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Chapter Eight
Accounting: Decision Making by the Numbers
Review Questions
1. How do public accountants differ from management accountants? Who are the key users
of the accounting information? What type of information does each stakeholder group
need?
Public accountants provide services such as tax planning and preparation, external
auditing, and business consulting on topics such as employee compensation and benefits
to clients on a fee basis. Management accountants work within a single company,
recording, and analyzing the financial information for their employer. They may do a
variety of tasks including budgeting and cost and asset management.
Accounting information is valuable to many different stakeholders. Owners of businesses
want to know whether their firms are generating an adequate return on their investment.
Banks and other lenders want to know whether the organization will be able to repay its
debts. Employees are interested in the financial performance of their company because it
has an impact on their job security, pay, and pension plans. Suppliers want to be sure
that the firm can pay for any supplies they provide on credit. Several government
agencies, including the IRS and SEC, also require information from financial statements
to insure that the firm is meeting tax and reporting requirements.
BUSPROG: Communication
Bloom’s: Knowledge
Topic: Accounting: Who Needs It—and Who Does It?
Difficulty Level: Easy
Learning Objective: 8-1
2. Financial statements are prepared using generally accepted accounting principles

(GAAP). What group is responsible for establishing these principles, and what goals
guide their formulation? Why are many generally accepted accounting principles likely to
change in the near future?
The Securities and Exchange Commission has the ultimate authority for establishing
generally accepted accounting principles (GAAP), but it has delegated the responsibility
for developing these rules to a private organization known as the Financial Accounting
Standards Board (or FASB).
The main purpose of GAAP is to give the external users of accounting information, such
as owners, creditors, suppliers and regulators, confidence in the quality and reliability of
the information they receive, and to enable them to use this information to make informed
decisions. The principles established by GAAP are designed to provide financial
statements that are:
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. EOC – 483
End-of-Chapter Solutions / Chapter 8
• Relevant: the information should be directly related to the firm’s financial

condition and performance.
• Reliable: the information should be based on sources that are accurate, objective,
and verifiable.
• Consistent: the information should be based on the same core assumptions and
procedures over time. (If a firm changes these procedures it should clearly
indicate the nature and impact of these changes.)
• Comparable: the information should be presented in a reasonably standardized
way so that users can easily compare results over time or among various
organizations.
The accounting practices of most other nations are based on a set of principles known as
the International Financial Reporting Standards (IFRS). These standards differ in
several respects from GAAP. For the past several years the FASB and its international
counterpart, the IASB have been working on ways to make the practice of financial
accounting in the United States more consistent among nations. The adoption of these
new practices will cause several changes in GAAP over the next several years.
Topic: The Role of the Financial Accounting Standards Board
3. State the “accounting equation” and define each of its terms. What is the logic behind this
equation? How is the structure of the balance sheet related to this equation?
The accounting equation states that Assets = Liabilities + Owners’ Equity. In this
equation, assets are the resources owned by a firm. These include the firm’s cash,
accounts receivable, inventory, machinery and equipment, buildings, land, and perhaps
even intangible assets such as patents, copyrights and goodwill.
Liabilities are the claims that outsiders have against the firm’s assets. They represent
what the firm owes to outsiders. A loan owed to a bank, trade credit (accounts payable)
owed to suppliers, bonds owed to bondholders, wages owed to employees and taxes owed
to the government are examples.
Owners’ Equity represents the claims of owners against the firm’s assets. These are
viewed as residual claims, since the claims of creditors come before those of owners. For
a corporation the key elements of owners’ equity would include common stock and
retained earnings.
The logic behind the accounting equation is based on the fact that firms must finance the
purchase of their assets, and owners and non-owners are the only two sources of funding.
The accounting equation tells us that the value of a firm’s assets must equal the amount
of financing provided by owners (as measured by owners’ equity) plus the amount
provided by creditors (as indicated by the firm’s liabilities) to purchase those assets.
EOC – 484 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The balance sheet is organized in a way that illustrates the logic behind the accounting
equation. A balance sheet lists a firm’s assets first, organizing them into current assets,
plant and equipment and intangible assets. It sums the value of all of these assets to come
up with a value for the firm’s total assets. It then lists is liabilities (organized according
to when they are due) and owners’ equity. It sums the value of all total liabilities and
owners’ equity and shows that this total is equal to the value of total assets.
BUSPROG: Analytic
Bloom’s: Comprehension
Topic: The Balance Sheet: What We Own and How We Got It
Difficulty Level: Moderate
4. You have a company's balance sheet, its income statement, and its statement of cash
flows. Which would you refer to if you wanted to know if a company made a profit last
year? If you wanted to find out whether the firm had any intangible assets? If you wanted
to know why its cash balance had changed over the past year? If you wanted to know how
much debt the firm had used to finance its assets? If you wanted to know what the firm’s
operating expenses were for the past year?
The income statement reports the company’s revenues and expenses (including operating
expenses). It computes net income (profit or loss) by deducting costs and expenses from
revenue.
The balance sheet reports the type of assets a company has, including any intangible
assets. It also identifies the short-term and long-term liabilities, thus indicating the extent
to which the company relies on debt.
The statement of cash flows reports the inflows and outflows of cash resulting from
operating, investing, and financing activities. Thus, it shows how and why a firm’s cash
balance changed over the past year.
BUSPROG: Analytic
Bloom’s: Analysis
Topic: Financial Statements: Read All About Us
5. Describe the three basic categories of cash flows reported by a statement of cash flows
and give examples of specific cash flows included in each category.
The statement of cash flows shows how and why the firm’s cash position changed by
identifying the amount of cash that flowed into and out of the firm from three types of
activities. The three basic types of activities that generate cash flows are:
• Operating activities, which generate cash inflows from the sale of goods or
services, as well as cash from dividends and interest received from ownership of
the financial securities of other firms. Operating activities generate cash outflows
from the payment of operating expenses.
• Investing activities, which create cash flows from the purchase or sale of long-
term assets or long-term financial investments.
• Financing activities generate cash flows from issuing new securities and from the
payment of dividends or repayment of principal on loans.
Topic: The Statement of Cash Flows: Show Me the Money
6. Identify and describe the basic elements of an income statement. Explain how the accrual
basis of accounting guides the way the information on the income statement is reported.
The income statement summarizes the financial results of a firm’s operations over a
given period of time. The figure that attracts the most attention on the income statement
is net income, which measures the company’s profit or loss. This simple equation
illustrates the logic behind the organization of the income statement:
Revenue − Expenses = Net Income
In this equation revenue represents the increase in the amount of cash and other assets
(such as accounts receivable) the firm earns in a given time period as the result of its
business activities. A firm normally earns revenue by selling goods or by charging fees
for providing services (or both). Expenses indicate the cash a firm spends, or other assets
it uses up, to carry out the business activities necessary to generate its revenue. Net
income is the profit or loss the firm earns in the time period covered by the income
statement. If net income is positive, the firm has earned a profit. If it’s negative, the firm
has suffered a loss.
Accountants use accrual-basis accounting when recognizing revenues and expenses
reported on the income statement. Under the accrual approach, revenues are recorded
when they are earned and payment is reasonably assured. It’s important to realize that
this is not always when the firm receives cash from its sales. Under accrual-basis
accounting, expenses aren’t necessarily recorded when cash is paid. Instead, expenses
are matched to the revenue they help generate.
BUSPROG: Analytic
Topic: The Income Statement: So, How Did We Do?
7. What is the purpose of an external audit by an independent CPA firm? How does an
auditor go about conducting an audit? How does a qualified opinion by an auditor differ
from an unqualified opinion or an adverse opinion?
The purpose of the external audit is to verify that the statements were properly prepared
in accordance with generally accepted accounting principles, and that they fairly present
the financial condition of the firm. The results of the audit are presented in an
independent auditor’s report which is included in the annual report the firm sends to its
stockholders.
Because they must determine whether a company’s financial statements were properly
prepared in accordance with GAAP, external auditors don’t just check the final figures in
the statements; they also examine the accounting methods the company used to obtain
those figures. Auditors also look for signs of fraud or falsified records. They often
conduct an actual physical count of goods or supplies in inventory to determine the
accuracy of the figures reported in the company’s inventory records and contact the
company’s banker to verify its account balances. The audit process is rigorous, but it’s
important to realize that in large, public companies it would be impossible for auditors to
check the accuracy of every transaction.
If the auditor doesn’t find any problems with the way a firm’s financial statements were
prepared and presented, the report will offer an unqualified opinion (also referred to as a
clean opinion). If the auditor identifies limited problems with the firm’s accounting
methods or financial statements, but believes that in all other respect these statements are
fair and accurate, the report will express a qualified opinion. But when auditors discover
more serious and widespread problems with a firm’s statements they offer an adverse
opinion. An adverse opinion indicates that the auditor believes the information contained
in the statements was not prepared according to generally accepted accounting
principles and that the statements may be inaccurate and unreliable.
Topic: The Independent Auditor’s Report: Getting a Stamp of Approval
Difficulty Level: Comprehension
8. Describe the key differences between financial accounting and managerial accounting.
Financial accounting is responsible for generating information used primarily by outside

