The Nordstrom name has become synonymous with a quality shopping experience. The company has a reputation for the helpfulness and friendliness of its employees in satisfying customer needs, even at the potential cost of losing a Nordstrom sale if the customer will be more satisfied purchasing merchandise at a competitor”s store. Nordstrom management invests in this reputation by hiring talented staff, by investing in training, and by forgoing a sale now in order to achieve higher levels of customer satisfaction in the long term. Nordstrom management believes that satisfied customers are more loyal and therefore will spend more at Nordstrom in the future. Thus, satisfied customers provide future benefits in the form of increased future sales. Neither the expected future sales nor the satisfied customers are assets on Nordstrom”s balance sheet because Nordstrom cannot control customers” future purchasing decisions.

Like many companies, Nordstrom has developed and maintains a list of its customers and their characteristics, which it uses for mailing catalogs and other promotional purposes. Creating and maintaining a customer list takes time and resources, so a decision to have one entails certain investments and continuing expenditures. The expected benefits of a customer list are the future cash inflows associated with purchases made by listed customers after they receive their promotional materials. The larger and more detailed the customer list, and the more high-purchasing customers it includes, the greater are the expected future benefits
of the customer list. However, an internally developed customer list is not an accounting asset. Although the item meets the definition of an asset, it does not meet the third recognition criterion, because the firm cannot measure the future economic benefits of the list with suf ficient reliability. However, the firm would recognize an externally purchased customer list as an asset at an amount equal to the purchase price. Chapter 9 discusses the distinction between internally developed and acquired intangible assets in more detail and introduces certain differences between U.S. GAAP and IFRS.

Preparing a balance sheet and income statement. The accounting records of Jet Away Airlines reveal the following for the year ended September 30, 2008 (amounts in thousands):

	September 30
Balance Sheet Items	2008	2007
Accounts Payable . . . . . . . . . . . . . . . . .	$ 157,415	$ 156,755
Accounts Receivable . . . . . . . . . . . . . . .	88,799	73,448
Cash . . . . . . . . . . . . . . . . . . . . . . . . . .	378,511	418,819
Common Stock . . . . . . . . . . . . . . . . . . .	352,943	449,934
Current Maturities of Long-Term Debt . . .	11,996	7,873
Inventories . . . . . . . . . . . . . . . . . . . . .	50,035	65,152
Long-Term Debt . . . . . . . . . . . . . . . . . .	623,309	871,717
Other Current Assets . . . . . . . . . . . . . . .	56,810	73,586
Other Current Liabilities . . . . . . . . . . . .	681,242	795,838
Other Noncurrent Assets . . . . . . . . . . . .	4,231	12,942
Other Noncurrent Liabilities . . . . . . . . . .	844,116	984,142
Property, Plant, and Equipment (net) . . . .	4,137,610	5,008,166
Retained Earnings . . . . . . . . . . . . . . . .	2,044,975	2,385,854
Income Statement Items		For the Year Ended September 30, 2008
Fuel Expense . . . . . . . . . . . . . . .		$ 892,415
Interest Expense . . . . . . . . . . . .		22,883
Interest Income . . . . . . . . . . . . .		14,918
Maintenance Expense . . . . . . . . .		767,606
Other Operating Expenses . . . . . .		1,938,753
Sales Revenue . . . . . . . . . . . . . .		4,735,587
Salaries and Benefits Expense . . . .		1,455,237

a. Prepare a comparative balance sheet for Jet Away Airlines as of September 30, 2008, and September 30, 2007 in the format used in Exhibit 1.1. Classify each balance sheet item into one of the following categories: current assets, noncurrent assets, current liabilities, noncurrent liabilities, and shareholders’ equity.

b. Prepare an income statement for Jet Away Airlines for the year ended September 30, 2008. Separate income items into revenues and expenses.

c. Prepare a schedule explaining the change in retained earnings between September 30, 2007, and September 30, 2008.

