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business
understanding financial accounting
Financial Accounting In An Economic Context 3rd Edition Jamie Pratt - Solutions
Converting an income statement to a statement of operating cash inflows and outflows (and vice-versa) is very important in understanding the statement of cash flows and how it relates to the income statement. In general, how does one make such conversions, and why might they be useful to financial
When preparing a reconciliation between net income and cash provided (used) by operat¬ ing activities for purposes of a statement of cash flows under either the direct or indirect method, into what two categories are the required adjustments separated? Provide several examples of the adjustments
Name an asset account and a liability account that are directly related to the revenue accounts, Sales and Fees Earned. Name asset and/or liability accounts that are directly related to the income statement accounts, Interest Expense, Depreciation Expense, Insurance Expense, Wage Expense, and Cost
How are book gains and losses, depreciation, and amortization treated when converting accrual numbers to cash-basis numbers? Why?
Express the change in the Cash balance during a period in terms of changes in the other balance sheet accounts. Begin with the basic accounting equation, and explain how this expression can be used to prepare a statement of cash flows from the information con¬ tained in two balance sheets, an
Are you likely to find a statement of cash flows in the set of financial statements provided by companies in foreign countries? Explain.
Why are foreign currency exchange gains and losses disclosed on the statement of cash flows prepared under the indirect method?
What are investing and financing transactions, and how do they relate to capital transactions?
Is it possible for a profitable company to go bankrupt? How?
The following are several activities that Wallingford, Inc., engaged in during 1997. 1. Wrote off an open receivable as uncollected. 2 Purchased a piece of plant equipment. 3. Reacquired 5,000 shares of its common stock. 4. Sold a building in exchange for a five-year note. 5. Declared, but did not
Summaries of the 1997 statements of cash flows for five different companies follow. For each company compute the missing dollar amount, and briefly describe the company’s cash man¬ agement policy for 1997. Cash Provided (Used) by Net Increase Company Operations Investments Financing (Decrease)
Presented below is a list of transactions entered into by Kaitland Manufacturing during 1997. 1. Recorded depreciation expense of $170,000. 2. Sold 10,000 shares of common stock ($10 par value) for $18 per share. 3. Purchased 5,000 shares of IBM for $75 per share. 4. Purchased a three-year
The following are several account titles that could appear on an income statement. 1. Cost of Goods Sold 6. Wage Expense 2. Insurance Expense 7. Supplies Expense 3. Sales Revenue 8. Interest Expense 4. Rent Expense 9. Rent Revenue 5. Dividend Revenue 10. Depreciation Expensea. b.c. d.e. f. gh. i.
Your boss asks you to examine the following income statements of Hamilton Hardware, Crozier Crafts Supplies, and Watson Glass. Hamilton Hardware Crozier Crafts Supplies Watson Glass Sales $900,000 $900,000 $900,000 Cost of goods sold 400,000 400,000 400,000 Depreciation expense 50,000 70,000
Tony began a small retailing operation on January 1, 1997. During 1997 the following trans¬ actions occurred. 1. Tony contributed $20,000 of his own money to the business. 2. $60,000 was borrowed from the bank. 3. Long-lived assets were purchased for $25,000 cash. 4. Inventory was purchased:
Driftwood Shipbuilders entered into the following transactions during 1997. 1. Sold $6,000 of no-par common stock. 2. Purchased $6,000 of inventory on account. 3. Purchased new equipment for $5,000 in cash. 4. Collections on accounts receivable totaled $10,000. 5. Made payments to suppliers of
The following year-end totals were taken from the records of Landau’s Supply House. Compute the cash outflows associated with insurance and wages during 1997. 1997 1996 Prepaid insurance $7,000 $4,200 Wages payable 6,000 0 Insurance expense 3,000 4,700 Wage expense 8,500 3,000 El 4-10
The following information was taken from the records of Dylan’s Toys. 1997 1996 Machinery $ 45,000 $ 20,000 Accumulated depreciation (15,000) (10,000) Depreciation expense 7,000 6,000 Gain on sale of machinery 2,000 500 ADDITIONAL INFORMATION: Machinery with a cost of $8,000 was sold during 1997.