stakeholders such as investors, creditors, and government agencies. It does this by
developing financial statements such as the balance sheet, income statement, and
statement of cash flows. These are prepared on a fixed schedule and are based on
methods that are consistent with generally accepted accounting principles (GAAP).
Managerial accounting prepares reports and performs analysis that is designed
primarily for the internal use of the firm’s managers. These reports are prepared as
needed, and are not required to follow GAAP.
Topic: Inside Intelligence: The Role of Managerial Accounting
9. How do management accountants view cost? How do implicit costs differ from explicit
costs? Give some examples to illustrate the difference.
Accountants define cost as the value of what is given up in exchange for something else.
Depending on the type of problem they are analyzing, managerial accountants actually
measure and evaluate several different types of costs. At the most basic level, accountants
distinguish between out-of-pocket costs and opportunity costs. Out-of-pocket costs (also
called explicit costs) are usually easy to measure because they involve actual
expenditures of money or other resources. The wages a company pays to its workers, the
payments it makes to suppliers for raw materials, and the rent it pays for office space are
examples. But accountants realize that not all costs involve a monetary payment;
sometimes what is given up is the opportunity to use an asset in some alternative way.
Such opportunity costs are sometimes referred to as implicit costs. For example, if an
entrepreneur uses her own money to finance a business she gives up the opportunity to
invest those funds in some other way.
BUSPROG: Analytic
Topic: Cost Concepts: A Cost for All Reasons
10. What is the purpose of budgeting? What is the master budget, and what are its major
components? How does a top down budgeting process differ from a bottom up approach,
and what are the advantages and disadvantages of each?
Budgeting is a management tool that explicitly shows how firms will acquire and use the
resources needed to achieve its goals over a specific time period. This process is crucial
to the planning process because it translates goals into measurable quantities and forces
managers to explicitly identify how they will meet these goals. When done correctly,
budgeting encourages communication and cooperation among various departments and
functional areas of the business, provides a motivational tool, and helps managers
monitor progress and evaluate progress.
In reality, a firm prepares several different budgets. The master budget organizes all of
these separate budgets into a unified whole, providing a complete picture of the firm’s
financial plan. The key elements of the master budget include the sales budget,
production budget, various cost budgets and cash and capital budgets.
Top down budgeting occurs when top managers develop budgets with little input from
middle and supervisory managers. Bottom up (or participatory) budgeting is an approach
which seeks the active involvement of managers at all levels of the organization.
The advantages of this approach are that top managers are likely to have a better
understanding of the overall goals and priorities of the company, and are thus in a better
position to determine how financial and real resources should be allocated. Also, top
down management tends to be quicker and simpler than the bottom up approach. Finally,
it frees up time for middle and supervisory managers to pursue other responsibilities. But
this approach may alienate middle and first line managers, who may resent being given
no say in the process.
The advantages of bottom up budgeting are that middle and supervisory managers may be
“closer to the action” and have a better understanding of the resources needed to meet the
needs of their departments, divisions and teams. Allowing middle and first line managers to
be more actively involved in the process is likely to improve their morale and encourage
them to “buy in” to the budget. In addition to being more time consuming, another problem
with participatory budgeting is that some managers may be tempted to overstate their needs
or set low budget goals in order to make their jobs easier.
BUSPROG: Analytic
Topic: Budgeting: Planning for Accountability
Application Questions
1. You have recently graduated with an accounting degree. Use the Web to investigate what
exactly is involved in becoming a Certified Public Accountant (CPA). Good places to start
are Wikipedia's "Certified Public Accountant" entry and the Department of Labor's
Occupational Outlook Handbook entry on accountants and auditors. What advantages and
disadvantages do you see? Would you decide to take this step? Why or why not?
Requirements for CPAs vary among states, but in most states a CPA candidate must have
completed at least 150 hours of college coursework, which is 30 hours more than is
normally required for a bachelor’s degree. Candidates in all states must pass a rigorous
four-part Uniform CPA Examination. This exam is given over a two-day period, but the
candidate does not have to pass all four parts in the same period. More than half of all
states also require candidates to have some accounting experience. After earning
certification, CPAs in virtually all states must complete a certain number of hours of
continuing education to have their licenses renewed.
The requirements that must be met to become a CPA are challenging, but according to
the Occupational Outlook Handbook, successful candidates do enjoy substantial
increases in job opportunities and earnings potential. In fact, the Handbook forecasts
that accountants who earn the CPA should experience excellent job prospects over the
next several years.
BUSPROG: Technology
Topic: Accounting: Who Needs It—and Who Does It?
2. Today there are four dominant public accounting firms: PricewaterhouseCoopers, Ernst
& Young, KPMG, and Deloitte Touche Tohmatsu. But until about a decade ago there
was a fifth major public accounting firm known as Arthur Andersen. Do some research
on the Internet to find out how the “Big Five” became the “Big Four.” What lessons does
this story yield about the practice of public accounting? How does it relate to the
provisions in the Sarbanes-Oxley Act?
Students who research this question will learn more about the accounting scandals that
rocked the profession in the earliest years of the twenty-first century. The major reason
for Arthur Andersen’s demise was its involvement in the Enron scandals. Andersen was
the external auditor for Enron (and for some other firms facing accounting scandals
during this period), but it failed to question any of Enron’s unethical or deceptive
practices. Many scholars suggest that Andersen’s lax oversight was due to the fact that
the accounting firm had close business relationships with Enron. In fact, Andersen
typically made more money from consulting fees with Enron than it did from its audits.
Some critics maintain that this relationship meant that Andersen wasn’t really
independent and that it was reluctant to be aggressive in its audits for fear of losing the
more lucrative consulting business.
Andersen was convicted of obstruction of justice for shredding thousands of pages of
Enron-related documents upon learning it would be investigated by the Securities and
Exchange Commission. After the conviction Andersen voluntarily gave up its license to
practice public accounting. In 2005 the Supreme Court overturned Andersen’s
conviction, ruling that the judge had given instructions to the jury that were too vague,
leading them to make an erroneous decision. However, by the time the Supreme Court
made its ruling Arthur Andersen had lost its clients and suffered so much damage to its
reputation that it was not feasible to restart the business.
The fall of Arthur Andersen provided the impetus for a key provision of the Sarbanes-
Oxley Act (SOX)—namely the provision that external auditors must be independent of the
companies they audit. The act identified and prohibited several specific business
relationships between public accounting firms and the companies they audited. These
practices include bookkeeping services, financial system design, actuarial services,
management functions, and investment or broker-dealer services and several other
services.
BUSPROG: Ethics
Bloom’s: Application
Topic: Ethics in Accounting
3. The generally accepted accounting principles (GAAPs) developed by the Financial

