnings to its
stockholders as a return on their investments.
Dividends are not an expense.
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1-12
Financial Statements
Financial statements are typically prepared
in this order.
Income Statement
Statement of Retained
Earnings
Balance Sheet
Statement of Cash Flows
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The Income Statement
The unit of
measure
assumption
states that results
of business
activities should
be reported in an
appropriate
monetary unit.
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The Statement of Retained Earnings
Reports the way that net income and the
distribution of dividends affected the financial
position of the company during the period
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The Balance Sheet
Reports at a point in time:
1. What a business owns
(assets)
2. What it owes to creditors
(liabilities)
3. What is left over for the
owners of the company’s
stock (stockholders’ equity)
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
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The Statement of Cash Flows
Summarizes how
a business’s
operating,
investing, and
financing
activities caused
its cash balance
to change over a
particular period
of time.
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Notes to the Financial Statements
Notes help financial statement users
understand how the amounts were derived and
what other information may affect their
decisions.
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Relationships Among the Financial Statements
1
1. Net income
from the income
statement is a
component in
determining
ending Retained
Earnings on the
Statement of
Retained
Earnings.
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Relationships Among the Financial Statements
2
2. Ending Retained
Earnings from the
Statement of
Retained Earnings is
then reported on the
Balance Sheet.
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Relationships Among the Financial Statements
3
3. Cash on the Balance Sheet is equal to the ending Cash
reported on the Statement of Cash Flows.
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Learning Objective 1-3
Explain how financial statements
are used by decision makers.
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Using Financial Statements
Creditors
Investors
1. Is the company
generating enough
cash to pay what it
owes? … SCF
1. What is the immediate
return (through
dividends) on my
contributions? … SRE
2. Does the company
have enough assets
to cover its liabilities?
… B/S
2. What is the long-term
return (through stock
price increases resulting
from the company’s
profits)? .. I/S
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Learning Objective 1-4
Describe factors that contribute to
useful financial information.
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External Financial Reporting
Main goal: Provide useful financial information
to external users for decision making.
Timely Verifiable Comparable Understandable
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Accounting Standards
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Ethical Conduct
When faced with an ethical dilemma:
• Identify who will be affected by the situation.
• Identify and evaluate the alternative courses
of action.
• Choose the alternative that is the most
ethical.
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Chapter 1
Supplement A
Careers That Depend on
Accounting Knowledge
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Learning Objective 1-S1
Describe examples where
accounting helps in pursuing other
business careers.
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Exhibit 1A.1
Exhibit 1A.1 Accounting Knowledge Can Benefit All Majors
Sources: https://venturebeat.com/2017/04/05/teardown-reveals-nintendo-switch-costs-257-to-build/,
http://blogs.forbes.com/johnray/2011/03/11/isuppli-teardown-of-the-ipad-2-investor-edition/,
http://www.isuppli.com/Teardowns/News/Pages/iPad-2-Carries-Bill-of-Materials-of-$326-60-IHS-iSuppli-TeardownAnalysis-Shows.aspx, https://www.nba.com/article/2019/06/29/nba-salary-cap-2019-20-season-set-10914-million.
Photo: Rubberball/Getty Images
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Chapter 1
Supplement B
Public Companies
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Learning Objective 1-S2
Describe the decision to become a
public company and explain the
implications for accounting.
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Going Public
1
Pros
The company:
1. keeps the money it raises when issuing shares.
2. can more easily raise money in the future by issuing
additional shares.
3. can pay employees using company shares not just cash.
4. gives founders and other stockholders a way to sell their
shares.
5. can buy other companies by paying with shares rather
than cash.
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Going Public
2
Cons
1. Greater public reporting of significant events affecting the
company.
2. Increased accounting disclosures.
3. Greater risk of litigation for misstatements in and
omissions from these reports.
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Public Company Reporting
1. Press releases.
2. Financial statement reports.
3. Securities and Exchange Commission (SEC) filings.
Exhibit 1B.2 Timing of Significant Financial Reporting Events
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Chapter 1
Solved Exercises
M1-12, E1-3, E1-6, E1-8, S1-6
(Req. 1)
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M1-12 Preparing a Statement of Retained
Earnings
1
Stone Culture Corporation was organized on January 1, 2020. For its
first two years of operations, it reported the following:
Net Income for 2020
$ 40,000
Net Income for 2021
45,000
Dividends for 2020
15,000
Dividends for 2021
20,000
Total assets at the end of 2020
125,000
Total assets at the end of 2021
242,000
On the basis of the data given, prepare a statement of retained
earnings for both 2020 (its first year of operations) and 2021.
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M1-12 Preparing a Statement of Retained
Earnings
2
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E1-3 Preparing a Balance Sheet
1
Designer Brands, Inc., previously called DSW sells luxurious and fashionable
shoes. Its balance sheet, at August 3, 2019 (the first Saturday of the month),
contained the following items and approximate amounts (in millions).
