Chapter 1: Accounting as a Form of Communication
420. Coglin, Inc. incurred a net loss of $20,000 for 2014. The balance sheet at December 31, 2014, for Coglin, Inc.,
includes the following items:
Cash
$ 23,000
Accounts receivable
13,000
Inventory
45,000
Prepaid insurance
1,000
Land
21,000
Building
80,000
Accounts payable
55,000
Salaries payable
2,000
Capital stock
100,000
Retained earnings
25,000
A) Determine Coglin’s current ratio and working capital.
B) Beyond the information provided in your answers to “A,” what does the composition of Coglin’s
current assets tell you about its liquidity.
C) What other information would one need to fully access Coglin’s liquidity?
Chapter 1: Accounting as a Form of Communication
421. During 2014, Wimbrow Images reported $60,000 of net income and generated $80,000 of cash from operations.
During the year, Wimbrow Images paid $15,000 to purchase a new delivery truck and also paid dividends in the
amount of $30,000. Wimbrow Images borrowed $40,000 cash from the bank. At the beginning of the year, cash
amounted to $50,000.
A) Prepare a statement of cash flows for the year ended December 31, 2014.
B) How much more cash does Wimbrow Images have available at the end of the year than at the beginning?
C) Why is there a difference between net income and cash flows from operations?
Chapter 1: Accounting as a Form of Communication
422. Tradewinds Corporation was organized on January 1, 2014, with the investment of $500,000 in cash by its
stockholders. Tradewinds signed a ten-year, $300,000 promissory note at a local bank during 2014 and received
cash in the same amount. The company immediately purchased an office building for $800,000, paying in cash.
During its first year, Tradewinds generated $35,000 in cash from operations and paid $30,000 in cash dividends.
A) In good form, prepare a statement of cash flows for the year ended December 31, 2014.
B) What does this statement tell you that an income statement does not?
Chapter 1: Accounting as a Form of Communication
423. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2014. Cash generated by
operations was $40,000. In addition, Hindsville Company borrowed $24,000 from a bank. During 2014, Hindsville
purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders. Hindsville’s cash
balance at the beginning of 2014 was $22,000.
A) Identify the amount of cash flows for financing, investing, and operating activities for
2014 by filling in the amounts below.
Financing Cash Flows:
Investing Cash Flows:
Operating Cash Flows:
B) Did Hindsville Company’s operating activities generate enough cash to cover its investing
and financing activities? Explain.
C) How much did Hindsville Company’s cash balance increase or decrease during 2014?
Chapter 1: Accounting as a Form of Communication
424. Presented below are items from Joplin Shoes statement of cash flows for 2014.
Cash flows provided by operating activities
$ 75,000
Cash flows provided by financing activities
115,000
Cash at the beginning of the year
60,000
Cash flows used by investing activities
(100,000)
A) Determine whether Joplin Shoes’ cash increased or decreased during the year.
B) How much cash does Joplin Shoes have at the end of 2014?
C) What is the purpose of the statement of cash flows?
Chapter 1: Accounting as a Form of Communication
425. Mill Valley Corporation was organized on January 1, 2014, with the investment of $225,000 in cash by its
stockholders. The company immediately purchased an office building for $300,000, paying $201,000 in cash and
signing a three-year promissory note for the balance. Mill Valley signed a five-year, $50,000 promissory note at a
local bank during 2014 and received cash in the same amount. During its first year, Mill Valley collected $93,000
from its customers. It paid $60,600 for inventory, $22,400 in salaries and wages, and another $5,100 in taxes. Mill
Valley paid $5,300 in cash dividends.
Required
1. Prepare a statement of cash flows for the year ended December 31, 2014.
2. What does this statement tell you that an income statement does not?
Chapter 1: Accounting as a Form of Communication
426. Identify each of the following items as operating (O), investing (I), or financing (F) activities on the statement of
cash flows(assuming the indirect method). If an item is not on the statement, please mark it as none of these (N). If
the item is an inflow, please indicate by a (+), (e.g. O+, I+ or F+). If the item is an outflow, please indicate by
brackets, (e.g., <O> for operating outflow, <I> for investing outflow, and <F> for financing outflow:
(a) Paid an account payable for inventory purchased in the previous accounting period.
