acct question

 

Prepare a business memo in Word addressed to Mark Zuckerberg discussing the following: 1. AccountBook obtains a $500,000 loan and Mark Zuckerberg contributes $250,000 of his own assets in exchange for common stock in the new company. a. What is the new company’s total amount of liabilities plus equity? b. What is the new company’s total amount of assets? 2. If the new company earns $80,000 in net income in the first year of operation, compute its return on asset (assume average assets equal $750,000). Assess its performance if competitors average a 10% return.

“Weare focused on… helping people share information“

—MARK ZUCKERBERG

PALO ALTO, CA—“Open Society” conjures up philosophical thoughts and political ideologies. However,

for Mark Zuckerberg, his vision of an open society “is to give people the power to share and make the

world more open and connected.” That vision led Mark to create Facebook (Facebook.com) from his

college dorm. Today, Facebook is the highest-profile social networking site. Along the way, Mark had to

learn accounting and the details of preparing and interpreting financial statements.

“It’s all been very interesting,” says Mark. Important questions involving business formation, transaction

analysis, and financial reporting arose. Mark answered them and in the process has set his company

apart. “I’m here to build something for the long term,” declares Mark. “Anything else is a distraction.”

Information is the focus—both within Facebook and within its accounting records. Mark recalls that

when he launched his business, there were “all these reasons why they could not aggregate this

*personal+ information.” He took a similar tactic in addressing accounting information. “There’s an

intense focus on… information, as both an ideal and a practical strategy to get things done,” insists

Mark. This includes using accounting information to make key business decisions.

While Facebook is the language of social networking, accounting is the language of business networking.

“As a company we are very focused on what we are building,” says Mark. “We are adding a certain

amount of value to people’s lives if we build a very good product.” That value is reflected in its financial

statements, which are based on transaction analysis and accounting concepts.

Facebook’s success is reflected in its revenues, which continue to grow and exhibit what people call the

monetizing of social networking. “Social Ads are doing pretty well,” asserts Mark. “We are happy with

how we are doing in terms of numbers of advertisers and revenue.” Facebook also tracks its expenses

and asset purchases. “We expect to achieve… profitability next year,” states Mark. “It means we will be

able to fund all of our operations and server purchases from the cash we generate.” This is saying a lot

as Facebook’s operating expenditures must support nearly 1 billion photo uploads and 8 million video

uploads per day.

Mark emphasizes that his financial house must be in order for Facebook to realize its full potential—and

that potential is in his sights. “We believe really deeply that if people are sharing more, then the world

will be a more open place where people can understand what is going on with the people around them.”

[Sources: Facebook Website, January 2011; CNN, October 2008; Mercury News, April 2009;

VentureBeat, March 2008; FastCompany.com, May 2007; Wired, June 2009]

Assume that Mark Zuckerberg decides to open a new Website devoted to social networking for

accountants and those studying accounting. This new company will be called AccountBook.

Required:

Prepare a business memo in Word addressed to Mark Zuckerberg discussing the following:

1. AccountBook obtains a $500,000 loan and Mark Zuckerberg contributes $250,000 of his own assets in

exchange for common stock in the new company.

a. What is the new company’s total amount of liabilities plus equity?

b. What is the new company’s total amount of assets?

2. If the new company earns $80,000 in net income in the first year of operation, compute its return on

asset (assume average assets equal $750,000). Assess its performance if competitors average a 10%

return.