97. The _____ basis of accounting typically recognizes revenue when a firm sells goods (manufacturing and
retailing firms) or renders services (service firms), and recognizes expenses in the period when the firm
recognizes the revenues that the costs helped produce.
98. Selected balance sheet amounts for Puff Group International Limited, a diversified electronics firm, appears
next, as of December 31,2009, and December 31, 2008. Compute the missing amounts for the two years.
December 31
2009 2008
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000 ?
Noncurrent Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 ?
Noncurrent Assets . . . . . . . . . . . . . . . . . . . . . . . … . . . . . . . . . . . . . . ? $ 18,000
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . ? ?
Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 127,000
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? 54,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? ?
99. Use the abbreviations below to classify the following balance sheet items.
CA
– Current assets
NA
– Noncurrent assets
CL
– Current liabilities
NL
– Noncurrent liabilities
SE
– Shareholders’ equity
X
– Item generally not appearing on a balance sheet
Balance Sheet Items
Example
Corporation, Inc.
January 1, Year 1
a.
Accounts payable
b.
Accounts receivable
c.
Bank loan payable, due April 5, Year 2
d.
Bonds payable, due Year 17
e.
Building, net of accumulated depreciation
f.
Supplies inventory
g.
Commissions paid to sales staff
h.
Common stock
i.
Equipment, net of accumulated depreciation
j.
Income taxes expense
k.
Land
l.
Merchandise inventory
m.
Note payable, due in March, Year 1
n.
Note receivable, due June 1, Year 2
o.
Note receivable, due December 2, Year 10
p.
Retained earnings
q.
Salaries expense
q.X
100. Use the abbreviations below to classify the following income statement items.
R
Revenues
E
Expenses
X
Item generally not appearing on an income statement
Income Statement Items
Example Corporation, Inc.
For the year ended December 31, Year 1
a. Accounts payable
b. Sales
c. Dividends paid
d. Cost of goods sold
e. Cash from operating activities
f. Supplies inventory
Commissions earned by sales staff
h. Common stock
i. Yearly depreciation on equipment
j. Administrative office space rent on a month-to-month lease
k. Sales from services
l. Sales from products
m. Note payable, due in March, Year 1
n. Note receivable, due June 1, Year 2
o. Acquisition of common stock
p. Retained earnings
q. Officer salaries
101. Compute the missing balance sheet amounts in each of the three independent cases that follow:
CASE B
CASE C
Noncurrent assets
$ 90,000
$280,000
Shareholders’ equity
870,000
340,000
Total assets
E
500,000
Current liabilities
20,000
I
Current assets
F
J
Noncurrent liabilities
G
K
Total liabilities and shareholders’ equity
990,000
L
Current assets minus current liabilities
H
200,000
102. Compute the missing amounts affecting the net income for Year 1 in each of the five independent cases
that follow. Amounts shown are in thousands.
CASE A
CASE B
CASE C
CASE D
CASE E
Sales revenue
$650
B
$400
$800
$390
Cost of goods sold
300
$110
C
400
200
Selling and
administrative expens
es
150
150
120
65
E
Income tax expense
56
30
55
D
0
Net income
A
10
75
235
(15)
103. Compute the missing amount affecting retained earnings for Year 2 in each of the five independent cases
that follow. Amounts shown are in millions.
CASE A
CASE B
CASE C
CASE D
CASE E
Retained earnings, Dec.
31, Year 1
$95
B
$75
$ 87
$175
Net income
30
$450
45
D
(50)
Dividends declared and paid
10
120
C
35
E
Retained earnings, Dec.
31, Year 2
A
670
60
105
75
104. Accountants classify various items on the balance sheet or the income statement in one of the following
ways:
CA
– Current assets
NA
– Noncurrent assets
CL
– Current liabilities
NL
– Noncurrent liabilities
CC
– Contributed capital
RE
– Retained earnings
IS
– Income statement item (revenue or expense)
X
– Item generally not appearing on a balance sheet
Using the abbreviations above, indicate the classification of each of the following items:
a.
__________
Factory
b.
__________
Note payable, due in 7 years
c.
__________
Interest revenue
d.
__________
Common stock issued by the corporation
e.
__________
Trucks used for deliveries
f.
__________
Cash on hand
g.
__________
Unsettled damage suit against the corporation, probability and amount of
settlement uncertain
h.
__________
Commissions earned by the sales staff
i.
__________
Employee taxes payable
105. Compute the missing amounts affecting the change in cash for Year 1 in each of the 5 independent cases
that follow. Amounts are in thousands.
