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Using Financial Accounting Information The Alternative to Debits and Credits 7th Edition Gary A. Porter, Curtis L. Norton - Solutions
Allowance Method for Accounting for Bad Debts At the beginning of 2010, Miyazaki Company’s accounts receivable balance was $105,000, and the balance in Allowance for Doubtful Accounts was $1,950. Miyazaki’s sales in 2010 were $787,500, 80% of which were on credit. Collections on account during
Using an Aging Schedule to Account for Bad Debts Rough Stuff is a distributor of large rocks. It sells on credit to commercial landscaping companies and extends terms that require customers to pay in 60 days. For accounts that are not overdue, Rough Stuff has found that there is a 90% probability
Accounts Receivable Turnover for Best Buy and Radio Shack The following information was summarized from a recent annual report of Best Buy Co. Inc.: (In millions) Receivables: February 28, 2009 ....................$ 1,868 March 1, 2008 .......................549 Revenue for the year ended:
Credit Card Sales A local fast-food store is considering accepting major credit cards in its outlets. Current annual sales are $800,000 per outlet. The company can purchase the equipment needed to handle credit cards and have an additional phone line installed in each outlet for approximately $800
Investments in Bonds and Stock Vermont Corp. enters into the following transactions during 2010: July 1: Paid $10,000 to acquire on the open market $10,000 face value of Maine bonds. The bonds have a stated annual interest rate of 8% with interest paid semiannually on June 30 and December 31. The
Investments in Stock Trendy Supercenter occasionally finds itself with excess cash to invest and consequently entered into the following transactions during 2010:Jan. 15: Purchased 100 shares of BMI common stock at $130 per share, plus $250 in commissions.May 23: Received dividends of $1 per share
Effects of Changes in Receivable Balances on Statement of Cash Flows St. Charles Antique Market reported a net loss of $6,000 for the year ended December 31, 2010. The following items were included on St. Charles Antique Market€™s balance sheets at December 31, 2010 and 2009:St. Charles
Accounts and Notes Receivable Tweety Inc. sold merchandise for $6,000 to P.D. Cat on July 31, 2010, with payment due in 30 days. Subsequent to this, Cat experienced cash flow problems and was unable to pay its debt. On December 24, 2010, Tweety stopped trying to collect the outstanding receivable
Reading Apple's Balance Sheet and Notes to the Statements Following is information available in Apple Computer's 2008 annual report in Note 2 to the financial statements: The following table summarizes the activity in the allowance for doubtful accounts for the three fiscal years ended September
Reading Apple Computer's Statement of Cash Flows The following items appeared in the Investing Activities section of Apple Computer's 2008 statement of cash flows. (All amounts are in millions of dollars.)Required1. What amount did Apple spend in 2008 to purchase short-term investments? How does
Comparing Two Companies in the Same Industry: Kellogg’s and General Mills Refer to the financial statement information of Kellogg’s and General Mills reproduced at the end of this book.Required1. Calculate the accounts receivable turnover ratios for both companies for the most recent year.2.
Oak and Maple both provide computer consulting services to their clients. The following are the current assets for each company at the end of the year. (All amounts are in millions of dollars.)RequiredAs a loan officer for First National Bank of Verona Heights, assume that both companies have come
Notes Receivable Patterson Company is a large diversified business with a unit that sells commercial real estate. As a company, Patterson has been profitable in recent years with the exception of the real estate business, where economic conditions have resulted in weak sales. The vice president of
How would you evaluate the following statement: The cash flows to a company are irrelevant to an investor; all the investor cares about is the potential for receiving dividends on the investment?
A key characteristic of useful financial information is understandability. How does this qualitative characteristic relate to the background of the user of the information?
What does relevance mean with regard to the use of accounting information?
What is the qualitative characteristic of comparability? Why is it important in preparing financial statements?
What is the difference between comparability and consistency as they relate to the use of accounting information?
How does the concept of materiality relate to the size of a company?
Does the IASB recognize a comparable qualitative characteristic to the concept of conservatism in the United States? If so, what is that concept?
How does the concept of the operating cycle relate to the definition of a current asset?
How would you evaluate the following statement: A note payable with an original maturity of five years will be classified on the balance sheet as a long-term liability until it matures?
How do the two basic forms of owners’ equity items for a corporation—capital stock and retained earnings—differ?
What are the limitations of working capital as a measure of the liquidity of a business as opposed to the current ratio?
What is meant by a company’s capital structure?
What is the major weakness of the single-step form for the income statement?
