1) Indicate how each event affects the elements of financial statements. Use the
following letters to record your answer in the box shown below each element. You do
not need to enter amounts.
On December 31, 2012, Stuart Co. estimated it had $8,000 of uncollectible accounts
related to credit sales it made during the year. Stuart, which uses the allowance method,
made the proper adjusting entry on this date. Indicate the effects of the adjusting entry.
2) What information is included in an inventory purchases budget?
3) Perry Corporation makes three products, X, Y, and Z. Expected overhead costs for
the coming year include:
Perry uses direct labor hours as the cost driver to allocate overhead costs. Budgeted
direct labor hours for each product are:
Product X, 20,000 direct labor hours
Product Y, 30,000 direct labor hours
Product Z, 10,000 direct labor hours
Required:
1) Determine the amount of manufacturing overhead that should be allocated to each of
the three products.
2) Assume that each unit of Product X requires $25 in direct materials and 3 direct labor
hours at a rate of $12 per hour. Calculate the budgeted or expected cost of each unit of
X.
4) Indicate which of the budgets and pro forma financial statements the given item
appears on by placing X’s in the appropriate column or columns.
Cash flow from financing activities
5) Explain the difference in “transportation-in” and “transportation-out”. Also indicate
whether each is a product cost or period cost.
6) Indicate whether each of the following statements is true or false.
1>Limited liability is an advantage of both corporations and partnerships but not sole
proprietorships
2>Unlike a partnership, a corporation is not terminated when a major stockholder
withdraws his or her investment
3>Corporations are subject to more governmental regulations than sole proprietorships
4>Double taxation refers to the fact that corporations have to pay both federal and state
income taxes
5>A corporation is a legal entity separate from its owners
7) Indicate whether each of the following statements about financial statement analysis
is true or false.
1>If a transaction causes a company’s working capital to increase, the transaction
caused the company to become less liquid
2>The quick ratio is a less conservative variation of the current ratio
3>Interpretation of a company’s working capital can be difficult because it is an
absolute amount
4>Working capital is a measure of the amount of current assets a company would have
left after paying its current liabilities
5>The quick ratio is usually calculated, (Cash + Receivables + Current Marketable
Securities + Prepaid Expenses)/Current Liabilities
8) Why is the time value of money often taken into account in analyzing a capital
investment?
9) Describe cumulative preferred stock.
10) ListenUp Audio Systems sells and installs car stereo systems. Managers need to
prepare an inventory purchases budget for the first quarter of 2012 . The company’s
sales budget for the first quarter is provided below:
Based on past experience the company expects the cost of goods sold to equal 80% of
sales. Furthermore, the ending inventory balance each month should be $4,000 plus
20% of the current period’s cost of goods sold. The inventory balance on December 31,
2011 was $17,000. The company makes all purchases on account and pays 60% of
accounts payable in the month of purchase and the remaining 40% in the next month.
Accounts payable stood at $18,000 at December 31, 2011 .
Required:
1) Prepare an inventory purchases budget for January, February, and March of 2012 .
2) Determine the amount of ending inventory and the accounts payable balance that will
appear on the March 31, 2012 pro forma balance sheet.
3) Prepare a schedule of cash payments for inventory for January, February, and March,
2012 .