Accounting Standards Board (FASB) try to make interpreting and comparing a firm's
financial performance easier for a variety of stakeholders. Those stakeholders include
suppliers, stockholders, creditors, and the government. Go to the FASB website and find
out more this board. Provide a brief overview of the board’s mission. Who are the current
members of the FASB and what are their qualifications? Given these backgrounds, do
you believe that the members of the FASB will adequately represent the interest of this
diverse set of stakeholders?
According to the FASB website, the board’s mission is “to establish and improve
standards of financial accounting and reporting for the guidance and education of the
public, including issuers, auditors, and users of financial information.”
At the time the book went to print the members of the FASB were Robert Herz, Thomas
Linsmeier, Leslie Seidman, Marc Siegel and Lawrence Smith, but its composition may be
different by the time the students check the website.
According to the FASB website the five members of the FASB serve full time and must
sever connections with the firms or institutions they served prior to joining the Board in
order to avoid the potential for conflicts of interest. While collectively they represent
diverse backgrounds, they must have an excellent knowledge of accounting, finance, and
business, and a concern for the public interest in matters of financial accounting and
reporting.
BUSPROG: Technology
4. The Financial Accounting Standards Board (FASB) is currently working with the
International Accounting Standards Board (IASB) to make U.S. financial accounting
standards more consistent with international standards. Use the Internet to find out why
the two boards are working toward convergence and how much progress they have made.
How would the convergence of the two sets of standards likely affect the practice of
financial accounting in the United States? How will these changes affect students just
beginning their study of accounting?
The main advantages of the move is that it will simplify the accounting process for firms
with global operations and make it easier for stakeholders to compare financial
statements of U.S. corporations with those in other countries. Although at present the
efforts of the FASB and IASB are focused on simply making the two systems more
consistent (which is referred to as convergence), the SEC has indicated on several
occasions that it would prefer to establish a single set of high-quality globally accepted
accounting standards. If this adoption of a single set of principles happens, it is much
more likely to be based on IFRS than on GAAP. The SEC has made a variety of
statements about this goal in recent years, establishing and then modifying guidelines for
when such a convergence would occur. This process is controversial, but many
authorities expect that it will happen. A recent report by PricewaterhouseCoopers

