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business
principles financial accounting
Financial Accounting 6th Edition Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso - Solutions
18. For each of the following items before adjustment, indi¬cate the type of adjusting entry (prepaid expense, unearned revenue, accrued revenue, and accrued expense)that is needed to correct the misstatement. If an item could result in more than one type of adjusting entry, indi¬cate each of the
17. On January 9, a company pays $5,000 for salaries, of which$2,000 was reported as Salaries Payable on December 31.Give the entry to record the payment.
16. A company makes an accrued revenue adjusting entry for$900 and an accrued expense adjusting entry for $700.How much was net income understated prior to these en¬tries? Explain.
15. A company fails to recognize an expense incurred but not paid. Indicate which of the following accounts is debited and which is credited in the adjusting entry: (a) asset, (b)liability, (c) revenue, or (d) expense.
14. A company fails to recognize revenue earned but not yet received. Which of the following accounts are involved in the adjusting entry: (a) asset, (b) liability, (c) revenue, or(d) expense? For the accounts selected, indicate whether they would be debited or credited in the entry.
13. What is the debit/credit effect of an unearned revenue adjusting entry?
12. Shinn Company purchased equipment for $18,000. By the current balance sheet date, $6,000 had been depreciated.Indicate the balance sheet presentation of the data.
11. Explain the differences between depreciation expense and accumulated depreciation.
10. “Depreciation is a valuation process that results in the reporting of the fair market value of the asset.” Do you agree? Explain.
9. What is the debit/credit effect of a prepaid expense ad¬justing entry?
8. Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category.
7. Why may a trial balance not contain up-to-date and com¬plete financial information?
6. “Adjusting entries are required by the cost principle of accounting.” Do you agree? Explain.
5. In completing the engagement in question 3, Marsh pays no costs in March, $2,000 in April, and $2,500 in May (in¬curred in April). How much expense should the firm deduct from revenues in the month when it recognizes the revenue? Why?
4. Why do accrual-basis financial statements provide more useful information than cash-basis statements?
3. Rick Marsh, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in May. If Marsh’s law firm prepares monthly financial statements, when should it recognize revenue from this engagement? Why?
2. State two generally accepted accounting principles that relate to adjusting the accounts.
1. (a) How does the time period assumption affect an accountant’s analysis of business transactions?(b) Explain the terms fiscal year, calendar year, and interim periods.
11. The trial balance shows Supplies $0 and Supplies Expense (SO$1,500. If $800 of supplies are on hand at the end of the period, the adjusting entry is:a. Debit Supplies $800 and credit Supplies Expense $800.b. Debit Supplies Expense $800 and credit Supplies $800.c. Debit Supplies $700 and credit
10. Which of the following statements is incorrect concerning (SO the adjusted trial balance?a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.b. The adjusted trial balance provides the primary
9. Kathy Siska earned a salary of $400 for the last week of (SO September. She will be paid on October 1. The adjusting entry for Kathy’s employer at September 30 is:a. No entry is required.b. Salaries Expense Salaries Payablec. Salaries Expense Cashd. Salaries Payable Cash 400 400 400 400 400 400
8. Adjustments for accrued revenues:a. have a liabilities and revenues account relationship.b. have an assets and revenues account relationship.c. decrease assets and revenues.d. decrease liabilities and increase revenues.(SO(SO
7. Adjustments for unearned revenues:a. decrease liabilities and increase revenues.b. have an assets and revenues account relationship.c. increase assets and increase revenues.d. decrease revenues and decrease assets.
5. Each of the following is a major type (or category) of adjusting entries except:a. prepaid expenses.b. accrued revenues.c. accrued expenses.d. earned revenues.The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting
4. Adjusting entries are made to ensure that:a. expenses are recognized in the period in which they are incurred.b. revenues are recorded in the period in which they are earned.c. balance sheet and income statement accounts have correct balances at the end of an accounting period.d. all of the
3. One of the following statements about the accrual basis of accounting is false. That statement is:a. Events that change a company’s financial statements are recorded in the periods in which the events occur.b. Revenue is recognized in the period in which it is earned.c. This basis is in accord
2. The principle or assumption dictating that efforts (expenses)be matched with accomplishments (revenues) is the:a. matching principle.b. cost assumption.c. periodicity principle.d. revenue recognition principle.