Income statement and balance sheet excerpts of Shevlin and Shores for the period ending December 31, 1997, follow. Compute cash provided (used) by operating activities for the period ending December 31, 1997. Use both the direct and indirect forms of presentation. Income Statement Excerpts Sales
The following information was taken from the records of Grimes Pools. Prepare a statement of cash flows (direct method) for the period ending December 31, 1997. Assume that all transac¬ tions involve cash. 1997 1996 Cash $ 4,000 $ 6,000 Noncash operating assets 15,000 15,000 Nonoperating assets
The following information was taken from the records of Romora Supply House. Prepare a statement of cash flows (direct method) for the period ending December 31, 1997. Assume that all transactions involve cash. of cash flowsfrom information contained 1997 1996 in two balance sheets, Cash $12,000 $
The operating cash flows and balance sheet excerpts of Schlee and Associates for the period ending December 31, 1997, follow. Compute net income for the period ending December 31, 1997. Operating Activities Cash inflows from sales $ 65,000 Cash payments for inventories (40,000) Cash payments for
The following events occurred during 1997 for Frames Unlimited. 1. Purchased inventory for $60,000 in cash. 2. Recorded $40,000 in insurance expense for the portion of an insurance policy acquired in 1991 that expired during 1997. 3. Paid $40,000 for rental space that the company will not use until
Endnote Enterprises entered into the following transactions during 1997. 1. Sold merchandise for $52,000 in cash. 2. Purchased a parcel of land. The company paid $12,000 in cash and issued a $30,000 note payable for the remainder. 3. Purchased a three-year insurance policy for $30,000. 4. Purchased
MHT Enterprises entered into the following transactions during 1997. 1. Sold a piece of equipment with a book value of $8,000 for $1,200. 2. Purchased a parcel of land for $13,000. 3. Purchased a three-year insurance policy for $9,000. 4. Issued 1,000 shares of common stock at $7 per share. 5.
Several transactions entered into by Travis Retail during 1997 follow. 1. Received $50,000 for wine previously sold on account. 2. Paid $55,000 in wages. 3. Sold a building for $100,000. The building had cost $170,000, and the related accumulated depreciation at the time of sale was $55,000. 4.
Ruttman Enterprises began operations in early 1995. Summaries of the statement of cash flows for the years 1995, 1996, and 1997 follow. 1997 1996 1 995 Cash provided (used) by operating activities 9 • $(202) 9 • Cash provided (used) by investing activities $ 160 9 • $(500) Cash provided
Webb Industries reported the following information concerning the company’s property, plant, and equipment in the 1997 financial report. 1997 1996 Buildings $ 750,000 $820,000 Accumulated depreciation (100,000) (80,000) Equipment 500,000 380,000 Accumulated depreciation (75,000) (85,000) Land
The stockholders’ equity section of Mountvale’s Associates is provided below. 1997 1996 Common stock ($1 par value) $128,000 $100,000 Additional paid-in capital (C/S) 95,000 12,000 Retained earnings 41,000 35,000 Total stockholders’ equity $264,000 $147,000 ADDITIONAL INFORMATION: 1. 1/1/97:
Taylor Brothers began operations in 1996. The following selected information was extracted from its financial records. Sales returns Cost of goods sold Inventory Accounts receivable Insurance expense Cash collected on sales Accounts payable Cash paid for insurance 1997 1996 $ 25,000 $ 20,000
Battery Builders, Inc., prepared statements of cash flows under both the direct and the indirect methods. The operating sections of each statement under the two methods follow. Prepare an income statement from the information provided. Direct Method Collections from customers $ 26,000 Payments to
Pendleton Enterprises began operations on January 1, 1995. Balance sheet and income state¬ ment information for 1995, 1996, and 1997 follow. 1997 1 996 1 995 Cash $ 6,000 $ 9,000 $7,000 Accounts receivable 8,000 5,000 4,000 Accounts payable 5,000 3,000 2,000 Revenues 12,000 14,000 8,000 Expenses