How does a statement of retained earnings act as a link between an income statement and a balance sheet?
In auditing the financial statements of a company, does the auditor certify that the statements are totally accurate without errors of any size or variety? Explain.
What is the first note in the annual report of all publicly held companies? What is its purpose?
Objectives of Financial Reporting State the primary objective of financial reporting and the three secondary objectives.
Qualitative Characteristics of Accounting Information List four qualities that make accounting information useful.
Classification of Assets Indicate whether each of the following assets is a current asset (CA) or a noncurrent asset (NCA). ________ Accounts receivable________ Land ________ Inventories ________ Cash ________ Furniture and fixtures ________ Office supplies ________ Buildings
Working Capital and Current Ratio A company reported current assets of $80,000 and current liabilities of $60,000. Compute the amount of working capital and the current ratio.
Multiple versus Single-Step Income Statement A retailer is considering whether to prepare a multiple- or single-step income statement. Provide three lines that appear on a multiple-step statement that do not appear on a single-step statement.
A company reported sales of $100,000; cost of goods sold of $60,000; selling, general, and administrative expenses of $15,000; and income tax expense of $10,000. Compute the company’s profit margin.
A company started the year with retained earnings of $200,000. During the year, it reported net income of $80,000 and paid dividends of $50,000. Compute the company’s ending retained earnings.
A company borrowed $100,000 from its bank and the next day used $80,000 of the cash from the loan to buy a new piece of equipment for its plant. Explain how each of those activities is reported on a statement of cash flows.
Elements of an Annual Report List three examples of the types of information that normally appear in a company’s annual report.
Fill in the blank with the qualitative characteristic for each of the following descriptions. _________________1. Information that users can depend on to represent the events that it purports to represent _________________2. Information that has the capacity to make a difference in a decision
Two Wheeler Cycle Shop buys all of its bikes from one manufacturer, Baxter Bikes. On average, bikes are on hand for 45 days before Two Wheeler sells them. The company sells some bikes for cash but also extends credit to its customers for 30 days. Required1. On average, what is the minimum length of
Classification of Financial Statement Items Carnival Corporation & plc is one of the largest cruise companies in the world with such well-known brands as Carnival Cruise Lines, Holland America Line, and Princess Cruises. Classify each of the following items found on the company’s November 30,
Baldwin Corp. reported the following current accounts at the end of two recent years:Required1. Compute Baldwin€™s current ratio at the end of each of the two years.2. How has Baldwin€™s liquidity changed at the end of 2010 compared to the end of 2009?3. Comment on the relative
Classification of Assets and Liabilities Indicate the appropriate classification of each of the following as a current asset (CA), noncurrent asset (NCA), current liability (CL), or long-term liability (LTL). ________ 1. Inventory ________ 2. Accounts payable ________ 3. Cash________ 4. Patents
Selling Expenses and General and Administrative Expenses Operating expenses are subdivided between selling expenses and general and administrative expenses when a multiple-step income statement is prepared. Identify each of the following items as a selling expense (S) or general and administrative
For each of the following cases, fill in the blank with the appropriate dollar amount.
The 2010 income statement of Holly Enterprises shows operating revenues of $134,800, selling expenses of $38,310, general and administrative expenses of $36,990, interest expense of $580, and income tax expense of $13,920. Holly’s stockholders’ equity was $280,000 at the beginning of the year
Landon Corporation was organized on January 2, 2008, with the investment of $100,000 by each of its two stockholders. Net income for its first year of business was $85,200. Net income increased during 2009 to $125,320 and to $145,480 during 2010. Landon paid $20,000 in dividends to each of the two
Components of the Statement of Cash Flows Identify each of the following items as operating (O), investing (I), financing (F), or not on the statement of cash flows (N). ________ 1. Paid for supplies ________ 2. Collected cash from customers ________ 3. Purchased land (held for resale) ________
Most financial reports contain the following list of basic elements. For each element, identify the person(s) who prepared the element and describe the information a user would expect to find in each element. Some information is verifiable; other information is subjectively chosen by management.
Financial Statement Classification Potential stockholders and lenders are interested in a company’s financial statements. Identify the statement—balance sheet (BS), income statement (IS), or retained earnings statement (RE)—on which each of the following items would appear. ________ 1.
Some headings and/or items are used on either the single- or multiple-step income statement. Some are used on both. Identify each of the following items as single-step (S), multiple-step (M), both formats (B), or not used on either income statement ________ 1. Sales________ 2. Cost of goods
Multiple-Step Income Statement Gaynor Corporation’s partial income statement is as follows: Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,200,000Cost of sales . . . . . . . . . . . . . . . . . . . . . . 450,000Selling expenses . . . . . . . . . . . . . . . . . . .