I. State whether the following statements are True or False

1. Accounting principles are judged on their general acceptability (subject to laws of the land) is the underlying concept of GAPP.
2. Accounting principles are final statement.
3. In all types of organisations, business is an accounting entity that separates from the owners.
4. Different accounting concepts are independent of each other.
5. GAPP manifest themselves through basic accounting concepts and accounting conventions.
6. Accounting concepts are based on accounting conventions
7. Accounting concepts are not internally inconsistent.
8. The capital of the owner is treated as a creditor for his investment in business.
9. The separate legal entity is recognised in law in the case of partnership firms.
10. As per entity concept, income is the property of the business and not that of the owners.
11. Money, the unit of measurement, has always a constant value.
12. The going concern concept facilitates the classification of assets and liabilities into short term and long term.
13. The accounting period concept necessitates the preparation of income statement on accrual basis.
14. As per the cost concept, assets are always values at historical cost.
15. Unexpired costs are not recorded in the balance sheet.
16. Realisation of revenue occurs at the time of exchange of goods or services.
17. Under accrual basis of accounting, revenue is recognised when the cash is received.
18. The accrual concept can also be described as the matching concept.
19. As per prudence convention, the accountants should anticipate profit and should not make provision for loss
20. As per materiality convention, the accountants should disclose all information in the financial statements, irrespective of the nature of materiality.

15. In the accompanying table, you are given information about two firms that compete in a price-taker market. Assume that fixed costs for each firm are $20.

a. Complete the table.

b. What is the lowest price at which firm A will proc. duce?

c. How many units of output will it produce at that price? (Assume that it cannot produce fractional units.)

d. What is the lowest price at which firm B will produce?

e. How many units of output will it produce?

f. How many units will firm A produce if the market price is $20?

g. How many units will firm B produce at the $20 price? (Assume that it cannot produce fractional units.)

h. If each firm’s total fixed costs are $20 and the price of output is $20, which firm would earn a higher net profit or incur a smaller loss?

i. How much would that net profit or loss be?

	FIRM A				FIRM b
	TOTAL		AVERAGE		TOTAL		AVERAGE
	VARIABLE	MARGINAL	VARIABLE		VARIABLE	MARGINAL	VARIABLE
QUANTITY	COST	COST	COST	QUANTITY	COST	COST	COST
1	$24			1	$8
2	30			2	10
3	38			3	16
4	48			4	24
5	62			5	36
6	82			6	56
7	110			7	86

Fill in the blanks with suitable words

1. In double entry accounting, all business transactions are marked as having __________ aspect.
2. Accounting principles are only __________ based on usage, and experience over a period of years.
3. Accounting concepts are not _________ forever.
4. The separate legal entity is recognised by law in the case of a _______ form of business organisation.
5. Though separate entity is not recognised by law in some types of organisations, the assumption of separate entity has to be followed in __________ types of business organisations.
6. The capital of the business is considered as a __________ of the business to its owners.
7. At cost or book value means cost ____________ depreciation.
8. Periodicity concept emphasises _____________ period assumption.
9. The cost concept is also referred at as ________ cost concept.
10. __________ concept assumes that the business entity will continue its activities independently.
11. The money measurement assumption which assumes that purchasing power of money is always __________.
12. The realisation concept emphasises the timing of __________.
13. The essence of accrual concept is that the earning of a revenue and consumption of expenses are related to a __________.
14. Disclosure is the_________ and _________ of financial information to its users.
15. Accounting records and statements must confirm to __________.