concluded that “ultimately we believe the United States will adopt IFRS.”
IFRS and GAAP differ in many ways, including when revenue is recognized, how
employee benefits are expensed, how nonfinancial assets are valued, how financial
derivatives are defined and accounted for, and how other financial instruments are
recognized and valued. (This identifies some of the differences that have attracted
attention, but it certainly is not a complete list.)
The challenges of the switch mainly involve the cost of switching procedures and the need
for accountants and other professionals to become more familiar with and proficient at
applying the new set of standards. The changes will also be a challenge for accounting
departments in colleges in universities. It will be important for them to modify their
curricula to adapt to changes as they occur. The good news for students just starting
their study of accounting is that they will get in on the ground floor of the changes, and
will have less to “unlearn” than students who studied accounting a few years ago.
BUSPROG: Diversity
Bloom’s: Synthesis
Difficulty Level: Challenging
5. Check out the most recent financial statements for a major U.S. corporation. Go to the
company’s website and find the link to investor relations. [This may take a bit of
searching. Not all corporate websites are laid out the same way, but almost all of them
contain a link to investor relations or investor information. It is often at the top of the
home page.] From the investor relations page, look for a link to the company’s annual
report. The financial statements will be presented in this report, along with a lot of other
information. Use information from these financial statements to answer the following
questions:
a. What amount of revenue did the firm earn in the most recent year?
b. What was its net income? Did it earn a profit or a loss?
c. How much cash did the company have?
d. What was the value of its accounts receivable—and what does this number
represent?
e. What was the total amount of current liabilities? What does this value represent?
f. What was the company’s net cash flow from investing activities?
Answers will vary depending on which corporation the student chooses. Revenues and net
income will be listed on the company’s income statement; cash, accounts receivable and
current liabilities will be listed on its balance sheet, and cash flows from investing and the
net increase or decrease in its cash balance will be listed on its statement of cash flows.
You might want to tell students that the names used for financial statements are not
always consistent. For example, balance sheets are often formally called statements of
financial position and income statements are sometimes called statements of net income
or profit and loss statements. Also, to simplify your grading you might limit the students
to a few corporations you select. For example, you might pick a few corporations that
have recently been in the news, or a few that are popular with students, or some of the
larger corporations with operations near your college or university. You could check out
the websites for each of these corporations to make sure that the link to investor relations
is easy to find.
BUSPROG: Analytic
Bloom’s: Analysis
Topic: Financial Statements: Read All About Us
Team Project
Pick out several publicly traded corporations, including some that you know are doing very well
financially and others that are struggling. Print out the most recent comparative financial
statements for each company. (Links to these statements are available on most financial websites
as well as the investor relationship pages of the firm’s websites.)
Break the class into small groups and give each group the financial statements for one of the
corporations. Tell the group to work together to find out what has happened over the past two
years to the firm’s total liabilities and stockholder’s equity, revenues, major costs and expenses,
net income and cash position and discuss what these figures tell them about the company’s
financial recent performance and current financial condition. Have each team report its findings
to the class and have the class discuss the results and compare the performance of the various
companies.
Case Connection
Budget Bashing Blues
The strategic planning session had degenerated into a gripe session—and you were one of the
biggest gripers. Your company’s CEO, Jan Draper, liked to keep planning sessions focused and
she usually did a good job of it. But she apparently sensed that this was a time when frustrated
managers needed to have their say. The meeting was attended by most of your company’s top
management team, and almost all of them appeared frustrated by the current budget process. The
key budget complaints brought up by the managers included:
• The current budgetary process takes too long and is too expensive. The company’s
approach to budgeting tries to get all levels of management involved. Everyone agreed
that this approach was good in theory. But in actual practice, middle and supervisory
managers frequently got bogged down and overwhelmed by the amount of time spent
dealing with budget issues.
• It appears that at least a few participants always try to “game the system” by purposefully
overstating their resource needs or understating their capabilities during the budget
process in order to make it easier to achieve their budget goals.
• The focus on meeting annual budget numbers encourages an emphasis on short-term

thinking rather than strategic thinking. For example, in order to stay within budget
managers sometimes defer needed purchases or repairs. Moreover, the focus on meeting
budget targets often prevents managers from thinking creatively.
• The budget is based on assumptions and forecasts that seldom turn out to be accurate—
often because of factors beyond the control of managers. For example, in 2008 and 2009
the dramatic economic decline made it impossible for managers to meet budget targets
that were formulated before the full impact of the recession was appreciated. Since
performance evaluations, bonuses and promotions are based on meeting budget numbers
this created a lot of stress and frustration.
Most managers agreed that the whole budget process needed rethinking. Rachel Sperling, the
youngest member of the top management team, argued for a more radical approach, suggesting
that the company abandon the annual budget process altogether. This was met by skepticism
(and even some derisive laughter), but Rachel held her ground. She mentioned that she had done
some research on a movement called “Beyond Budgeting” that called for more flexible planning
tools and evaluation of employees based on relative performance rather than fixed budget targets.
She pointed out that companies as well known and diverse as Google, Toyota, American Express
and Southwest Airlines have used Beyond Budgeting ideas to move away from traditional
budgeting methods.
CEO Draper let the discussion on budgets go on for several minutes before steering the meeting
back on track. But before turning back to the agenda she noted that budget issues were a topic
that clearly needed further research and discussion. She asked you (as one of the biggest gripers)
to work with Rachel to come up with some preliminary proposals that could be discussed at a
future meeting devoted to the budget process.
You Decide:
• Does your company currently use a top down or bottom up approach to budgeting? What
are the advantages and disadvantages of the current approach? Would a switch to the
other approach be beneficial? Why or why not?
Based on the description in the case, which mentions that the firm’s approach tries to get
everyone involved, the company currently appears to be using a bottom-up approach.
(Organizations that use this approach allow middle and supervisory managers to
participate actively in the creation of the budget.) Theoretically, this has some important
advantages. First, middle and supervisory managers are likely to know more about the
issues and challenges facing their departments—and the resources it will take to address
them—than top management. Second, middle and first-line managers are likely to be more
highly motivated to achieve budgetary goals when they have a say in how those goals are
developed. Finally, managers are more likely to believe a bottom-up process establishes
fair and reasonable goals—an important consideration because managers’ bonuses,
promotions and other rewards and incentives are often based on whether or not they meet
targets set by the budget. But there is also a negative side to this approach. A bottom-up
approach is more time consuming and resource intensive to carry out than the top-down
approach. Also, some middle managers may be tempted to overstate their needs or set low
budget goals in order to make their jobs easier—an outcome known as budgetary slack.
A top-down approach has top management take the lead role in the budget process, with
less reliance on input from middle and supervisory managers. This approach can be
faster and less expensive to implement, and it frees up time for middle and supervisory
managers to devote to other responsibilities. Also, top managers know the long-term
strategic needs of the company and are in a better position to see the big picture when
making budget decisions. But top managers may not know much about the specific
challenges faced by different divisions or functional areas. Also, a top down approach
may be resented by subordinates, resulting in less “buy-in” and lower morale.
There is no right or wrong answer to the question of whether the firm would be better of
with a more top-down approach—a case could be made either way. What is important is
that the student looks at both the benefits and drawbacks of both approaches and
compares their merits. (While there is no definitely right or wrong answer, it is worth
noting that most recent literature seems to support the bottom-up approach.)
BUSPROG: Analytic
Bloom’s: Analysis
Topic: Preparing the Budget: Top Down or Bottom Up?
• How could the budget process be modified to take changes in economic conditions into
account?
It appears that this company relies completely on a static budget. The firm could improve
its budget process by incorporating flexible budgets. A flexible budget is developed over
a range of possible sales levels, and is designed to show the appropriate budgeted level
of costs for each different level of sales. This flexibility enables managers to make more
meaningful comparisons between actual costs and budgeted costs, and makes it possible
to compensate for changes in economic conditions that are beyond management control.
BUSPROG: Analytic
Topic: Being Flexible: Clearing Up Problems With Static
• Rachel is really serious about abandoning the annual budget. She also suggests that you
do some research on the Beyond Budgeting (BB) movement. Do some research to find
out more about Beyond Budgeting. What are the major criticisms BB makes against the
traditional approach to budgeting? What core concepts and values does BB suggest as
replacements for the traditional approach? What are some problems associated with the
BB approach? On balance, do you think this approach is worth pursuing? Explain.
According to the BB movement traditional budgeting:

1. Is too detailed, time consuming and expensive
2. Is often out of date within a few months
3. Is not flexible enough to deal with rapidly changing competitive environments
4. Perpetuates a narrow focus on short-term results and undermines long-term
strategic thinking
5. Discourages managers from thinking creatively and being flexible
6. Encourages “gaming the system” and unethical behavior
(Note: this is not a complete list, but it gets at the essence of the BB criticism.)
The BB approach encompasses a different set of concepts and values. Beyond Budget
advocates make the following suggestions:
1. Scrap the traditional budget process; make planning a continuous, inclusive and
dynamic process rather than an annual event.
2. Focus on a common cause, not a central plan
3. Make information open and transparent
4. Encourage ambitious goals, but (unlike traditional budgeting) don’t turn them
into fixed targets
5. Focus on accountability and continuous improvement rather
6. Base performance review on relative performance, not fixed targets
(Again, this isn’t a complete list, but it gets at the essence of the BB approach without
getting bogged down in the details—see the links above for more details. It is important
to note that BB doesn’t call for a standardized approach to planning and control, but
rather adherence to a general set of principles.)
Many students are likely to agree with some of the criticisms of traditional budgeting and
to agree that the principles of the BB approach seem good on paper. But before
recommending this type of approach they should show an awareness of the challenges it
would bring. For most firms, (including the one in this case) a Beyond Budgeting
approach would require a revolution in the way they plan, the way they evaluate workers
and the way managers view their responsibilities and their relationships with others in
the organization. There is no simple blueprint for bringing about such a dramatic
transformation. Only firms with visionary and dynamic leaders are likely to successfully
pull it off. (The Beyond Budgeting literature does contain a number of success stories of
firms that have successfully replaced the traditional budgeting process with a more
flexible and dynamic system, but such firms are still relatively rare.)
BUSPROG: Reflective Thinking

Bloom’s: Evaluation
Topic: Budgeting: Planning for Accountability
Sources: “Budget Process,” Online Success Center website:

http://onlinesuccesscentre.com/2010/07/how-to-prepare-a-sound-budget-process-six-
steps-in-the-budgeting-process-bottom-up-versus-top-down-budget-plans/; “How
Budgeting Works for Companies,” by Jonas Elmerraji, Investopedia website:
http://www.investopedia.com/articles/07/budgetingforcompanies.asp#axzz1Uf9fws5m;
“The Advantages of a Flexible Budget,” by Kathy Adams McIntosh, eHow.com website:
http://www.ehow.com/info_7779199_advantages-flexible-budget.html; “What Is the
Problem?” Beyond Budgeting Roundtable website: http://www.bbrt.org/beyond-
budgeting/bb-problem.html; “Benefits of Beyond Budgeting to Your Organization,”
Beyond Budgeting Roundtable website: http://www.bbrt.org/beyond-budgeting/bb-
ben.html; “Performance Management Beyond Budgeting: Why You Should Consider It,
How It Works, and Who Should Contribute to Make It Work,” by Jürgen Daum,
Juergendaum.com website: http://www.juergendaum.com/news/06_08_2002.htm.
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of History of the
United States of America, Volume 2 (of 9)
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.
Title: History of the United States of America, Volume 2 (of 9)

During the first administration of Thomas Jefferson
Author: Henry Adams
Release date: December 24, 2023 [eBook #72499]
Language: English
Original publication: New York: Charles Scribner's Sons, 1889
Credits: Richard Hulse, Karin Spence and the Online Distributed

Proofreading Team at https://www.pgdp.net (This file was
produced from images generously made available by The
Internet Archive/American Libraries.)
*** START OF THE PROJECT GUTENBERG EBOOK HISTORY OF

THE UNITED STATES OF AMERICA, VOLUME 2 (OF 9) ***
THE FIRST ADMINISTRATION
OF
THOMAS JEFFERSON
1801–1805
HISTORY
OF THE
UNITED STATES OF AMERICA
DURING THE FIRST ADMINISTRATION OF
THOMAS JEFFERSON
By HENRY ADAMS
Vol. II.
NEW YORK
CHARLES SCRIBNER’S SONS
1889
Copyright, 1889,
By Charles Scribner’s Sons.
University Press:
John Wilson and Son, Cambridge.
CONTENTS OF VOL. II.
CHAPTER PAGE
I. Rupture of the Peace of Amiens 1
II. The Louisiana Treaty 25
III. Claim to West Florida 51
IV. Constitutional Difficulties 74
V. The Louisiana Debate 94
VI. Louisiana Legislation 116
VII. Impeachments 135
VIII. Conspiracy 160
IX. The Yazoo Claims 192
X. Trial of Justice Chase 218
XI. Quarrel with Yrujo 245
XII. Pinckney’s Diplomacy 264
XIII. Monroe and Talleyrand 288
XIV. Relations with England 316
XV. Cordiality with England 342
XVI. Anthony Merry 360
XVII. Jefferson’s Enemies 389
XVIII. England and Tripoli 410
Index to Vols. I. and II. 439