The 1996 and 1997 balance sheets and related income statement of Watson and Holmes Detective Agency follow. Prepare a statement of cash flows under both the direct and the indi¬ rect methods for 1997. 1 997 1996 Balance Sheet Assets Cash $10,000 $ 6,000 Accounts receivable 7,000 2,000 Less:
ISS Inc. began operations on January 1, 1997. They engaged in the following economic events during 1997. 1. Issued 6,000 shares of no-par common stock for $10 per share. 2. Purchased on account 20,000 units of inventory for $ 1 per unit. 3. Paid and capitalized $7,000 for rent covering 1997 and
Sunshine Enterprises included the following statements in its 1997 financial report. Income Statement 1 997 Marketing revenue $1,000,000 Salary expense (250,000) Office supplies used (175,000) Depreciation expense (100,000) Insurance expense (60,000) Rent expense (120,000) Net income $ 295,000
The following information was extracted from the financial records of Bower Manufacturing Industries. Income Statement 1997 Sales $190,000 Cost of goods sold (80,000) Depreciation expense (30,000) Interest expense (10,000) Salary expense (12,000) Supplies expense (7,000) Loss on sale of marketable
The following information was extracted from the 1997 financial records of Price Restaurant Supply Company. Income Statement Sales $160,000 Cost of goods sold (100,000) Depreciation expense (12,000) Insurance expense (10,000) Interest expense (11,000) Gain on sale of plant equipment 10,000 Net
Lynch Engineering Firm provided the following income statement for 1997 in its annual finan¬ cial report. 1997 1996 Sales Salary expense $2,025,000 Advertising expense 755,000 Bad debt expense 275,000 Administrative expenses 898,000 Janitorial expense 132,000 Supplies expense 281,000 Depreciation
Mick’s Photographic Equipment began operations on January 1, 1996. During 1996 the com¬ pany entered into the following transactions. 1. Issued 50,000 shares of $15 par value common stock for $30 per share in exchange for cash. Also issued, for cash, 1,000 shares of 10 percent, $100 par value
An article in Business Week (October 30, 1995) describes how Bob Olstein, a successful stock analyst, predicts that the prices of stocks issued by firms who “engage in aggressive account¬ ing practices” will go down, stating that other “investors have unrealistic expectations of the earnings
As of December 31, 1994, Safeway Inc., one of the world’s largest food retailers, held a 35% equity interest in Vons, which operated 336 grocery stores located mostly in southern California, and a 49% equity interest in Casa Ley, which operated 70 stores in western Mexico. These investments
In Forbes, Loan Officer, Han Blackford, commented that cash flow analysis has risen in impor¬ tance due to a “trend over the past twenty years toward capitalizing and deferring more and more expenses. Although the practice may match revenues and expenses more closely, a laud¬ able intent, it
King’s Table operates buffet-style restaurants throughout the United States. The company recently pursued a strategy of remodeling and expansion, using cash from operating activities and bank borrowings. REQUIRED:a. In which section of the statement of cash flows (operating, investing, or
Federal Express provides door-to-door delivery service of small packages and docu¬ ments throughout the United States. Its December 31, 1994, statement of cash flows included the following: Years ended May 31 (In thousands) 1994 1993 1 992 Operating Activities Net income (loss) $ 204,370 $ 53,866
USA Today (February 12, 1991), in an article about how financial analysts follow cable TV companies, commented: “Analysts look at cable companies’ cash flow—earnings plus cash set aside for depreciation—rather than just earnings.” REQUIRED: Critique the statement published in USA Today
Refer to the statements of cash flows for the years ending 1994, 1993, and 1992 at the top of the next page. The statements were taken from the 1994 annual report of The Quaker Oats Company (dollars in millions). REQUIRED:a. The company has expanded considerably over the past three years. Describe