Joseph Knapp, a newly hired accountant wanting to impress his boss, stayed late one night to analyze the office supplies expense. He determined the cost by month for the previous 12 months of each of the following: computer paper, copy paper, fax paper, pencils and pens, notepads, postage,
The following costs are incurred by a retailer: 1. Display fixtures in a retail store2. Advertising3. Merchandise for sale4. Incorporation (i.e., legal costs, stock issue costs)5. Cost of a franchise 6. Office supplies 7. Wages and salaries8. Computer software 9. Computer hardware RequiredFor each
The following balance sheet items, listed in alphabetical order, are available from the records of Ruth Corporation at December 31, 2010:Required 1. Prepare in good form a classified balance sheet as of December 31, 2010.2. Compute Ruth€™s current ratio.3. On the basis of your answer to
The following items, in alphabetical order, are available from the records of Walker Corporation as of December 31, 2010 and 2009:Required1. Calculate the following as of December 31, 2010, and December 31, 2009:a. Working capitalb. Current ratio2. On the basis of your answers to (1), comment on
The balance sheet of Stevenson Inc. includes the following items:Required1. Determine the current ratio and working capital.2. Beyond the information provided in your answers to (1), what does the composition of the current assets tell you about Stevenson€™s liquidity?3. What other
The following income statement items, arranged in alphabetical order, are taken from the records of Shaw Corporation for the year ended December 31, 2010:Required1. Prepare a single-step income statement for the year ended December 31, 2010.2. What weaknesses do you see in this form for the
Refer to the list of income statement items in Problem 2-6. Assume that Shaw Corporation classifies all operating expenses into two categories: (1) Selling and (2) General and administrative. Required1. Prepare a multiple-step income statement for the year ended December 31, 2010.2. What advantages
Colorado Corporation was organized on January 1, 2010, with the investment of $250,000 in cash by its stockholders. The company immediately purchased an office building for $300,000, paying $210,000 in cash and signing a three-year promissory note for the balance. Colorado signed a five-year,
Comparative income statements for Grammar Inc. are as follows:RequiredThe president and management believe that the company performed better in 2010 than it did in 2009. Write the president€™s letter to be included in the 2010 annual report. Explain why the company is financially sound
The current items, listed in alphabetical order, are taken from the consolidated balance sheets of Coca-Cola as of December 31, 2008, and PepsiCo as of December 27, 2008. (All amounts are in millions of dollars.)Coca-ColaAccounts payable and accrued expenses .........$6,205Accrued income taxes
The following income statements were provided by Gleeson Company, a retailer:Required1. Identify each income statement as either single- or multiple-step format.2. Convert the 2009 income statement to the same format as the 2010 incomestatement.
Franklin Co., a specialty retailer, has a history of paying quarterly dividends of $0.50 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2011, to pay a dividend if one is declared by the board of directors. The following additional
Jane Erving, a newly hired accountant wanting to impress her boss, stayed late one night to analyze the long-distance calls by area code and time of day placed. She determined the monthly cost for the previous 12 months by hour and area code called. Required1. What did Jane think her boss would
The following costs are incurred by a retailer: 1. Point of sale systems in a retail store2. An ad in the yellow pages3. An inventory-control computer software system4. Shipping merchandise for resale to chain outlets RequiredFor each cost, explain whether all of the cost or only a portion of the
What are several examples of operating assets? Why are operating assets essential to a company’s long-term future?
The following balance sheet items, listed in alphabetical order, are available from the records of Singer Company at December 31, 2010:Required1. Prepare a classified balance sheet as of December 31, 2010.2. Compute Singer€™s current ratio.3. On the basis of your answer to (2), does
The following items, in alphabetical order, are available from the records of Quinn Corporation as of December 31, 2010 and 2009:Required1. Calculate the following as of December 31, 2010, and December 31, 2009:a. Working capitalb. Current ratio2. On the basis of your answers to (1), comment on the
The balance sheet of Kapinski Inc. includes the following items:Required1. Determine the current ratio and working capital.2. Kapinski appears to have a positive current ratio and a large net working capital. Why would it have trouble paying bills as they come due?3. Suggest three things that
The following income statement items, arranged in alphabetical order, are taken from the records of Corbin Enterprises for the year ended December 31, 2010:Required1. Prepare a single-step income statement for the year ended December 31, 2010.2. What weaknesses do you see in this form for the
Refer to the list of income statement items in Problem 2-6A. Assume that Corbin Enterprises classifies all operating expenses into two categories: (1) Selling and (2) General and administrative. Required1. Prepare a multiple-step income statement for the year ended December 31, 2010.2. What
Wisconsin Corporation was organized on January 1, 2010, with the investment of $400,000 in cash by its stockholders. The company immediately purchased a manufacturing facility for $300,000, paying $150,000 in cash and signing a five-year promissory note for the balance. Wisconsin signed another
Comparative income statements for Thesaurus Inc. are as follows:RequiredThe president and management believe that the company performed better in 2010 than it did in 2009. Write the president€™s letter to be included in the 2010 annual report. Explain why the company is financially sound
What is the meaning of the term acquisition cost of operating assets? Give some examples of costs that should be included in the acquisition cost.