1. The time period assumption states that:a. revenue should be recognized in the accounting period in which it is earned.b. expenses should be matched with revenues.c. the economic life of a business can be divided into arti¬ficial time periods.d. the fiscal year should correspond with the
2. How do companies prepare an adjusted trial balance?
1. What is the purpose of an adjusted trial balance?
2. If an accrued expense adjusting entry is not made, what is the effect on liabilities, stockholders’ equity, expenses, and net income?
1. If an accrued revenue adjusting entry is not made, what is the effect on assets, stockholders’ equity, revenues, and net income?
4. Using PepsiCo’s Consolidated Statement of Income, what was the amount of depreciation expense for 2005 and 2004? (See Note 4 to the financial state¬ments.) The answer to this question appears on page 140.
3. What is the effect on liabilities, stockholders’ equity, revenues, and net income if a company does not make an unearned revenue adjusting entry?
2. What is the effect on assets, stockholders’ equity, expenses, and net income if a company does not make a prepaid expense adjusting entry?
1. What are the four types of adjusting entries?
7 Describe the nature and purpose of an adjusted trial balance.
6 Prepare adjusting entries for accruals.
5 Prepare adjusting entries for deferrals.
4 Identify the major types of adjusting entries.
3 Explain the reasons for adjusting entries.
2 Explain the accrual basis of accounting.
1 Explain the time period assumption.
24. Identify and explain factors that affect quality of earnings.
23. Indicate which of the following items would be reported as an extraordinary item in Mordica Corporation’s in¬come statement.(a) Loss from damages caused by volcano eruption.(b) Loss from sale of short-term investments.(c) Loss attributable to a labor strike.(d) Loss caused when manufacture
22. STL Inc. reported 2007 earnings per share of $3.20 and had no extraordinary items. In 2008, EPS on income be¬fore extraordinary items was $2.99, and EPS on net in¬come was $3.49. Is this a favorable trend?
21. You are considering investing in Shawnee Transportation.The company reports 2008 earnings per share of $6.50 on income before extraordinary items and $4.75 on net in¬come. Which EPS figure would you consider more rele¬vant to your investment decision? Why?
20. Why is it important to report discontinued operations sep¬arately from income from continuing operations?
19. Hillman Inc. has net income of $160,000, weighted average shares of common stock outstanding of 50,000, and pre¬ferred dividends for the period of $40,000. What is Hillman’s earnings per share of common stock? Kate Hillman, the president of Hillman Inc., believes the computed EPS of the
18. (a) What is meant by trading on the equity?(b) How would you determine the profitability of trading on the equity?
17. Why must preferred stock dividends be subtracted from net income in computing earnings per share?
16. Which two ratios do you think should be of greatest inter¬est to:(a) A pension fund considering the purchase of 20-year bonds?(b) A bank contemplating a short-term loan?(c) A common stockholder?
15. The return on assets for Tresh Corporation is 7.6%.During the same year Tresh’s return on common stock¬holders' equity is 12.8%. What is the explanation for the difference in the two rates?
14. Holding all other factors constant, indicate whether each of the following changes generally signals good or bad news about a company.(a) Increase in profit margin.(b) Decrease in inventory turnover.(c) Increase in the current ratio.(d) Decrease in earnings per share.(e) Increase in
13. What is the formula for computing the payout ratio?Would you expect this ratio to be high or low for a growth company?
12. The price-earnings ratio of General Motors (automobile builder) was 8, and the price-earnings ratio of Microsoft(computer software) was 38. Which company did the stock market favor? Explain.
(d) How able is a company to meet interest charges as they fall due?
