Chapter 01 – Financial Statements and Business Decisions
Chapter 01 – Financial Statements and Business Decisions
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108. National Shops, Inc. reported the following amounts on its balance sheet as of December
31, 2010:
Requirements:
1. What is the amount of National’s total assets as of December 31, 2010?
2. Identify the items listed above that are liabilities.
3. What is the amount of National’s retained earnings as of December 31, 2010?
4. Prepare a balance sheet for National as of December 31, 2010.
5. National wishes to purchase merchandise from your company on account. The amount of
the purchases would probably be about $10,000 per month, and the terms would require
National to make payment in full within 30 days. Would you recommend that your company
grant credit to National under these terms? Explain the reasoning for your response.
Chapter 01 – Financial Statements and Business Decisions
Chapter 01 – Financial Statements and Business Decisions
109. During 2010, Winterset Company performed services for which customers paid or
promised to pay $587,000. Of this amount, $552,000 had been collected by year-end.
Winterset paid $340,000 in cash for employee wages and owed the employees $15,000 at the
end of the year for work that had been done but had not paid for. Winterset paid interest
expense of $3,000 and $195,000 for other service expenses. The income tax rate was 35%,
and income taxes had not yet been paid at the end of the year. Winterset declared and paid
dividends of $20,000. There were no other transactions that affected cash.
Requirements:
1. What was the amount of the increase or decrease in cash during the year?
2. Prepare an income statement for Winterset for the year.
3. At the beginning of 2010, Winterset’s retained earnings were $90,000. Prepare a statement
of retained earnings.
Chapter 01 – Financial Statements and Business Decisions
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110. Alfred Company manufactures men’s clothing. During 2010, the company reported the
following items that affected cash. Indicate whether each of these items is a cash flow from
operating activities (O), investing activities (I), or financing activities (F).
Chapter 01 – Financial Statements and Business Decisions
111. Fulton Company was established at the beginning of 2010 when several investors paid a
total of $200,000 to purchase Fulton stock. No additional investments in stock were made
during the year. By December 31, 2010, Fulton had cash on hand of $45,000, office
equipment (net) of $40,000, inventories of $156,000, and accounts payable of $10,000. Sales
for the year were $812,000. Of this amount, customers still owed $20,000. Fulton paid
dividends of $25,000 to its stockholders during 2010.
Requirements:
1. Based on the information above, prepare a balance sheet for Fulton Company as of
December 31, 2010. In the process of preparing the balance sheet, you must calculate the
ending balance in retained earnings.
2. Prepare a statement of retained earnings for the year ended December 31, 2010.
3. What was the amount of Fulton’s net income for 2010?
4. Was Fulton successful during its first year in operation?
Chapter 01 – Financial Statements and Business Decisions
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Chapter 01 – Financial Statements and Business Decisions
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112. For Glad Rags Shops, the following information is available for the year ended
December 31, 2010:
Dividends declared 10,000
The income tax rate is 30%.
Requirements:
Prepare an income statement for Glad Rags Shops.
Chapter 01 – Financial Statements and Business Decisions
Chapter 01 – Financial Statements and Business Decisions
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113. Baseline Corporation was formed two years ago to manufacture fitness equipment. It has
been profitable and is growing rapidly. It currently has 150 stockholders and 90 employees;
most of the employees own at least a few shares of Baseline’s stock. The company has
received financing from two banks. It will sell additional shares of stock within the next three
months and will also seek additional loans and hire new employees to support its continued
growth.
Requirements:
1. Explain who relies on the information in financial statements prepared by Baseline
Corporation.
2. Why is compliance with generally accepted accounting principles and accuracy in
accounting important for Baseline?
A new accountant who tried to prepare Baseline’s financial statements at the end of the
current year made several errors. For each of the following items, indicate how the income
statement and balance sheet are affected by the error and the nature of the effect. (For
example, an error might cause revenues and net income on the income statement and retained
earnings and assets on the balance sheet to be overstated). Ignore the effects of income taxes.
The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000 that
had been collected by the end of the year, and sales on account of $200,000 that are expected
to be collected early the following year. The accountant reported total sales revenue of
$4,800,000.
3. The company had total inventories of $600,000 at the end of the year. Of this amount,
inventory reported at $30,000 was obsolete and will have to be scrapped. The balance sheet
prepared by the accountant showed total inventories of $600,000.