When assets are purchased as a group, how should the acquisition cost of the individual assets be determined?
Why is it important to account separately for the cost of land and building even when the two assets are purchased together?
Under what circumstances should interest be capitalized as part of the cost of an asset?
What factors may contribute to the decline in usefulness of operating assets? Should the choice of depreciation method be related to these factors? Must a company choose just one method of depreciation for all assets?
Why do most companies use the straight-line depreciation method?
How should the residual value of an operating asset be treated when the straight-line method is used? How should it be treated when the double-declining-balance method is used?
Why do many companies use one method to calculate depreciation for the income statement developed for stockholders and another method for income tax purposes?
What should a company do if it finds that the original estimate of the life of an asset or the residual value of the asset must be changed?
The following current items, listed in alphabetical order, are taken from the consolidated balance sheets of Starwood Hotels & Resorts Worldwide, Inc. as of December 31, 2008, and Marriott International, Inc. as of January 2, 2009. (All amounts are in millions of dollars.) Any assets or liabilities
Define the terms capital expenditures and revenue expenditures. What determines whether an item is a capital or revenue expenditure?
The following income statements were provided by Chisholm Company, a wholesale food distributor:Required1. Identify each income statement as either single- or multiple-step format.2. Restate each item in the income statements as a percentage of sales. Why did net income remain unchanged when sales
How is the gain or loss on the sale of an operating asset calculated? Where would the Gain on Sale of Asset account appear on the financial statements?
Give several examples of intangible assets. In what balance sheet category should intangible assets appear?
Roosevelt Inc., a consulting service, has a history of paying annual dividends of $1 per share. Management is trying to determine whether the company will have adequate cash on December 31, 2011, to pay a dividend if one is declared by the board of directors. The following additional information is
Define the term goodwill. Give an example of a transaction that would result in the recording of goodwill on the balance sheet.
Kellogg’s Refer to the financial information for General Mills and Kellogg’s reproduced at the back of the book for the information needed to answer the following questions. Required1. Compute each company’s working capital at the end of the two most recent years. Also, for each company,
Do you agree with the FASB’s ruling that all research and development costs should be treated as an expense on the income statement? Explain.
Refer to General Mills’s balance sheet reproduced at the back of the book to answer the following questions. Required1. Which is the largest of General Mills’s current assets on May 31, 2009? What percentage of total current assets does it represent? Explain what this asset represents and why
Do you agree with some accountants who argue that intangible assets have an indefinite life and therefore should not be subject to amortization? Explain.
Charles, a financial consultant, has been self-employed for two years. His list of clients has grown, and he is earning a reputation as a shrewd investor. Charles rents a small office, uses the pool secretarial services, and has purchased a car that he is depreciating over three years. The
When an intangible asset is amortized, should the asset’s amortization occur over its legal life or its useful life? Give an example in which the legal life exceeds the useful life.
As an investor, you are considering purchasing stock in a chain of theaters. The annual reports of several companies are available for comparison. RequiredPrepare an outline of the steps you would follow to make your comparison. Start by listing the first section that you would read in the
Suppose that an intangible asset is being amortized over a ten-year time period but a competitor has just introduced a new product that will have a serious negative impact on the asset’s value. Should the company continue to amortize the intangible asset over the ten-year life?
Roberto is the plant superintendent of a small manufacturing company that is owned by a large corporation. The corporation has a policy that any expenditure over $1,000 must be approved by the chief financial officer in the corporate headquarters. The approval process takes a minimum of three
Property, Plant, and Equipment Classification Which of the following would be in the Property, Plant, and Equipment balance sheet category? Land Buildings Accumulated depreciation Patent Leasehold improvements Construction in process
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