Amounts owed to suppliers
$ 650
Designer Brands’ right to collect on account
85
Currency and bank account balances
75
Common stock issued to stockholders
460
Warehouses, stores, and offices
Merchandise held for sale
1,700
700
Amounts owed for promissory notes
1,180
Accumulated profits of the company
270
Required:
1. Give the account name commonly used for each item listed.
2. Prepare the balance sheet as of August 3, 2019, providing appropriate totals
and subtotals.
3. As of August 3, did most of the financing for assets come from creditors or
stockholders?
© McGraw Hill
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E1-3 Preparing a Balance Sheet
© McGraw Hill
ITEM
ACCOUNT NAME
Amounts owed to suppliers
Accounts Payable
Designer Brands’ right to collect on account
Accounts Receivable
Currency and bank account balances
Cash
Common stock issued to stockholders
Common Stock
Warehouses, stores, and offices
Buildings
Merchandise held for sale
Inventory
Amounts owed for promissory notes
Notes Payable
Accumulated profits of the company
Retained Earnings
2
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E1-3 Preparing a Balance Sheet
3
Most of the financing as of
August 3 came from
creditors. The creditors have
financed $1,830 million of
the total assets and
stockholders have financed
only $730 million of the total
assets of the company.
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© McGraw Hill
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E1-6 Preparing an Income Statement and
Inferring Missing Values
1
Cinemark Holdings, Inc., operates movies and food concession counters
throughout the United States. Its income statement for the quarter ended June
30, 2019, reported the following (accounts are listed alphabetically in
thousands):
Admissions Revenue
$ 521,000 Office Expense
$171,000
Concessions Expense
63,000 Rent Expense
89,000
Concessions Revenue
345,000 Salaries & Wages Expense
109,000
Film Rental Expense
295,000 Net Income
Income Tax Expense
38,000
?
Required:
1. Solve for the missing amount and prepare an income statement for the
quarter ended June 30, 2019.
2. What are Cinemark’s main source of revenue and two biggest expenses?
© McGraw Hill
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E1-6 Preparing an Income Statement and
Inferring Missing Values
2
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© McGraw Hill
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E1-6 Preparing an Income Statement and
Inferring Missing Values
3
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© McGraw Hill
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E1-8 Inferring Values Using the Income
Statement and Balance Sheet Equations
1
Review the chapter explanations of the income statement and the balance
sheet equations. Apply these equations in each of the following independent
cases to compute the two missing amounts for each case. Assume that it is the
end of the first full year of operations for the company.
TIP: First identify the numerical relations among the columns using the balance
sheet and income statement equations. Then compute the missing amounts.
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© McGraw Hill
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E1-8 Inferring Values Using the Income
Statement and Balance Sheet Equations
2
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© McGraw Hill
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S1-6 (Req. 1) Critical Thinking:
Developing a Balance Sheet
1
On September 30, Ashley and Jason started arguing about who is
better off. Jason said he was better off because he owned a video
game console that he bought last year for $250. He figures that, if
needed, he could sell it to a friend for $180. Ashley argued that she
was better off because she had $1,000 cash in her bank account and a
piece of art that she bought two years ago for $800 but could now sell
for $1,400. Jason countered that Ashley still owed $250 on her car loan
and that Jason’s dad promised to buy him a Porsche if he does really
well in accounting. Jason said he had $6,000 cash in his bank account
right now because he just received a $4,800 student loan. Ashley
knows that Jason also owes a tuition installment of $800 for this term.
© McGraw Hill
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S1-6 (Req. 1) Critical Thinking:
Developing a Balance Sheet
2
Ashley and Jason met again in early November. They each asked how
the other was doing. Ashley claimed that she’d become much more
successful than Jason. She had a part-time job, where she earned
$1,500 per month. Jason laughed at Ashley because he had won
$1,950 on a lottery ticket he bought in October, and that was merely for
the “work” of standing in line for a minute. It was just what he needed,
because his apartment costs $800 each month. Ashley, on the other
hand, pays $470 for her share of the rent. Both Ashley and Jason have
other normal living costs that total $950 each month.
Required:
1. Prepare a financial report that compares what Ashley and Jason each own
and owe on September 30. Make a list of any decisions you had to make
when preparing your report.
© McGraw Hill
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S1-6 (Req. 1) Critical Thinking:
Developing a Balance Sheet
3
Balance Sheet
What is owned
Cash
Console
Art
TOTAL
Ashley
Jason
$1,000
$6,000
0
250
800
0
$1,800
$6,250
$ 250
$
What is owned
Car loan
© McGraw Hill
0
Tuition Payable
0
800
Student Loan
0
4,800
TOTAL
250
5,600
“Net Worth”
1,550
650
TOTAL
$1,800
$6,250
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S1-6 (Req. 1) Critical Thinking:
Developing a Balance Sheet
4
Balance Sheet
ASSETS
Ashley
Jason
Cash
$1,000
$6,000
0
250
800
0
$1,800
$6,250
$ 250
$
Console
Art
TOTAL
LIABILITIES
Car loan
© McGraw Hill
0
Tuition Payable
0
800
Student Loan
0
4,800
TOTAL
250
5,600
EQUITY
1,550
650
TOTAL
$1,800
$6,250
1-50
End of Chapter 1
© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
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