Refer to the statements of cash flows for the years ended 1994, 1993, and 1992 for Sprint, which can be found in Figure 14-4 in the text, and answer the following questions.a. In what general ways has cash provided by operating activities been used in 1992, 1993, and 1994?b. Comment on Sprint’s
During the 1980s many huge mergers were financed with large amounts of debt. On Decem¬ ber 1, 1988, for example, RJR Nabisco agreed to be purchased for $25 billion by takeover artists Kohlberg Kravis Roberts in a deal that depended heavily on junk bonds, and in late 1989 Time, Inc., merged with
Refer to the annual report of MCI and answer the questions below.a. What major reasons explain the large increase in MCI’s cash position from 1993 to 1994?b. Cash from operating activities ($2,355) is calculated in two different ways on the statement of cash flows. Discuss the differences and the
The following balance sheet and income statement data were taken from the records of L. L. Beeno for the year ended December 31, 1996. 1996 1995 Balance Sheet Cash $ 3,000 $ 2,800 Accounts receivable 5,600 4,500 Inventory 7,500 7,800 Prepaid insurance 600 900 Total current assets $16,700 $16,000
The following balance sheet and income statement data were taken from the records of Martland Stores for the year ended December 31, 1996. 1996 1995 Balance Sheet Cash $ 6,000 $ 1,400 Accounts receivable 12,000 13,500 Inventory 4,500 9,800 Prepaid insurance 900 1,200 Total current assets $23,400
The following balance sheet and income statement data were taken from the records of Mako Retail Supply for the year ended December 31, 1996. 1996 1995 Balance Sheet Cash $ 6,000 $ 5,400 Accounts receivable 11,200 9,000 Inventory 15,000 15,600 Prepaid rent 1,200 1,800 Total current assets $ 33,400
The following balance sheet and income statement data were taken from the records of Steeler and Jones for the year ended December 31, 1996. 1996 1995 Balance Sheet Cash $ 6,400 $ 7,400 Accounts receivable 11,900 13,000 Inventory 14,100 15,600 Prepaid rent 1,300 900 Total current assets $33,700 $
The following balance sheet and income statement data were taken from the records of Harbaugh Auto Supply for the year ended December 31, 1996. 1996 1995 Balance Sheet Cash $ 10,100 $ 8,400 Accounts receivable 14,400 13,900 Inventory 21,600 18,700 Interest receivable 1,200 1,500 Prepaid rent 2,600
The following balance sheet and income statement data were taken from the records of Standard Center Manufacturing for the year ended December 31, 1996. 1996 1995 Balance Sheet Cash $ 20,200 $ 22,800 Accounts receivable 28,800 34,800 Inventory 42,900 43,900 Interest receivable 4,100 6,300 Prepaid
Review the statement of cash flows in the annual report of MCI, and answer the following questions.a. What method does MCI use to present the operating section of the statement of cash flows?b. Explain how MCI used two methods to compute the $2,355 cash from operating activities amount. What kind
What is the definition of current assets? How is it used? What weaknesses are inherent i the measure of current assets?
Would the current assets classification on the balance sheet of a bridge-building compan mean the same as the current assets classification on the balance sheet of a small retailer Why?
What is “window dressing?” How and why might managers manipulate the current ratii by choosing certain accounting methods or biasing estimates used in applying these metf ods? How might managers manipulate the current ratio by making certain operating dec: sions?
Explain why window dressing may not be in the best interest of a company, its stockholo ers, or its management.
Provide two examples of restrictions on a company’s use of the cash it owns. How an these restrictions reported on the financial statements? Why should restricted cash be sep arated from cash that is free and clear?
What two issues must managers consider in their efforts to maintain the proper cash bail ance?
What two methods for providing both physical and record control of the cash balance ar discussed in the chapter?