(c) How many dollars of net income were earned for each dollar invested by the owners?
(b) How near to sale is the inventory on hand?
(a) How efficient is a company in using its assets to pro¬duce sales?
11. Which ratios should be used to help answer the following questions?
10. Donte Company, a retail store, has a receivables turnover of 4.5 times. The industry average is 12.5 times. Does Donte have a collection problem with its receivables?
9. What is the difference between the current ratio and the acid-test ratio?
8. What do the following classes of ratios measure? (a)Liquidity ratios, (b) Profitability ratios, (c) Solvency ratios.
7. Raphael Ochoa is puzzled. His company had a profit mar¬gin of 10% in 2008. He feels that this is an indication that the company is doing well. Cindy Lore, his accountant, says that more information is needed to determine the firm’s financial well-being. Who is correct? Why?
6. Name the major ratios useful in assessing (a) liquidity and(b) solvency.
5. What is a ratio? What are the different ways of expressing the relationship of two amounts? What information does a ratio provide?
4. (a) If Leonard Company had net income of $360,000 in 2008 and it experienced a 24.5% increase in net in¬come for 2009, what is its net income for 2009?(b) If six cents of every dollar of Leonard revenue is net income in 2008, what is the dollar amount of 2008 revenue?
3. Two popular methods of financial statement analysis are horizontal analysis and vertical analysis. Explain the dif¬ference between these two methods.
2. (a) Distinguish among the following bases of comparison:(1) intracompany, (2) industry averages, and (3) inter¬company.(b) Give the principal value of using each of the three bases of comparison.
1. (a) Juan Marichal believes that the analysis of financial statements is directed at two characteristics of a com¬pany: liquidity and profitability. Is Juan correct?Explain.(b) Are short-term creditors, long-term creditors, and stockholders interested primarily in the same charac¬teristics of a
3. What is pro forma income and why are analysts often critical of this number?
2. Give examples of alternative accounting methods that hamper comparability.
1. What is meant by quality ofearnings?
2. What is included in comprehensive income?
1. What are the similarities and differences in reporting material items not typ¬ical of regular operations?
3. What are solvency ratios? Explain the debt to total assets ratio and times interest earned.
2. What are profitability ratios? Explain the profit margin, asset turnover ratio, return on assets, return on common stockholders’ equity, earnings per share, price-earnings ratio, and payout ratio.
1. What are liquidity ratios? Explain the current ratio, acid-test ratio, receivables turnover, and inventory turnover.
5. lf you want to keep current with the financial and operating developments of a company in which you own shares, what are some ways you can do so?
4. Identify the specific sections in PepsiCo’s 2005 annual report where hori¬zontal and vertical analysis of financial data is presented. The answer to this question is provided on page 747.
3. What is vertical analysis?
2. What is horizontal analysis?
1. What are the different tools that might be used to compare financial infor¬mation?
7 Understand the concept of ^_ quality of earnings.
6 Understand the concept of earning power, and how irregular items are presented.
5 Identify and compute ratios used in analyzing a firm's liquidity, profitability, and solvency.
4 Describe and apply vertical analysis.
3 Explain and apply horizontal analysis.
2 Identify the tools of financial statement analysis.
1 Discuss the need for comparative analysis.
(c) Estimate how much you should set aside based upon your current situation. Are you closer to Cliff’s scenario or to Prudence’s?
(b) How many months of living expenses does the article suggest to set aside?
(a) Describe the three factors that determine how much money you should set aside for short¬term needs.
(b) With whom do you agree, Ron or Lisa? Explain your position.
(a) Using the data provided, prepare a statement of cash flows in proper form using the indirect method. The only noncash items in the income statement are depreciation and the gain from the sale of the investment.
(c) Are the board members or anyone else likely to discover the misclassification?
(b) Was there anything unethical about the president's actions? Was there anything unethical about the controller’s actions?
(a) Who are the stakeholders in this situation?
(c) What other recent SEC filings are available for your viewing?
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