CASE A
CASE B
CASE C
CASE D
CASE E
INFLOWS OF
CASH:
Operations
$600
$450
$650
$(390)
E
New financing
200
120
C
400
$400
Sale of
noncurrent assets
190
50
0
160
50
OUTFLOWS OF
CASH:
Dividends
150
150
300
0
175
Reduction in
financing
110
0
100
70
75
Acquisition of
noncurrent assets
650
B
900
180
200
Change in cash
A
50
(60)
D
100
106. Compute the missing information in each of the four independent cases below. The letters in parentheses
refer to the following:
BS
– Balance sheet
IS
– Income statement
SCF
– Statement of cash flows
a.
Accounts Receivable, Jan. 1, Year 2 (BS)
$ 500
Sales on Account for Year 2 (IS)
1900
Collections from Customers on Account during Year 2 (SCF)
1,350
Accounts Receivable, Dec. 31, Year 2 (BS)
-?-
b.
Salaries Payable, Jan. 1, Year 2 (BS)
$ 175
Salary Expense for Year 2
-?-
Payments to Salaried Employees during Year 2 (SCF)
725
Salaries Payable, Dec. 31, Year 2 (BS)
100
c.
Equipment (net of depreciation), Jan. 1, Year 2(BS)
$ 900
Depreciation Expense for Year 2 (IS)
-?-
Sales of Equipment during Year 2 (SCF)
-0-
Acquisition of Equipment during Year 2 (SCF)
330
Equipment (net of depreciation), Dec. 31, Year 2 (BS)
910
d.
Retained Earnings, Jan. 1, Year 2 (BS)
$1,550
Net Income for Year 2 (IS)
400
Dividends Declared and Paid during Year 2 (SCF)
-?-
Retained Earnings, Dec. 31, Year 2 (BS)
1,350
107. (CMA adapted, Jun 94 #6) Accounting systems vary widely from one business to another, depending on
the size of the firm, the volume of data to be handled, and the nature of the business. An accounting system
should provide information for management decision-making and generate reports on the enterprise’s financial
condition and operations. The accounting profession relies on general-purpose financial statements to provide
information to users; the intent of these general-purpose statements is to provide the most useful information
possible to diverse user groups at minimal cost. The principal financial statements used for public reporting
purposes are the statement of earnings (income statement), statement of financial position (balance sheet), and
statement of cash flows.
Required:
a.
Financial statements should provide information that is useful to users. Describe the level of
sophistication expected of the external users of financial statements.
b.
For each of the financial statements listed below, define its purpose and briefly explain how
it meets the needs of external users.
1. Statement of earnings.
2. Statement of financial position.
3. Statement of cash flows.
c.
Footnotes and responsibility for the financial statements
1. Explain the role of the notes to the financial statements.
2. Explain management’s responsibility for the financial statements.
Explain the auditor’s responsibility for the financial statements.
a. Although the level of sophistication related to business and financial accounting matters varies both within
and between user groups, users are expected to possess a reasonable understanding of accounting concepts,
financial statements, and business and economic activities, and are expected to be willing and able to study and
·ability to meet obligations and pay dividends.
·need for external financing (solvency).
c. 1.The notes accompanying the financial statements are an integral part of the financial statements and are
used to present additional information not included in the body of the statements. Notes should add to the
108.
December 31
BALANCE SHEET ITEMS
Year 7
Year 6
Accounts Payable
$ 5,219
$ 7,873
Accounts Receivable
58,363
48,645
Bonds Payable (due Year 20)
10,313
4,602
Cash
821
668
Common Stock
560
540
Income Taxes Payable
414
580
Inventories
33,305
30,752
Other Current Assets
2,681
742
Other Current Liabilities
185
1,115
Other Noncurrent Assets
90
152
Property, Plant, and Equipment
21,881
15,972
Retained Earnings
99,969
81,627
Salaries Payable
481
594
INCOME STATEMENT ITEMS
Year 7
Administrative Expense
$ 20,588
Cost of Goods Sold
246,864
Income Tax Expense
7,267
Interest Expense
1,803
Sales Revenue
361,026
Salary and Wage Expense
21,367
Selling Expense
44,795
Required:
a.
Prepare a comparative balance sheet for Cellular Communications Inc. as of December 31,
Year 6 and Year 7. Classify each balance sheet item into one of the following categories:
current assets, noncurrent assets, current liabilities, noncurrent liabilities, and shareholders’
equity.
b.
Prepare an income statement for Cellular Communications Inc. for Year 7.
c.
Prepare a schedule explaining the change in retained earnings between the beginning and
the end of Year 7.
d.
