Finance Chapter 2 3 A deferral is a transaction in which the exchange

23) Clean Sweep contracted to clean an office building in July for $1,500. The work was

contracted in July. The building was completely cleaned in August and Clean Sweep received a

payment of $500. The remaining payment of $1,000 was received in September. Discuss how

this event would be reported in the monthly financial statements for July, August and September.

24) Clean Sweep agreed to clean an office building on a weekly basis for $1,000 per week. The

contract began on August 15, and Clean Sweep cleaned the building twice during August. Clean

Sweep received $1,000 cash in August. During August, Clean Sweep spent $400 on wages for

the workers who cleaned the building, $90 for the cleaning supplies used, and $4,000 to purchase

specialized cleaning equipment. How much revenue should Clean Sweep recognize in August

using accrual accounting?

25) Clean Sweep agreed to clean an office building on a weekly basis for $1,000 per week. The

contract began on August 15, and Clean Sweep cleaned the building twice during August. Clean

Sweep received $1,000 cash in August. During August, Clean Sweep spent $400 on wages for

the workers who cleaned the building, $90 for the cleaning supplies used, and $4,000 to purchase

specialized cleaning equipment. How much revenue should Clean Sweep recognize in August

using cash-basis accounting?

26) Explain the differences between accruals and deferrals.

27) Explain the differences between cash-basis and accrual accounting.

28) Max is having a problem understanding the financial statements. He believes that his

administrative assistant has made some errors in preparing the income statement. Evaluate the

following transactions and the income statement prepared by the administrative assistant. Prepare

a corrected income statement using U.S. GAAP.

a. Max’s Catering earned $10,000 in catering business during June.

b. Customers paid $2,500 in deposits for parties to be catered in July.

c. The business paid $500 for June rent.

d. The business paid the chef $5,000 in wages for June.

e. The business spent $3,300 on food, spices, and other ingredients, and used $1,500 of them

during June.

Max’s Catering

Income Statement

At June 2012

Revenues $12,500

Expenses

Rent $ 500

Wages 5,000

Supplies 3,300

Total expenses $(8,800)

Net income $ 3,700

29) Clean Sweep agreed to clean an office building on a weekly basis for $1,000 per week. The

contract began on August 15, and Clean Sweep cleaned the building twice during August. Clean

Sweep received $2,000 cash in September for the cleaning performed in August. How much

revenue should Clean Sweep recognize in August using accrual accounting?

30) Clean Sweep agreed to clean an office building on a weekly basis for $1,000 per week. The

contract began on August 15, and Clean Sweep cleaned the building twice during August. Clean

Sweep received $2,000 cash in September for the cleaning performed in August. How much

revenue should Clean Sweep recognize in August using cash-basis accounting?

31) Identify each of the following items as either an accrual or deferral.

a. Accrual

b. Deferral

_____ 1. Account receivable

_____ 2. Account payable

_____ 3. Prepaid insurance

_____ 4. Interest receivable

_____ 5. Prepaid advertising

32) Team Instructions: Divide the class into teams of three or four people. Each team member

should work the following problem separately outside of class. Then give the students time in

class to compare answers with their teammates and put together a final correct copy of the

problem. Each team should turn in only one copy of the problem for grading. All team members

will receive the same grade.

First do Parts A through C on your own. Then get together with your team and prepare a team

solution to hand in.

Part A: Record Icon Consultant’s transactions below by filling in the amount and the account

title from the list of accounts below (use the abbreviations given):

Account – abbreviation

Accounts receivable – AR

Insurance expense – Ins exp

Service revenue – Rev

Cash

Operating expenses – Oper

exp

Supplies – Sup

Common stock – CS

Other payables – OP

Supplies expense – Sup exp

Dividends – Div

Prepaid insurance – PI

Part B: Using Part A, fill in the missing information on the following financial statements for

the year ended December 31, 2012.

Part C:

Learning Objective 2-5

1) The current ratio measures the ________.

A) amount of revenue recognized in the current accounting period

B) liquidity of a company

C) profitability of a company

D) financial risk of a company

2) Liquidity ________.