THE COAST OF
WEST FLORIDA
AND
LOUISIANA
(From Jeffery’s American Atlas. London, 1800.)
HISTORY OF THE UNITED STATES.
CHAPTER I.
Congress expired; Monroe set sail March 8, 1803; Washington
relapsed into silence; and the President and his Cabinet waited
alone in the empty village, triumphing for the moment over their
difficulties. Although a French prefect was actually in New Orleans,
and the delivery of Louisiana to Bonaparte might from day to day be
expected, not an additional soldier stood on the banks of the
Mississippi, and the States of Kentucky and Tennessee were as
quiet as though their flat-boats still floated down to New Orleans. A
month passed before Madison or Jefferson again moved. Then the
President asked his Cabinet[1] what Monroe should do in case
France, as he expressed it, “refused our rights.” He proposed an
alliance with England, and suggested three inducements which
might be offered to Great Britain: “1. Not to make a separate peace.
2. To let her take Louisiana. 3. Commercial privileges.” The Cabinet
unanimously rejected the second and third concessions, but
Dearborn and Lincoln were alone in opposing the first; and a majority
agreed to instruct Monroe and Livingston, “as soon as they find that
no arrangements can be made with France, to use all possible
procrastination with them, and in the mean time enter into
conferences with the British government, through their ambassador
at Paris, to fix principles of alliance, and leave us in peace till
Congress meets; and prevent war till next spring.”
Madison wrote the instructions. If the French government, he
said,[2] should meditate hostilities against the United States, or force
a war by closing the Mississippi, the two envoys were to invite
England to an alliance, and were to negotiate a treaty stipulating that
neither party should make peace or truce without consent of the
other. Should France deny the right of deposit without disputing the
navigation, the envoys were to make no positive engagement, but
should let Congress decide between immediate war or further
procrastination.
At no time in Talleyrand’s negotiations had the idea of war
against the United States been suggested. Of his intentions in this
respect alone he had given positive assurances.[3] Above all things
both he and the First Consul feared a war with the United States.
They had nothing to gain by it. Madison’s instructions therefore
rested on an idea which had no foundation, and which in face of the
latest news from Europe was not worth considering; yet even if
intended only for use at home, the instructions were startling enough
to warrant Virginians in doubting their authenticity. The late
Administration, British in feeling as it was supposed to be, had never
thought an alliance with England necessary even during actual
hostilities with France, and had not hesitated to risk the chances of
independent action. Had either of Jefferson’s predecessors
instructed American ministers abroad, in case of war with France, to
bind the United States to make no peace without England’s consent,
the consequence would have been an impeachment of the
President, or direct steps by Virginia, Kentucky, and North Carolina,
as in 1798, tending to a dissolution of the Union. Such an alliance,
offensive and defensive, with England contradicted every principle
established by President Washington in power or professed by
Jefferson in opposition. If it was not finesse, it was an act such as
the Republicans of 1798 would have charged as a crime.
While Madison was writing these instructions, he was interrupted
by the Marquis of Casa Yrujo,[4] who came in triumph to say that his
Government had sent out a brigantine especially to tell the President
that the right of deposit would be restored and continued till another
agreement or equivalent place could be fixed upon.[5] Yrujo was
instructed to thank the President for his friendly, prudent, and
moderate conduct during the excitement. He sent to New Orleans
the positive order of King Charles IV. to the Intendant Morales, that
the right of deposit should be immediately restored; the western
people were told that their produce might go down the river as
before, and thus the last vestige of anxiety was removed. In face of
this action by Godoy, and of the war evidently at hand between
France and England, the success of the peace policy was assured.
These events in some degree explained the extraordinary nature of
the new instructions of April, 1803.
Monroe was then already at Paris. In order to make clear the
situation in which he found himself, the sequence of events in
Europe needs to be understood.
Bonaparte’s expedition to Louisiana was to have sailed at the
end of September, 1802.[6] A general of division, three generals of
brigade, five battalions of infantry, two companies of artillery, sixteen
pieces of cannon, and three thousand muskets were to be collected
at Dunkirk for shipment; but as fast as regiments could be named
they were consumed by the fiery furnace of St. Domingo.
Nevertheless, all the orders and arrangements were gradually made.
Victor was to command the forces in Louisiana; Laussat was to be
prefect, charged with the civil administration. Both received elaborate
written instructions; and although Victor could not sail without ships
or troops, Laussat was sent on his way.
These instructions, which were never published, had extreme
value for the decision of disputes which were to perturb American
politics for the next twenty years. Although Victor was forced to wait
in Holland for the expedition he commanded, a copy of his
instructions was given to Laussat, and served to regulate his conduct
as long as he remained in office. Decrès, the Minister of Marine, was
the author of this paper, which unfolded the purpose that had guided
France in recovering, and was to control her in administering, this
vast possession. Nothing could be simpler, clearer, or more
consistent with French policy than this document, which embodied
so large a part of Talleyrand’s political system.
The instructions began, as was natural, by a careful definition of
the new province. After reciting the terms of the retrocession
according to the Third Article of Berthier’s Treaty, Decrès fixed the
boundaries of the territory which Victor, on the part of the French
republic, was to receive from the Marquis of Somoruelos, the
Captain-General of Cuba.[7]
“The extent of Louisiana,” he said, “is well determined on the south
by the Gulf of Mexico. But bounded on the west by the river called Rio
Bravo from its mouth to about the 30° parallel, the line of demarcation
stops after reaching this point, and there seems never to have been
any agreement in regard to this part of the frontier. The farther we go
northward, the more undecided is the boundary. This part of America
contains little more than uninhabited forests or Indian tribes, and the
necessity of fixing a boundary has never yet been felt there. There
also exists none between Louisiana and Canada.”
In this state of things the captain-general would have to relieve
the most remote Spanish garrisons, in order to establish possession;
in other respects he would be guided only by political and military
interests. The western and northern boundary was of less
consequence than the little strip which separated New Orleans from
Mobile; and to this point the instructions specially called Victor’s