Compare the amounts on Cellular Communications Inc. balance sheet on December 31,
Year 6, and December 31, Year 7. Identify the major changes and suggest possible
explanations for the changes.
a.
Cellular Communications Inc.
Comparative Balance Sheet
As of December 31,
Assets
Year 7
Year 6
Current assets
Cash
$ 821
$ 668
Accounts receivable
58,363
48,645
Inventories
33,305
30,752
Other current assets
2,681
742
Total current assets
95,170
80,807
Noncurrent assets
Property, plant and equipment
21,881
15,972
Other noncurrent assets
90
152
Total noncurrent assets
21,971
16,124
Total assets
$117,141
$96,931
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
$ 5,219
$ 7,873
Salaries payable
481
594
Income taxes payable
414
580
Other current liabilities
185
1,115
Total current liabilities
6,299
10,162
Noncurrent liabilities
Bonds payable, due Year 20
10,313
4,602
Total liabilities
16,612
14,764
Shareholders’ equity
Common stock
560
540
Retained earnings
99,969
81,627
Total shareholders’ equity
100,529
82,167
Total liabilities and shareholders’ equity
$117,141
$96,931
b.
Cellular Communications Inc.
Income Statement
For the Year Ending December 31, Year 7
Sales revenue
$361,026
Cost of goods sold
246,864
Gross profit
114,162
Administrative expense
20,588
Interest expense
1,803
Salary and wage expense
21,367
Selling expense
44,795
Net income before income taxes
25,609
Income tax expense
7,267
Net income after income taxes
$ 18,342
c.
Cellular Communications Inc.
Statement of Change in Retained Earnings
For the Year Ended December 31, Year 7
Retained earnings, beginning
$81,627
Add: Net income
18,342
Retained earnings, end
$99,969
d.
Many comments can be made here. This company has a strong working capital position. In the
period between Year 6 and 7, more debt was issued as was more stock. However, the company is
quite liquid. In fact, this company has such strong internal financing through retained earnings,
that it has the capacity to grow fast in the future. In fact, this company is adapted from the
financial statements of a new public company. It is in the process of buying out many small
competitors. Most of these buyouts are in the form of stock, with some cash. Other relevant
comments from students would also be acceptable.
109. Briefly list and describe the principal financial statements.
110. Explain the roles, duties, and responsibilities of managers and governing boards of reporting entities.
Firms receive funds from owners with the expectation that managers will use the funds to increase the market
value of the firm. From a legal perspective, managers are agents of the shareholders and have responsibility for
111. What is US GAAP?
In the United States the Securities and Exchange Commission (SEC), an agency of the federal government, has
the legal authority to set acceptable accounting methods, or standards. The SEC is also the enforcement agency
for U.S. securities laws that apply to firms that access the public debt and equity markets of the United States.
For example, the SEC enforces the proper application of required accounting standards for U.S. SEC registrants
as well as non-U.S. SEC registrants (also called foreign private issuers). A U.S. SEC registrant is a firm
incorporated in the United States that lists and trades its securities in the United States; a non-U.S. SEC
112. FASB board members make standard-setting decisions guided by a conceptual framework
that addresses the objectives of financial reporting and qualitative characteristics of accounting
information.. Briefly describe the objectives of financial reporting and qualitative characteristics of accounting
information
FASB board members make standard-setting decisions guided by a conceptual framework that addresses the
following issues:
113. Concerns over the quality of financial reporting have led, and continue to lead, to government
initiatives in the United States including, the Sarbanes-Oxley Act of 2002. Briefly describe the Sarbanes-Oxley
Act of 2002.
Concerns over the quality of financial reporting have led, and continue to lead, to government
114. Briefly describe the International Accounting Standards Board (IASB) and who can use IFRS in the United
States?
115. What are the roles, duties, and responsibilities of the independent auditor?
Regulatory bodies generally require firms whose securities trade publicly (for example, common shares) to
obtain an audit of their financial reports by an independent external auditor. Even if the securities do not trade
The auditor obtains evidence for the first assessment by studying the procedures and internal controls built into
the accounting system. The auditor obtains evidence for the second assessment by examining a sample of actual
116. Who are the users of financial statements and what do they need?
117. As a basis for measuring performance for a particular accounting period, the cash basis of accounting has
three weaknesses. Briefly describe the three weaknesses.
118. Describe the accrual basis of accounting.
The accrual basis of accounting typically recognizes revenue when a firm sells goods (manufacturing and
retailing firms) or renders services (service firms), and recognizes expenses in the period when the firm