State whether the following statements are True or False

1. A business transaction not necessarily involves an exchange of money or money’s worth.
2. Business transactions are classified into Cash Transactions, Credit Transactions and Non-cash Transactions.
3. Depreciation is a credit transaction.
4. Only one account is prepared for all transactions and it is not prepared for each and every item.
5. Credit transactions are always nominal account.
6. Accounts of legal entities in the nature of limited companies accounts belong to groups or representative personal accounts.
7. Goodwill is a tangible account.
8. Bad debt is a nominal account.
9. Valuation accounts are also known as Contra Accounts.
10. Interest received in advance is a Personal Account.
11. Insurance Premium Account is a Personal Account.
12. The giving and receiving aspects take place between accounts and in different account books and not in the same set of books.
13. The giving and receiving aspects of a business transaction must be recorded simultaneously and at the same time.
14. Double Entry System means recording each transaction twice.
15. Every debit must have a corresponding credit
16. A Goods account is generally not opened.
17. In accounting, transactions are recorded on the basis of business entity concept.
18. The business transactions are not recorded chronologically.
19. The terms “General Journal” and “Journal Paper” both denote the same meaning.
20. A Journal is a permanent record of the business
21. Each transaction is provided with an explanation (written at the end of transaction briefly within brackets) is referred to as “narration.”
22. The application of debit-credit rules do not apply to American approach of journalising.
23. The accounts with the balances in the previous year, comprising Real and Personal Accounts are entered in the new books of account with the help of “Opening Entry.”
24. In an Accounting Equation Approach, transactions are analysed in terms of variables: assets, liabilities, capital, revenues and expenses.
25. In an Accounting Equation Approach, decrease in an asset item is debited
26. In an Accounting Equation Approach, decrease in liability is debited
27. In an Accounting Equation Approach, increase in Capital is debited
28. In an Accounting Equation Approach, increase in an expense item is debited
29. Increase in an income item is debited as per American procedure.

Journal entry will be the same for both the conventional approach and accounting equation approach in recording business transactions

Market research is coming out of the closet. Direct marketing firms have emerged to service the new phenomenon of relationship marketing – lifestyle databases underpinning the mailings of the firms to provide a direct interface between research and practice.

Direct marketing company databases hold a mass of fine detail on customers’ purchasing habits. Advances in computer technology have given firms the ability to combine databases to give a fuller picture of customer purchasing habits without ever having to approach a respondent with a questionnaire – the information is directly available. Researchers no longer need to reassure respondents about anonymity, either; instead they offer rewards to consumers in exchange for giving personal information to the researchers. Data mining is the new catchword for market researchers. Using what used to be considered as secondary sources of information, the researchers analyze direct marketing company records to build up an in-depth picture of the lifestyles of millions of consumers. New ways of segmenting markets based on lifestyles and attitudes are being discovered and ways of translating market research into market action are working more quickly and effectively. Because of the speed of analysing such research, market researchers are able to offer high-quality tailored research packages to small firms which previously could not have afforded professional market research.

Another area in which market research is being revolutionised is through the Internet. On one Web-based project, 160 out of 400 respondents replied to an email survey within three hours – formerly, this many responses would have taken days to obtain or even weeks using normal postal services. An additional advantage is that such surveys cost around one-third the price of telephone surveys. Currently most of this research is being conducted in the United States, where more people are connected to the Net than is the case in Europe, but eventually Web-based research is expected to outperform all other methods of conducting surveys.

The relatively new activity of category management (CM) has also thrown up new challenges for market researchers. The Institute of Grocery Distribution defines CM as: ‘The strategic management of product groups through trade partnerships which aim to maximise sales and profits by satisfying consumer needs.’ In practice, what this means is that manufacturers and retailers need to cooperate in managing certain product categories, rather than concentrating solely on brands. For example, Van den Bergh Foods (manufacturers of margarine and other fats) saw a need to establish retailer-specific market research programmes to develop an understanding of consumers’ motivations to buy margarine. The research programme involved 1200 interviews conducted as customers left thestores, 1300 interviews at the margarine display fixtures in the stores, 200 depth interviews, 76 accompanied shopping trips and 36 hours of video observation. The research was carried out in seven major retail chains. Marked differences between the different retailers were found, so Van den Bergh was able to conclude that marketing, merchandising and even pricing might need to be varied between retailers to take account of differences in consumer motivation between store chains.