attention. Quoting the treaty of 1763 between Spain, Great Britain,
and France, when Florida was to become a British possession,
Decrès fixed its terms as still binding upon all the interested parties.
“‘It is agreed,’” said the seventh article of this treaty, “‘that in future
the boundaries between the States of his Most Christian Majesty and
those of his Britannic Majesty shall be irrevocably fixed by a line
drawn down the middle of the Mississippi River from its source to the
River Iberville, and from there by a line down the middle of that river
and of the lakes Maurepas and Pontchartrain to the sea. New Orleans
and the island on which it stands shall belong to France.’ Such is still
to-day the eastern limit of Louisiana. All to the east and north of this
limit makes part of the United States or of West Florida.”
Nothing could be clearer. Louisiana stretched from the Iberville to
the Rio Bravo; West Florida from the Iberville to the Appalachicola.
The retrocession of Louisiana by Spain to France could restore only
what France had ceded to Spain in 1762. West Florida had nothing
to do with the cession of 1762 or the retrocession of 1800, and being
Spanish by a wholly different title could not even be brought in
question by the First Consul, much as he wanted Baton Rouge,
Mobile, and Pensacola. Victor’s orders were emphatic:—
“There is therefore no obscurity as to our boundary on this side
any more than as to that of our allies; and although Florida belongs to
Spain, Spain’s right of property in this quarter will have as much
interest for the Captain-General of Louisiana as though Florida were a
French possession.”
After thus establishing the boundary, as far as possible, in every
direction, the minister treated at some length of the English claim to
navigation on the Mississippi, and at last reached the general subject
of the relation between Louisiana and the world about it,—the
subject in which Jefferson would have found acute interest:—
“The system of this, as of all our other colonies, should be to
concentrate its commerce in the national commerce; it should have in
particular the aim of establishing its relations with our Antilles, so as to
take the place, in these colonies, of the American commerce for all the
objects whose import and export is permitted to them. The captain-
general should especially abstain from every innovation favorable to
strangers, who should be restricted to such communications as are
absolutely indispensable to the prosperity of Louisiana and to such as
are explicitly determined by the treaties.”
Commercial relations with the Spanish colonies were to be
encouraged and extended as much as possible, while the utmost
caution was to be observed toward the United States:—
“From what has been said of Louisiana and the adjacent States, it
is clear that the republic of France, being master of both banks at the
mouth of the Mississippi, holds the key to its navigation. This
navigation is nevertheless a matter of the highest importance for the
western States of the Federal Government.... This is enough to show
with what jealousy the Federal Government will see us take
possession of Louisiana. Whatever may be the events which this new
part of the continent has to expect, the arrival of the French forces
should be marked there by the expression of sentiments of great
benevolence for these new neighbors.”
Expression of benevolent sentiments was a pleasing duty; but it
was not to interfere with practical measures, both defensive and
offensive:—
“The greatest circumspection will be required in directing the
colonial administration. A little local experience will soon enable you to
discern the sentiments of the western provinces of the Federal
Government. It will be well to maintain sources of intelligence in that
country, whose numerous, warlike, and sober population may present
you a redoubtable enemy. The inhabitants of Kentucky especially
should fix the attention of the captain-general.... He must also fortify
himself against them by alliance with the Indian nations scattered to
the east of the river. The Chibackas, Choctaws, Alabamas, Creeks,
etc., are represented as being entirely devoted to us.... He will not
forget that the French government wishes peace; but that if war takes
place, Louisiana will certainly become the theatre of hostilities.... The
intention of the First Consul is to raise Louisiana to a degree of
strength which will allow him in time of war to abandon it to its own
resources without anxiety; so that enemies may be forced to the
greatest sacrifices merely in attempting to attack it.”
In these instructions not a word could be found which clashed
with Jefferson’s pacific views; and partly for that reason they were
more dangerous to the United States than if they had ordered Victor
to seize American property on the Mississippi and occupy Natchez
with his three thousand men. Victor was instructed, in effect, to
tamper with every adventurer from Pittsburg to Natchez; buy up
every Indian tribe in the Georgia and Northwestern Territory; fortify
every bluff on the western bank from St. Louis to New Orleans; and
in a few years create a series of French settlements which would
realize Madison’s “sound policy” of discouraging the United States
from colonizing the west bank.
Fortified by these instructions, the Citizen Laussat set sail Jan.
12, 1803, and in due time arrived at New Orleans. Victor labored in
Holland to put his ships and supplies in a condition to follow. As
Laussat sailed, another step was taken by the French government.
General Bernadotte, a very distinguished republican officer, brother-
in-law of Joseph Bonaparte, was appointed minister at Washington.
[8] The First Consul had his own reasons for wishing to remove
Bernadotte, as he meant to remove Moreau; and Washington was a
place of indirect banishment for a kinsman whose character was to
be feared. Bernadotte’s instructions[9] were signed by Talleyrand
Jan. 14, 1803, the day after Monroe was confirmed as special envoy
to France by the Senate at Washington, and while Laussat was still
on the French coast. Although Bonaparte had been obliged to
withdraw a part of Victor’s force, he still intended that the expedition
should start at once with two thousand men;[10] and its departure
was to be so timed that Bernadotte should reach Washington as
Victor and his troops reached New Orleans. Their instructions were
on one point identical. News of the closure of the Mississippi by
Morales had reached Paris, and had already caused an official
protest by Livingston, when Talleyrand drew up the instructions to
Bernadotte:—
“Louisiana being soon to pass into our hands, with all the rights
which have belonged to Spain, we can only with pleasure see that a
special circumstance has obliged the Spanish Administration to
declare formally [constater] its right to grant or to refuse at will to the
Americans the privilege of a commercial entrepôt at New Orleans; the
difficulty of maintaining this position will be less for us than that of
establishing it.... Yet in any discussion that may arise on this subject,
and in every discussion you may have to sustain, the First Consul
wishes you to be informed of his most positive and pronounced desire
to live in good understanding with the American government, to
cultivate and to improve for the advantage of American commerce the
relations of friendship which unite the two peoples. No one in Europe
