Chapter 2 The Firm Is stuck Paying High Rates Interest

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Authors
Robert W. Ingram, Thomas L. Albright
78 Chapter 2
9. Saunders Enterprises had the following account balances at December 31, 2007:
Cash
225,000
Contributed capital
240,000
Computer equipment
41,000
Cost of goods sold
290,000
Inventory
30,000
Land
60,000
Loans payable
18,000
Machinery
50,000
Notes payable
50,000
Rent expense
12,000
Retained earnings, beginning of year
0
Sales revenue
500,000
Supplies
6,000
Supplies expense
14,000
Wages expense
80,000
Required:
Prepare an income statement for the year.
Business ActivitiesThe Source of Accounting Information 79
10. Hamilton Company had the following account balances at December 31, 2007:
Buildings
335,000
Cash
40,000
Contributed capital
180,000
Cost of goods sold
125,000
Equipment
122,000
Fees earned for service
75,000
Land
80,000
Merchandise inventory
34,000
Owed to owners
38,000
Retained earnings, beginning of year
0
Sales revenue
540,000
Interest expense
2,000
Supplies expense
8,000
Utilities expense
15,000
Wages expense
72,000
Required:
Prepare an income statement for the year.
80 Chapter 2
11. Williams Company had the following account balances at December 31, 2007:
Buildings
165,000
Cash
48,000
Contributed capital
150,000
Cost of goods sold
180,000
Equipment
70,000
Furniture
8,000
Land
80,000
Merchandise inventory
66,000
Notes payable
116,000
Retained earnings, January 1
0
Sales revenue
400,000
Supplies inventory
3,000
Utilities expense
6,000
Wages expense
40,000
Required:
Prepare a balance sheet at December 31, 2007.
Business ActivitiesThe Source of Accounting Information 81
12. Beltway Company had the following account balances at December 31, 2007:
Buildings
335,000
Cash
70,800
Contributed capital
180,000
Cost of goods sold
150,000
Equipment
52,000
Fees earned for service
5,000
Land
80,000
Merchandise inventory
34,000
Note payable to bank
10,000
Loan payable to owner
38,000
Retained earnings, beginning of year
0
Sales revenue
565,000
Interest expense
1,200
Supplies expense
11,000
Wages expense
64,000
Required:
Prepare a balance sheet at December 31, 2007
82 Chapter 2
13. Following are the first six transactions of the Fine Thread Shirt Company:
1.
The company was established by its owners depositing $90,000 into the company
checking account.
2.
A loan was obtained from friends in the amount of $52,000.
3.
Manufacturing equipment was purchased for $80,000. A $10,000 down payment was
made and the balance was on a note payable.
4.
A manager was hired who will be paid $10,000 per month when she starts work in two
weeks.
5.
Materials inventory costing $15,200 were purchased for cash.
6.
Services totaling $16,000 were performed for customers.
Required:
After these six transactions, what is the total amount of:
a.
Assets
b.
Liabilities
c.
Revenues
d.
Expenses
14. Mort Kramer had the following activities during July:
July 1
Paid $1,200 rent on building.
2
Purchased $400 of supplies for cash.
5
Purchased merchandise inventory for cash, $5,600.
10
Sold goods to customers for $4,000 cash, that had cost Simpson $1,800.
15
Paid employees $1,000.
25
Sold goods to customers for $4,800 cash, that had cost Simpson $2,200.
31
Paid employees $1,000
31
Paid $3,600 to creditor for note payable.
At the beginning of July, Mort had $5,000 in his cash account.
Required:
a. Prepare, in good form, a statement of Kramer's net income.
b. Prepare, in good form, a statement of Kramer’s cash flow activities for July.
Business ActivitiesThe Source of Accounting Information 83
84 Chapter 2
ESSAY
1. Two basic concepts in accounting are asset and revenue. Clearly define each term and describe
how they are related.
2. Accounting activities often include the concepts of liabilities and equity. Clearly define each term
and describe how they are similar and how they are different.
Business ActivitiesThe Source of Accounting Information 85
3. In discussing a well-known company, a recent newspaper article reported that "management has to
deal with a lack of factory capacity, rising wages because of skilled-worker shortages, and a
higher cost of capital than that faced by competitors." The firm had borrowed heavily in the long-
term capital markets in recent years and now interest rates have declined substantially.
For each of these problems, identify which of the three types of activities (operating, financing, or
investing) is involved. Also, indicate the probable effect on cash flow from dealing with each of
these problems.
4. Define financing, investing, and operating activities and give two examples of each type of
activity in which a retail store (i.e. Sears, Wal-Mart, etc.) would be engaged.
86 Chapter 2
5. Creativity is one of your strong qualities. Recently, you had a clever idea for a new "Relaxation
System" for relieving stress. You have begun thinking about how to get started on this project,
which potentially could make you a lot of money. In order to get this product to market, you must
have a plan. In your financial accounting course, you have learned about the transformation
process. By planning the steps in the transformation process, you can begin to get your project
underway. Describe several key steps of the transformation process you believe are necessary for
your project. Be sure that you identify and describe briefly at least two financing activities, two
investing activities, and two operating activities.
6. What is the difference between the information reported on the balance sheet and the information
that is reported on the income statement? Discuss. How are the income statement and balance
sheet related? Discuss.
Business ActivitiesThe Source of Accounting Information 87
7. What is the relationship between "net income" reported on the income statement and "net cash
flow from operating activities" reported on the statement of cash flows?
8. Discuss the purpose of the Transformation Process and its relationship to the accounting
information system.
9. What information can one derive from the Statement of Cash Flows? How is this information
important to decision making?

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