ACC 305 Week 2 Quiz Assignments: E4-16, E4-19, E4-22, E5-3, E5-10, Integrating Case 5-23, Judgment Case 4-9. Judgment Case 4-3, Judgment Case 5-2
E4-16 Statement of cash flows preparation
The following summary transactions occurred during 2011 for Bluebonnet Bakers:
Cash received from: Customers $380,000 interest on note receivable 6,000 Principal on note receivable 50,000 sale of investments 30,000 Proceeds from note payable 5,000 Purchase of equipment 85,000 salaries to employees 90,000 Principal on note payable 25,000 payment of dividends to shareholders
The balance of cash and cash equivalents at the beginning of 2011 was $17,000.
Prepare a statement of cash flows for 2011 for Bluebonnet Bakers. Use the direct method for reporting operating activities.
E 4-19 Statement of cash flows directly from transactions
E 4-19 Wainwright Corporation
The following transactions occurred during March 2011 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. [These are the same transactions analyzed in Exercise 2-1, when we determined their effect on elements of the accounting equation.]
1. Issued 30,000 shares of capital stock in exchange for $300,000 in cash.
2. Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable was signed for the balance owed.
3. Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.
4. Credit sales for the month totaled $120,000. The cost of the goods sold was $70,000.
5. Paid $5,000 in rent on the warehouse building for the month of March.
6. Paid $6,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2011.
7. Paid $70,000 on account for the merchandise purchased in 3.
8. Collected $55,000 from customers on account.
9. Recorded depreciation expense of $1,000 for the month on the equipment.
1. Analyze each transaction and classify each as a financing, investing and/or operating activity (a transaction can represent more than one type of activity). In doing so, also indicate the cash effect of each, if any. If there is no cash effect, simply place a check mark (√) in the appropriate column(s).
Finding Investing operating
2. Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was $40,000.
E 4-22 Statement of cash flows; indirect method
E 4-22 Tiger Enterprises.
Presented below is the 2011 income statement and comparative balance sheet information for Tiger Enterprises.
TIGER ENTERPRISES Income Statement For the Year Ended December 31, 2011($ in thousands) Sales revenue $7,000 Operating expenses: Cost of goods sold $3,360 Depreciation 240 insurance 100 Administrative and other 1,800 Total operating expenses 5,500 Income before income taxes 1,500 income tax expense 600 Net income $900
Balance sheet information ($ in thousands) Dec. 31,2011 Dec. 31, 2010 Assets: Cash $300 $200 Accounts receivable 750 830 Inventory 640 600 Prepaid insurance 50 20 Plant and equipment 2,100 1,800 Less Accumulated depreciation (840) (600) Total assets $3,000 $2,850 Liabilities and shareholder’s Equity: Accounts payable $300 $360 Accounts payable 300 400 Income taxes payable 200 150 Notes payable (due 12/31/2012 800 600 Common stock 900 800 retained earnings 500 540 Total liabilities and share holders equity $3000 $2850
Prepare Tiger’s statement of cash flows, using the indirect method to present cash flows from operating activities. (Hint: You will have to calculate dividend payments.)
E 5-3 Installment sales method; journal entries
[This is a variation of Exercise 5-2 focusing on journal entries.]
Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2011 and 2012:
Prepare summary journal entries for 2011 and 2012 to account for the installment sales and cash collections. The company uses the perpetual inventory system.
E5-10 Sanderson Construction
On June 15, 2011, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $220 million. The expected completion date is April 1 of 2013, just in time for the 2013 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
2011 2012 2013 Costs incurred during the year $40 $80 $50 Estimated costs to complete as of 12/31
1. Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage- of-completion method.
2. How much revenue will Sanderson report in its 2011 and 2012 income statements related to this contract using the percentage-of-completion method?
3. Determine the amount of gross profit or loss to be recognized in each of the three years using the completed contract method.
4. Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three
years under IFRS, assuming that using the percentage-of-completion method is not appropriate.
5. Suppose the estimated costs to complete at the end of 2012 are $80 million instead of $60 million. Determine the amount of gross profit or loss to be recognized in 2012 using the percentage-of-completion method.
Integrating Case 5-23. You are a new staff accountant with a large regional CPA firm, participating in your first audit.
You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by the client. Since ratios reflect the relationships among various account balances, if it is assumed that prior relation- ships still hold, prior years’ ratios can be used to estimate what current balances should approximate. However, you never actually performed this kind of analysis until now. The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown below and tells you these reflect the relationships maintained by Covington Pike in recent years.
Profit margin on sales = 5%
Return on assets = 7.5%
Gross profit margin = 40%
Inventory turnover ratio = 6 times
Receivables turnover ratio = 25
Acid-test ratio = .9
Current ratio = 2 to 1
Return on shareholders’ equity = 10%
Debt to equity ratio = 1/3
Times interest earned ratio = 12 times
Jotted in the margins are the following notes:
● Net income $15,000
● Only one short-term note ($5,000); all other current liabilities are trade accounts
● Property, plant, and equipment are the only noncurrent assets
● Bonds payable are the only noncurrent liabilities
● The effective interest rate on short-term notes and bonds is 8%
● No investment securities
● Cash balance totals $15,000
You are requested to approximate the current year’s balances in the form of a balance sheet and income statement, to the extent the information allows. Accompany those financial statements with the calculations you use to estimate each amount reported.
Judgment Case 4-9 on page 227
Judgment Case 4-9 Income statement presentation
Each of the following situations occurred during 2011 for one of your audit clients:
1. The write-off of inventory due to obsolescence
2. Discovery that depreciation expenses were omitted by accident from 2010’s income statement.
3. The useful lives of all machinery were changed from eight to five years.
4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method.
5. Ten million dollars face value of bonds payable were repurchased (paid off) prior to maturity resulting in a material loss of $500,000. The company considers the event unusual and infrequent.
6. Restructuring costs were incurred.
7. The Stridewell Company, a manufacturer of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered components of the entity.
8. The inventory costing method was changed from FIFO to average cost.
1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):
a. As an extraordinary item
b. As an unusual or infrequent gain or loss.
c. As a prior period adjustment
d. As a change in accounting principle
e. As a discontinued operation.
f. As a change in accounting estimate.
g. As a change in accounting estimate achieved by a change in accounting principle.
2. Indicate whether each situation would be included in the income statement in continuing operations (CO) or below continuing operations (BC), or if it would appear as an adjustment to retained earnings (RE). Use the format shown below to answer requirements 1 and 2
Situation Treatment(a-g) Financial Statement Presentation
(CO, BC, or RE)
Judgment Case 4-3 Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results.
Is earnings management always intended to produce higher income? Explain.
Judgment Case 5-2 (page 291)
Judgment Case 5-2 Revenue earned by a business enterprise is recognized for accounting purposes at different times,
Judgment Case 5-2Revenue recognition
Revenue earned by a business enterprise is recognized for accounting purposes at different times, according to the circumstances. In some situations revenue is recognized approximately as it is earned in the economic sense. In other situations revenue is recognized at point of delivery.
1. Explain and justify why revenue often is recognized as earned at point of delivery.
2. Explain in what situations it would be useful to recognize revenue as the productive activity takes place
3. At what times, other than those included in (1) and (2) above, may it be appropriate to recognize revenue?