Ultimately, it seems that such research would be more efficiently carried out if the retailers themselves participated in the costs and shared the benefits – this would, of course, require agreements between the retailers to share information. Such agreements do not present a problem if an independent market research company, of course, carries out the work but the result for the market researchers is that they may find themselves forced into a tight brief that allows little room for creativity. Increasingly, the business community is becoming more information oriented. In a constantly changing world, the need for up-to-date and accurate information is more important than ever before, and market researchers are using (and seeking) new tools for collecting and analysing that information. (Case contributed by Jim Blythe)

Questions

1 What might be the limitations of using Web-based research in the UK?

2 What are the advantages and disadvantages of research for category management purposes?

3 How might the disadvantages of category management research be reduced?

4 What ethical problems might arise from the combination of direct mail databases to generate detailed information about consumers?

5 How might creative approaches to Web research increase response rates?

‘The general election will determine which techniques will be used for opinion polling in future, although the diversity of current practices may make it more difficult for the polling industry as a whole to win credibility,’ Mr John Curtice, a reader in politics at Strathclyde University, said yesterday. He said that because pollsters had changed their methodologies in different ways after getting the 1992 election wrong, this election would be a test of which of the various methods now in use was most accurate.

The polling industry was as diverse in its methodologies as it had ever been, in contrast to the last election, when there was a broad consensus about how polling should be conducted, Mr Curtice said. He told the Market Research Society conference in Birmingham that the election would provide an opportunity to assess the relative merits of telephone and face-to-face polling and of sampling on a random basis or by setting certain quotas for the types of people to be questioned.

A study following the debacle of 1992 said the surveys did not identify hidden Tories and that the controls in quota sampling were not enough to counter the possibility that people questioned in a quota poll were more likely to be Labour than the population in general.

The polls’ failure in 1992 to reflect the Tory victory has allowed the Conservative party to cast doubt on the credibility of the overwhelming Labour lead, which most have shown for many months.

Among changes brought in since 1992, NOP and Mori have altered how they weight the quotas they set, by making more use of government surveys, such as the Labour Force Survey.

ICM and Gallup have both switched to using a form of random sampling rather than quota sampling and to telephone polling instead of face-to-face interviews. Pollsters have also adjusted how they weight figures depending on how people say they voted in the last election. Source: Smith6 (reprinted with permission)

Question

Discuss the problems associated with quota sampling in surveys. How might such problems be solved? FT

The New Shoe Company, based in the English Midlands, is experiencing a fall in profits. The company measures profits in terms of the annual pre-tax return on capital employed earned by the company.

The sales director says that falling profitability is a reflection of the current slump in the market. Total demand in the marketplace is much less than it was 12 months ago and the company has struggled to maintain its market share at the previous level as competition has intensified. Competition from European manufacturers has been sharpened by changes in EU trading regulations and Spanish manufacturers, in particular, have taken advantage of their lower cost structure to make inroads into the British market. At the same time, the New Shoe Company has failed to take full advantage of opportunities in Europe. It has not fully developed its market niching strategy where it can gain a competitive advantage. The sales director blames the firm’s lack of competitiveness on the poor performance of the R&D team and the inability of the manufacturing departments to control costs.

The technical director claims that the firm’s products are competitive with any that are produced worldwide. Indeed, in her view, the firm’s products are by far the best available at the price offered. She points to the lack of marketing effort expended by the firm in the past year, pointing to the necessity to keep the firm’s name before the public at all times, especially when competition is increasing in strength. At the same time she recognises that marketing effort requires financing and that this was not adequately provided during the period in question. The production director points out that the company has been able to lower its manufacturing costs substantially through the introduction of new technology into the manufacturing process. However, he points out the accounting practices adopted by the firm distort the true picture. Profitability, in his view, has improved, although this is not truly reflected in the company’s management accounts. The finance director feels that the drop in profitability is attributable to recent acquisitions the firm has made. Ventures into retailing have not been as profitable as had first been supposed. This might to some extent have been reflective of bad timing on behalf of the company, given the current recession, in making such acquisitions. The managing director points out that there clearly is a problem and that perhaps one should pay particular attention to what competitors are doing and how the firm is responding from a marketing viewpoint.

Questions

1 Given the limited information in this case, what do you think could be the real problem or problems in this example?

2 Depending on the real nature of the problem identified, how might marketing research help in this case?