wishes the prosperity of that people more than he. In accrediting you
to its Government he has given it a peculiar mark of his good
disposition; he doubts not that you will make every effort to bind closer
the ties which exist between the two nations. In consequence of the
firm intention which the First Consul has shown on this subject, I must
recommend you to take every care to avoid whatever might alter our
relations with that nation and its Government. The agents of the
French republic in the United States should forbid themselves
whatever might even remotely lead to a rupture. In ordinary
communication, every step should show the benevolent disposition
and mutual friendship which animate the chiefs and all the members
of the two Governments; and when any unforeseen difficulty rises
which may in any degree whatever compromise their good
understanding, the simplest and most effectual means of preventing
all danger is to refer its solution to the inquiry and direct judgment of
the two Governments.”
Talleyrand’s language was more elaborate, but not clearer, than
that which Bonaparte himself used to Victor.[11]
“I have no need to tell you,” the First Consul wrote, “with what
impatience the Government will wait for news from you in order to
settle its ideas in regard to the pretensions of the United States and
their usurpations over the Spaniards. What the Government may think
proper to do must not be judged in advance until you have rendered
an account of the state of things. Every time you perceive that the
United States are raising pretensions, answer that no one has an idea
of this at Paris (que l’on n’a aucune idée de cela à Paris); but that you
have written, and that you are expecting orders.”
These were the ideas held by the government of France at the
moment when Jefferson nominated Monroe as a special envoy to
buy New Orleans and West Florida. Jefferson’s hopes of his success
were small; and Livingston, although on the spot and eager to try the
experiment, could only write:[12] “Do not absolutely despair.”
Whatever chance existed of obtaining New Orleans seemed to lie in
the possibility that Addington’s peaceful administration in England
might be driven into some act contrary to its vital interests; and even
this chance was worth little, for so long as Bonaparte wanted peace,
he could always keep it. England was thoroughly weary of war; and
proved it by patiently looking on while Bonaparte, during the year,
committed one arbitrary act after another, which at any previous time
would have been followed by an instant withdrawal of the British
minister from Paris.
On the other hand, the world could see that Bonaparte was
already tired of peace; his rôle of beneficent shopkeeper disgusted
him, and a new war in Europe was only a question of months. In
such a case the blow might fall on the east bank of the Rhine, on
Spain, or on England. Yet Bonaparte was in any case bound to keep
Louisiana, or return it to Spain. Florida was not his to sell. The
chance that Jefferson could buy either of these countries, even in
case of a European war, seemed so small as hardly to be worth
considering; but it existed, because Bonaparte was not a man like
other men, and his action could never be calculated in advance.
The news that Leclerc was dead, that his army was annihilated,
St. Domingo ruined, and the negroes more than ever beyond control,
reached Paris and was printed in the “Moniteur” Jan. 7, 1803, in the
same active week when Bernadette, Laussat, and Victor were
ordered from France to America, and Monroe was ordered from
America to France. Of all the events of the time, Leclerc’s death was
the most decisive. The colonial system of France centred in St.
Domingo. Without that island the system had hands, feet, and even
a head, but no body. Of what use was Louisiana, when France had
clearly lost the main colony which Louisiana was meant to feed and
fortify? The new ruler of France was not unused to failure. More than
once he had suddenly given up his dearest plans and deserted his
oldest companions when their success was hopeless. He had
abandoned Paoli and Corsica with as little compunction as afterward
he abandoned the army and the officers whom he led to Egypt.
Obstinate in pursuing any object which led to his own advancement,
he was quick to see the moment when pursuit became useless; and
the difficulties that rose in his path toward colonial empire were quite
as great as those which had driven him to abandon Corsica and
Egypt. Not only had the island of St. Domingo been ruined by the
war, its plantations destroyed, its labor paralyzed, and its population
reduced to barbarism, so that the task of restoring its commercial
value had become extremely difficult; but other and greater
objections existed to a renewal of the struggle. The army dreaded
service in St. Domingo, where certain death awaited every soldier;
the expense was frightful; a year of war had consumed fifty thousand
men and money in vast amounts, with no other result than to prove
that at least as many men and as much money would be still needed
before any return could be expected for so lavish an expenditure. In
Europe war could be made to support war; in St. Domingo peace
alone could but slowly repair some part of this frightful waste.
Leclerc was succeeded at St. Domingo by General Rochambeau,
a son of the Comte de Rochambeau, who twenty years before had
commanded the French corps which enabled Washington to capture
Cornwallis at Yorktown. A brave officer, but known to be little fit for
administration, Rochambeau was incompetent for the task that fell
on him. Leclerc had warned the Government that in case of his own
retirement he had no officer fit to replace him,—least of all
Rochambeau, who was next in rank. Rochambeau wrote to inform
the First Consul that thirty-five thousand men must be sent to save
the island.[13] Without a new commander-in-chief of the highest
ability, a new army was useless; and meanwhile Rochambeau was
certain to waste the few thousand acclimated soldiers who should
form its nucleus.
The First Consul found himself in a difficult and even dangerous
situation. Probably the colonial scheme had never suited his tastes,

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2. Financial statements are prepared using generally accepted accounting principles

• Relevant: the information should be directly related to the firm’s financial

Revenue − Expenses = Net Income

Financial accounting is responsible for generating information used primarily by outside

3. The generally accepted accounting principles (GAAPs) developed by the Financial

authorities expect that it will happen. A recent report by PricewaterhouseCoopers

• The focus on meeting annual budget numbers encourages an emphasis on short-term

According to the BB movement traditional budgeting:

BUSPROG: Reflective Thinking

Sources: “Budget Process,” Online Success Center website:

Title: History of the United States of America, Volume 2 (of 9)

Author: Henry Adams

Release date: December 24, 2023 [eBook #72499]

Original publication: New York: Charles Scribner's Sons, 1889

Credits: Richard Hulse, Karin Spence and the Online Distributed

*** START OF THE PROJECT GUTENBERG EBOOK HISTORY OF

UNITED STATES OF AMERICA

DURING THE FIRST ADMINISTRATION OF

Index to Vols. I. and II. 439

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