Explain the link between accounts receivable and the income statement. How is the recog nition of an account receivable related to the four criteria of revenue recognition?
The Sales account, which appears on the income statement, usually differs from Cast Inflows Due to Operating Activities, which is found on the statement of cash flows. Why How can accounts receivable be used to reconcile these two numbers?
Provide three examples of how a manager may practice window dressing with respect ttf accounts receivable.
Discuss why auditors are concerned that sales on account be recognized in the proper timi period and that bad debts be estimated accurately.
The valuation base for accounts receivable is called net realizable value. What is the deft inition of net realizable value with respect to accounts receivable?
Distinguish cash discounts from quantity discounts and sales discounts (markdowns). Why are quantity discounts and sales discounts not explicitly recognized in financial account¬ ing statements?
Why do companies offer cash discounts? State your answer in terms of the trade-offs between the time value of money, collection costs, and the terms of the cash discount.
Explain how the account “Cash Discounts” is recognized on the financial statements.
What can companies do to reduce uncollectible accounts receivable? How could they reduce them to zero? Why don’t they do it?
Explain how bad debts are accounted for under the allowance method and estimated by using a percentage of credit sales. What kind of information is used by management when preparing such an estimate?
What is an aging of accounts receivable? Describe the computation, and explain how it provides information that is useful to managers. How can aging accounts receivable help managers set the terms of their cash discounts? What effect has the computerization of accounts receivable had on
Discuss the role of the Allowance for Doubtful Accounts account. What financial state¬ ment numbers are affected when a bad debt is written off the books? How are current assets, working capital, the current ratio, and net income affected?
Suppose you are an investor attempting to decide whether to invest a substantial sum of money in a small manufacturing company. While examining the financial statements, you note that the company has shown large profits over the past several years and that the bal¬ ance in the Allowance for
If a company that uses the allowance method to account for bad debts consistently over¬ estimates bad debts, how does this show up in the books? Ifthe same company consistently understates the bad debt estimate, how does this show up in the books?
(Appendix 6A) Briefly explain some of the problems in U.S. financial institutions, and describe how these problems relate to the accounting issues covered in this chapter.
(Appendix 6B) What is an exchange rate and how can fluctuating exchange rates give rise to gains and losses recognized on the financial statements?
(Appendix 6B) Define hedging, and explain how and why companies enter into hedging transactions.
Boyer International is currently preparing its financial statements for 1996. The company has several different sources of cash and is trying to decide how to classify them. The sources of cash follow:a. $30,000 in a checking account with The First National Bank.b. $3,000 in checks dated December
The following items relate to the financial statements of Melvin Construction Company.$2,000 in a checking account.$8,000 invested in a treasury note due to mature in ninety days.$3,000 in a savings account that cannot be withdrawn until a $10,000 outstanding debt is paid off.$18,000 invested in
E6-3(Accounting for cash discounts)On December 12, Woodington sold goods on account for a gross price of $40,000. The terms of the sale were 2/10, n/30. As of December 31, when financial statements were prepared, no payment had been received by Woodington. Full payment was received on January 5 of
on December 20. Prepare journal entries and dis¬cuss how the timing of the cash receipt affected the income statement and statement of cash flows.E6-4(Accounting for cash discounts)E6-5(Bad debts under the allowance method)
On May 1, 1997 Crab Cove Fishing Company sold Maine lobster on account for a gross price of $30,000. On May 5 the company also sold cod on account for a gross price of $20,000. The terms of both sales were 3/10, n/30. Crab Cove received payment for the first sale on May 6, 1997 and payment for the