The company has a bank loan for which interest expense during the year of $10,000 will be
paid early in January of the next year. The accountant recorded neither the interest expense
nor the interest payable.
An insurance policy was listed as an asset of $6,000 at the beginning of the year. The entire
amount of the policy was for the current year and the policy has expired. The accountant took
no action to recognize the expiration of the policy.
Chapter 01 – Financial Statements and Business Decisions
Chapter 01 – Financial Statements and Business Decisions
114. Larson Company ends its recent year of operations with $3,500,000 in retained earnings.
During the year Larson’s net income exceeded its dividend declarations by $200,000. Larson’s
dividend declarations were $25,000 greater than the dividend payments.
How much was Larson Company’s beginning retained earnings?
115. As of January 1, 2010, a corporation had assets of $340,000 and liabilities of $120,000.
During 2010, assets increased $45,000 and liabilities increased $15,000. What was
stockholders’ equity on December 31, 2010?
Chapter 01 – Financial Statements and Business Decisions
116. Laker Company has provided the following information for its most recent year of
operation:
Cash collected from customers totaled $99,300.
Cash borrowed from banks totaled $42,700.
Cash paid to employees totaled $23,300.
Cash paid for interest totaled $3,100.
Cash received from selling an investment in Husky stock totaled $73,000.
Cash payments to banks for repayment of money borrowed totaled $9,700.
Cash paid for operating expenses totaled $11,200.
Land costing $75,000 was sold for $75,000 cash.
Cash paid for dividend payments to stockholders totaled $7,700.
How much was Laker’s net cash flow from financing activities?
Chapter 01 – Financial Statements and Business Decisions
117. Laker Company has provided the following information for its most recent year of
operation:
Cash collected from customers totaled $99,300.
Cash borrowed from banks totaled $42,700.
Cash paid to employees totaled $23,300.
Cash paid for interest totaled $3,100.
Cash received from selling an investment in Husky stock totaled $73,000.
Cash payments to banks for repayment of money borrowed totaled $9,700.
Cash paid for operating expenses totaled $11,200.
Land costing $75,000 was sold for $75,000 cash.
Cash paid for dividend payments to stockholders totaled $7,700.
How much was Laker’s net cash flow from investing activities?
Chapter 01 – Financial Statements and Business Decisions
118. Laker Company has provided the following information for its most recent year of
operation:
Cash collected from customers totaled $99,300.
Cash borrowed from banks totaled $42,700.
Cash paid to employees totaled $23,300.
Cash paid for interest totaled $3,100.
Cash received from selling an investment in Husky stock totaled $73,000.
Cash payments to banks for repayment of money borrowed totaled $9,700.
Cash paid for operating expenses totaled $11,200.
Land costing $75,000 was sold for $75,000 cash.
Cash paid for dividend payments to stockholders totaled $7,700.
How much was Laker’s net cash flow from investing activities?
Chapter 01 – Financial Statements and Business Decisions
119. During 2010, Rock Company’s cash balance increased from $57,000 to $94,300. Rock’s
net cash flow from operating activities was $26,900 and its net cash flow from financing
activities was $13,700. How much was Rock’s net cash flow from investing activities?
120. Moss Company has provided the following data:
2010 revenues were $87,500.
2010 net income was $43,900.
Dividends declared and paid by Moss during 2010 totaled $15,700.
Total assets on December 31, 2010 were $227,000.
Total stockholders’ equity on December 31, 2010 was $133,000.
Contributed capital on December 31, 2010 was $93,000.
What was the beginning retained earnings balance?
Chapter 01 – Financial Statements and Business Decisions
121. Describe the roles of the Securities & Exchange Commission and The Financial
Accounting Standards Board with respect to the development of Generally Accepted
Accounting Principles.
122. Describe the elements of the balance sheet equation.
Chapter 01 – Financial Statements and Business Decisions
123. Describe the role of a company’s management and the external auditors in the accounting
communication process.
124. What is the objective of the cash flow statement? Describe the three cash flow
classifications that are reported within the cash flow statement.
Chapter 01 – Financial Statements and Business Decisions
125. How is net income in the income statement different than cash flow from operations in
the cash flow statement?