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Financial Accounting and Its Environment

INTRODUCTION Jane Johnson is considering selling T-shirts in the parking lot during her university’s football games. Jane, of course, will do this only if she expects to make a profit. To es- timate her profits, Jane needs certain pieces of information, such as the cost of a shirt, the university’s charge for the right to conduct business on its property, the expected selling price, and the expected sales volume. Suppose Jane has developed the follow- ing estimates: | 1 Financial Accounting and Its Environment LEARNING OBJECTIVES 1. Define accounting and identify its objectives. 2. Distinguish among the three major types of accounting. 3. List the three primary financial statements and briefly summarize the information contained in each. 4. Identify financial statement users and the decisions they make. 5. Define generally accepted accounting principles and explain how they are determined. 6. Describe the role of auditing. 7. List the economic consequences of accounting principle choice. 8. Assess the importance of ethics in accounting. INTRODUCTION Jane Johnson is considering selling T-shirts in the parking lot during her university s football games. Jane of course will do this only if she expects to make a profit. To estimate her profits Jane needs certain pieces of information such as the cost of a shirt the university s charge for the right to conduct business on its property the expected selling price and the expected sales volume. Suppose Jane has developed the following estimates Sales price per shirt Cost per shirt Number of shirts sold per game day University fee per game day 12 7 50 100 Although developing estimates is tricky let s take these estimates as given. Based on the estimates Jane would earn a profit of 150 per game day. Sales 12 X 50 Less expenses Cost of merchandise 7 X 50 600 University fee Total expenses Net income 350 100 450 150 2 Financial Accounting and Its Environment Since this looks like a reasonable profit Jane puts her plan into action. After her first game day Jane needs to assess her success or failure . Based on her actual results Jane prepares the following information Sales 12 X 40 480 Less expenses Cost of merchandise 7 X 40 280 University fee 100 Total expenses 380 Net income 100 Jane s business was profitable but not as profitable as she planned. This is because Jane sold fewer shirts than she hoped but Jane is confident that she can sell any remaining shirts on the next game day. The .