(b) Amortization of debt issuance costs
(c) Paid a dividend to stockholders.
(d) Paid the interest on a note payable to National Street Bank.
(e) Paid the principal amount due on the note payable to National Street Bank.
(f) Transferred cash from a checking account into a money market fund.
(g) Purchased equipment for cash.
427. Most financial reports contain the following list of basic elements. For each element identify the person(s) who
prepared the element and describe the information a user would expect to find in each element.
Elements
Prepared By
Information Provided
Management
Discussion &
Analysis
Financial Statements
Notes to Financial
Statements
Report of
Independent
Accountants
Chapter 1: Accounting as a Form of Communication
428. Comparative income statements for Gregson Inc. are as follows:
2014
2013
Sales
$2,000,000
$600,000
Cost of sales
800,000
400,000
Gross profit
$1,200,000
$200,000
Operating expenses
520,000
120,000
Operating income
$ 680,000
$ 80,000
Loss on sale of subsidiary
(800,000)
0
Net income (loss)
$ (120,000)
$ 80,000
Required:
The president and management believe that the company performed better in 2014 than it did in 2013. Write the
president’s letter to be included in the 2014 annual report. Explain why the company is financially sound and why
shareholders should not be alarmed by the $120,000 loss in a year when gross profit increased significantly.
429. What financial statement items are investors and creditors most interested in and why?
430. Cory Harper, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyze the
office supplies expense account. He determined the cost by month, for the past 12 months, of each of the following:
computer paper, copy paper, fax paper, pencils and pens, note pads, postage, corrections supplies, stationery, and
miscellaneous items. Why do companies not include information of this nature in published financial statements?
Chapter 1: Accounting as a Form of Communication
431. Service-oriented companies have different needs than product-oriented companies when analyzing financial
statements.
REQUIRED: Why is this true? Give an example of a financial ratio that is meaningless to a service business.
432. Ginger Company claims its financial information is useful. What two qualities must be present in order to have
“useful” accounting information? Explain these two qualities.
433. What is the difference between comparability and consistency?
434. What is conservatism and why is it important in accounting?
435. How is a classified balance sheet useful to decision makers?
436. What is the operating cycle of a business? How does this impact the classification of assets into current and
noncurrent categories?
437. How does the definition of a current liability relate to that of a current asset?
Chapter 1: Accounting as a Form of Communication
438. Potential stockholders and lenders are interested in a company’s financial statements. Several financial
statement items appear below. Answer the questions that follow.
Accounts receivable
Accounts payable
Advertising expense
Cash
Depreciation expense
Income taxes
Common stock
Land held for future expansion
Dividends
Retained earnings
Loss on the sale of equipment
Service revenue
Office supplies
Patent amortization expense
Sales
Unearned revenue
Utilities expense
A) Which two items would stockholders be most interested in that can either be computed
from the above data or are included in the items listed above? Explain why the two you
selected are important to stockholders.
B) In which one item would lenders be most interested? Explain why this item is important.
439. What is the purpose of a statement of stockholders’ equity? How does it differ from the statement of
retained earnings? Which statement is required?
440. What is the purpose of a statement of cash flows? Give an example of one of each of the three activities.
Chapter 1: Accounting as a Form of Communication
441. What information is provided in an annual report in addition to the financial statements?
ANSWER: An annual report contains the reports of management, the auditor’s report, management’s
discussion and analysis of the amounts appearing in the statements, footnotes to the financial
statements, and a summary of selected financial data over a period of years.
Identify whether the following investor questions are associated with (a) primary or (b) secondary
financial reporting objectives.
a. primary financial reporting objective
b. secondary financial reporting objective
442. How much has Apple invested in research and development projects?
443. Based on the financial information, should I buy shares of Apple?
444. If I buy 50 shares of Apple, how much cash will I receive in dividends each year?
445. How much revenue will Apple generate during the time period in which I own the shares?
446. Based on the financial information, should I sell my shares of Apple next quarter?
Match the following characteristics with the statements about each qualitative characteristic’s
importance.