on January 1, 1996. The company reported the fol¬lowing selected items in the 1997 financial report.1997 1996 Gross sales $1,400,000 $1,500,000 Accounts receivable 600,000 650,000 Actual bad debt write-offs 22,000 10,000 nr Arlington estimates bad debts at 2 percent of gross sales.REQUIRED:Analyze
In its 1996 financial report Sound Unlimited reported the following items: 1. A credit balance in Allowance for Doubtful Accounts of $200,000. 2. A debit balance in accounts receivable of $7,500,000. 3. Sales of $3,250,000. During 1996 the company was involved in the following transactions that
The following items were extracted from the financial records of Stein Glass Company. Sales $ 980,000 Accounts Receivable 1,025,000 Allowance for Doubtful Accounts 50,000 (cr.) After analyzing individual accounts, the company’s accountant wrote off $35,000 of accounts receivable as uncollectible,
The 1997 annual report of Johnson Services reveal the following information. The dollar amounts are end-of-year balances. 1997 1996 Credit sales Accounts receivable Allowance for doubtful accounts Bad debt recoveries $75,300 $61,500 9,400 9,200 1,300 1,000 55 70 Johnson estimates bad debts each
Potter Stables uses the aging method to estimate its bad debts. Sherman Potter, the company president, has given you the following aging of accounts receivable as of December 31, 1997 along with the historical probabilities that the account balances will not be collected. Noncollection Account Age
Peffer Financial loaned $9,000 to Slatten Brothers on December 1, 1996. The ninety-day note (both principal and interest) was due March 1 of the following year and had a stated annual interest rate of 8 percent. REQUIRED:a. Prepare the journal entries on Peffer Financial’s books related to this
On January 1, 1997, Outreach Incorporated sold services to a Canadian supply company and accepted a three-year note in the amount of 11,000 Canadian dollars. Exchange rates between the U.S. dollar and the Canadian dollar are provided below. Date U.S. Dollars per Canadian Dollars January 1,1997 $.85
This exercise refers to E6-11. Assume that Outreach hedged the 11,000 (Canadian dollar) receivable by borrowing 11,000 Canadian dollars from a Canadian bank on January 1, 1997. Demonstrate using journal entries how this transaction removes Outreach’s exposure to the risk of fluctuating exchange
On September 30, 1996, Print-O-Matic Inc. entered into an arrangement with its bank to bor¬ row $250,000. The principal is due on October 1, 2001, and the note has a stated annual inter¬ est rate of 10 percent. Under the borrowing agreement, Print-O-Matic agreed to maintain a compensating balance
During the month of March, QNI Corporation made the following credit sales and had the fol¬ lowing related collections. QNI prepares financial statements for the first quarter of operations at the end of March. March 3 March 8 March 11 March 28 March 29 Sold goods to AAA company for a gross price
Financial information for CNG Inc., follows. 1997 1996 1995 Credit sales $205,000 $200,000 $180,000 Actual bad debt write-offs 11,000 10,000 6,000 The company estimates bad debts for financial reporting purposes at 3 percent of credit sales. The balance in Allowance for Doubtful Accounts as of
Glacier Ice Company uses a percentage-of-net-sales method to account for estimated bad debts. Historically, 3 percent of net sales have proven to be uncollectible. During 1996 and 1997 the company reported the following: 1997 1996 Gross sales $1,500,000 $1,800,000 Sales discounts 100,000 130,000
The following financial information represents Hadley Company’s first year of operations, 1996. (Ignoring potential bad debts can lead to Income Statement Balance Sheet serious overstatements) Sales $200,000 Cash $ 5,000 Cost of goods sold 102,000 Accounts receivable 85,000 Gross profit $ 98,000
Excerpts from the 1996 financial statements of Finley, Ltd., a service company, follow. Fees earned $240,000 Accounts receivable 68,000 Allowance for doubtful accounts 3,400 Total current assets 105,000 Total current liabilities 65,000 Net income 15,000 Dividends declared 5,000 Bad debt charge
Fine Linen Service began operations on January 28, 1993. The company does not establish an allowance for bad debts. It simply recognizes a bad debt charge when an account is deemed uncollectible. Over the past five years the company has written off the following items. July 6,1993 Feb. 3,1994 Mar.
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