A) represents the amount of financial risk a company assumes

B) measures how easily a company can turn its long-term assets into cash

C) measures how easily a company can pay its debts as they come due

D) is always higher for large companies than for small companies

3) Team Shirts had current assets of $2,500, long-term assets of $3,850, current liabilities of

$1,450, long-term liabilities of $2,000, and shareholder’s equity of $2,900. The current ratio

(rounded) is ________.

A) 0.72

B) 1.84

C) 4.38

D) 1.72

4) Team Shirts had current assets of $500 and total assets of $2,300. Long-term liabilities were

$700 and total liabilities were $1,430. The current ratio (rounded) is ________.

A) 0.68

B) 1.61

C) 0.35

D) 0.71

5) Maids-R-Us had current assets of $1,160 and total assets of $2,640. It had $650 in accounts

payable and a note payable for $1,500 due in two years. The current ratio (rounded) was

________.

A) 1.23

B) 1.78

C) 0.54

D) 0.81

6) Clean Sweep had current assets of $650 and long-term assets of $1,350. It had current

liabilities of $500 and a note payable of $600 due in three years. Its current ratio (rounded) was

________.

A) 1.30

B) 1.82

C) 4.00

D) 0.59

7) Before lending money to Brokah, Inc., you should calculate Brokah’s current ratio to measure

its ________.

A) liquidity, i.e., its ability to pay its current debts as they come due

B) ability to turn its noncurrent liabilities into current liabilities

C) profitability

D) ability to turn its noncurrent assets into current assets

8) The current ratio measures a company’s ability to pay its bills.

9) Team Shirts has $189,000 in total current assets and $165,000 in total current liabilities.

Calculate the current ratio for Team Shirts. Round your answer to one decimal place.

10) Team Shirts has $240,000 in total current assets and $190,000 in total current liabilities.

Calculate the current ratio for Team Shirts. Round your answer to one decimal place.

11) Team Shirts has $233,000 in total current assets and $141,500 in total current liabilities.

1. Calculate the current ratio (rounded to one decimal place) for Team Shirts.

2. Is this a more favorable ratio than 0.9 to 1?

12) Evaluate the following information for Team Shirts.

Part A: Calculate the current ratio for Team Shirts (round to two decimal places).

Part B: Is the ratio acceptable or unacceptable? Why?

Part C: Advise Team Shirts how to improve the ratio.

Assets Liabilities and shareholders’ equity

Cash $ 10,000 Accounts payable $ 20,750

Accounts receivable 2,030 Wages payable 1, 220

Supplies 180 Notes payable (due in 2 years) 8,000

Prepaid insurance 2,000

Equipment 25,000 Common stock 100,000

Building 110,000 Retained earnings 19,240

13) Ima Knerd is happy with the progress of her computer repair business. She has made a profit

in each of the past six months. However, her accountant is worried because the current ratio for

the business is 0.80. Explain to Ima why this is a concern.

14) Evaluate the following information for Team Shirts:

Part A: Calculate the current ratio for Team Shirts (round to two decimal places).

Part B: Is the ratio acceptable or unacceptable? Why?

Part C: Advise Team Shirts how to improve the ratio.

Assets Liabilities and shareholders’ equity

Cash $ 9,000 Accounts payable $ 10,750

Accounts receivable 4,430 Wages payable 250

Supplies 2,690 Common stock 6,000

Prepaid insurance 3,000 Retained earnings 2,120

15) Evaluate the following information for Team Shirts.

Part A: Calculate the current ratio for Team Shirts. (Round to two decimal places.)

Part B: Is the ratio acceptable or unacceptable?

Part C: Advise Team Shirts how to improve the ratio.

Assets Liabilities and shareholders’ equity

Cash $ 8,000 Accounts payable $ 13,750

Accounts receivable 7,030 Wages payable 3, 220

Supplies 980 Notes payable (due in 2 years) 20,000

Prepaid insurance 3,000

Equipment 35,000 Common stock 120,000

Building 120,000 Retained earnings 17,040