a. Consistency
b. Materiality
c. Conservatism
d. Comparability
e. Reliability
f. Relevance
g. Understandability
447. Those willing to spend the time should be provided with comprehensible accounting information.
448. The accounting information must be information that could affect a decision.
449. Accounting information should use the least optimistic estimate.
Chapter 1: Accounting as a Form of Communication
450. This quality allows users to analyze two or more companies and look for similarities and differences.
451. Users must be able to compare accounting information of a firm with its prior year information.
452. Accounting information must be verifiable and faithfully represent actual transactions.
453. This quality refers to an amount large enough to affect a decision.
For each item listed, select the section of the balance sheet in which the item would be reported.
a. Current Assets
b. Property. Plant, and Equipment
c. Current Liabilities
d. Long-term Liabilities
e. Stockholders’ Equity
454. Cash
455. Accounts payable
456. Retained earnings
457. Land
458. Capital stock
459. Accounts receivable
460. Equipment
461. Notes payable—due within one year
462. Interest payable
Chapter 1: Accounting as a Form of Communication
463. Bonds payable
464. Computer used within the business
465. Computer available for resale
Match the selected items from a classified balance sheet and multiple-step income statement to the
section in which they would appear on the classified balance sheet or the income statement.
a. Current Assets (balance sheet)
b. Property, Plant, & Equipment (balance sheet)
c. Current Liabilities (balance sheet)
d. Long-term Liabilities (balance sheet)
e. Stockholders’ Equity (balance sheet)
f. Operating Revenue (income statement)
g. Operating Expenses (income statement)
h. Other Revenue & Expenses (income statement)
i. Income Taxes (income statement)
466. Accounts receivable
467. Consulting revenues
468. Buildings
469. Interest expense
470. Capital stock
471. Land
472. Bonds payable
473. Income taxes payable
Chapter 1: Accounting as a Form of Communication
474. Service revenues
475. Wages payable
476. Cost of goods
sold
From the following choices, select the answer that describes the effect on working capital as a result of
the transaction.
a. Working capital will increase
b. Working capital will decrease
c. Working capital will not change
477. Paid cash for supplies
478. Purchased inventory on account
479. Purchased land for cash
480. Borrowed cash using a long-term note
481. Borrowed cash using a six-month note
482. Collected an account receivable
From the following list, select the proper section from the statement of cash flows in which it would be
classified.
a. Operating Activities
b. Investing Activities
c. Financing Activities
483. Purchased equipment for cash
Chapter 1: Accounting as a Form of Communication
484. Received cash from the sale of a building
485. Paid a cash dividend on capital stock
486. Received cash from bond issuance
487. Paid income taxes
488. Received cash from selling goods to customers
489. Sold equipment no longer used in the business
490. Paid suppliers cash for inventory purchased
491. In preparing financial statements, accountants should consider all of the following except:
a. the objectives of financial reporting.
b. the characteristics that make accounting information useful.
c. the most useful way to display the information found on the financial statements.
d. the presentation of the value of a company.
492. Which of the following is the best description of the purpose of financial reporting?
a. To allow users to access to the daily detailed records of a business.
b. To help the users reach their decisions in an informed manner.
c. To provide users with an assessment of how long the company will continue as a going concern.
d. To allow users access to a list of all the individuals who owe the company money.
493. The quality of accounting information that allows a user to analyze two or more companies and look for
similarities and differences is known as understandability.
a. True
b. False
Chapter 1: Accounting as a Form of Communication
494. The quality of accounting information that makes it comprehensible to those willing to spend the necessary
time is consistency.
a. True
b. False
495. The quality of accounting information that allows a user to compare two or more accounting periods for a
single company is known as consistency.
a. True
b. False
496. You are comparing three companies that use different depreciation methods. Which of the following would
help you the most in making a comparison of the companies?
a. The average earnings per share for the quarter.
b. Prospective cash receipts.
c. Claims to resources.
d. Disclosure of accounting policies.
497. There is a standard threshold for materiality set by the Financial Accounting Standards Board for all companies.
a. True
b. False
498. The lack of a common depreciation method makes it impossible to compare the performance companies
using different methods.
a. True
b. False
499. The amount of a transaction may be immaterial by company standards but still be considered
significant by financial statement users.
a. True
b. False
Chapter 1: Accounting as a Form of Communication
500. Which of the following are generally supplementary information required by GAAP concerning the accounting
treatments used by a company?
a. A Year-End Worksheet
b. Management’s Discussion and Analysis
c. The Report of Independent Accountants
d. Notes to the Consolidated Financial Statements