1) Holmes Corporation manufactures electronic components for use in many consumer
products. Their raw materials are purchased literally from all over the world. Depending
on the country involved, purchase terms vary widely. Some suppliers, for example,
require full prepayment, while others are content to receive payment within six months
of receipt of the goods.
Because of this situation, Holmes never closes its books until at least ten days after
month end. In this way, it can sort out ownership of goods in transit, and document
which goods were received by month end, and which were not.
Manya Andre, a new accountant, was asked to record about $70,000 in inventory as
having been received before month end. She argued that the shipping documents clearly
showed that the goods were actually received on the 8th of the current month. Her boss,
busy with month-end reports, curtly tells Ann to check the shipping terms. She did so,
and found the notation “FOB shipper’s dock” on the document. She hadn’t seen that
particular notation before, but she reasoned that if the selling company considered it
shipped when it reached their dock, Holmes should consider it received when it reached
Holmes’s dock. She did not record the purchase until after month end.
Required:
1>Why are accountants concerned with the timing in the recording of purchases?
2>Was there a violation of ethical standards here? Explain.
2) The data for an investment center is given below.
January 1, 2014December 31, 2014
Current Assets$ 800,000$ 1,600,000
Plant Assets6,000,0008,000,000
The controllable margin is $1,312,000.
Instructions
Compute the return on investment for the center for 2014 .
3) The cost of goods purchased during a period plus the beginning inventory is the
amount of goods ________________ during the period.
4) The following information is available for Sally Corporation for the year ended
December 31, 2014:
Collection of principal on long-term loan to a supplier$15,000
Acquisition of equipment for cash10,000
Proceeds from the sale of long-term investment at book value20,000
Issuance of common stock for cash27,000
Depreciation expense28,000
Redemption of bonds payable at carrying (book) value35,000
Payment of cash dividends15,000
Net income25,000
Purchase of land by issuing bonds payable45,000
In addition, the following information is available from the comparative balance sheet
for Sally at the end of 2013 and 2014:
2014 2013
Cash$ 66,000$14,000
Accounts receivable (net)20,00016,000
Prepaid insurance 18,000 13,000
Total current assets$104,000$43,000
Accounts payable$ 30,000$20,000
Salaries payable 3,000 7,000
Total current liabilities$ 33,000$27,000
Instructions
Prepare Sally’s statement of cash flows for the year ended December 31, 2012 using the
indirect method.
5) The ______________ principle gives accountants guidance as to when revenue is to
be recorded.
6) The beginning cash balance is $15,000. Sales are forecasted at $800,000 of which
80% will be on credit. 70% of credit sales are expected to be collected in the year of
sale. Cash expenditures for the year are forecasted at $475,000. Accounts Receivable
from previous accounting periods totaling $9,000 will be collected in the current year.
The company is required to make a $15,000 loan payment and an annual interest
payment on the last day of every year. The loan balance as of the beginning of the year
is $90,000, and the annual interest rate is 10%.
Instructions
Compute the excess of cash receipts over cash disbursements.
7) Tall Oak, Inc. produces rulers from plastic resin. Tall Oak has estimated production
and sales of rulers in units for the next 2 months as:
May June
Estimated production42,00048,000
Estimated sales50,00036,000
Each ruler requires 0.25 pounds of resin. The cost of resin is $4.50 per pound. Tall Oak
wants to have 20% of the next month’s materials requirements on hand at the end of
each month.
Instructions
Prepare a direct materials purchases budget for the month of May.