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Accounting Chapter 21 Homework The cash effects of income statement elements can be

Page Count
14 pages
Word Count
2002 words
Book Title
INTERMEDIATE ACCOUNTING WITH AIR FRANCE-KLM 2013 ANNUAL REPORT 8th Edition
Authors
David Spiceland, James Sepe, Mark Nelson, Wayne Thomas
Dec. 31 Changes Dec. 31
2015 Debits Credits 2016
Income Statement
Revenues:
Sales revenue 100
T21-11 (continued)
21-22 Intermediate Accounting, 8/e
ANALYZING ELEMENTS OF THE FINANCIAL
STATEMENTS TO DETERMINE SPREADSHEET
ENTRIES
The cash effects of income statement elements can be
discerned by referring to changes in the balances of the
balance sheet accounts that are directly related to those
elements.
We can compare sales and the change in accounts receivable
to determine the amount of cash received from customers.
This relationship can be viewed in Taccount format as
follows:
Accounts Receivable
Beginning balance 30
Credit sales 100 ? Cash received
SUMMARY ENTRY FOR SALES AND COLLECTION
ACTIVITIES
Note that even if some of the year's sales were cash sales, say
$40 million cash sales and $60 million credit sales, the result
is the same:
Accounts Receivable
Beg. bal. 30 Cash sales $40
Summary entry (1) explains the changes in two account balances
accounts receivable and sales revenue:
($ in millions)
Entry (1) Cash (received from customers) ............ 98
T21-12 (continued)
21-24 Intermediate Accounting, 8/e
INVESTMENT REVENUE
Since neither an investment revenue receivable account nor a
T21-13
GAIN ON THE SALE OF LAND
The accounting records indicate that land that originally cost
$10 million was sold for $18 million. The entry recorded in
the journal when the land was sold also serves as our
summary entry:
T21-14
21-26 Intermediate Accounting, 8/e
COST OF GOODS SOLD
During the year UBC sold goods that had cost $60 million.
This does not necessarily indicate that $60 million cash was
SALARIES
Only $11 million cash was paid to employees; the remaining
$2 million of salaries expense is reflected as an increase in
salaries payable.
T21-16
21-28 Intermediate Accounting, 8/e
DEPRECIATION
The income statement reports depreciation expense of $3
million. The entry used to record depreciation, which also
serves as our summary entry, is:
($ in millions)
Entry (6) Depreciation expense ($3 - 0) ................... 3
T21-17
BOND INTEREST
Since we know that bond interest expense is $5 million and
that $2 million of the discount was reduced in 2016, we can
determine that $3 million cash was paid to bondholders by
recreating the entry that summarizes the recording of bond
interest expense.
T21-18
21-30 Intermediate Accounting, 8/e
INSURANCE
A decrease of $3 million in the prepaid insurance account
indicates that cash paid for insurance coverage was $3 million
less than the $7 million insurance expense for the year.
($ in millions)
Entry (8) Insurance expense ($7 - 0) ........................ 7
LOSS ON SALE OF EQUIPMENT
Recreating the journal entry for the sale of equipment gives us
the following summary entry:
T21-20
21-32 Intermediate Accounting, 8/e
INCOME TAXES
T21-21
INCOME TAXES
Additional Consideration
Entry (10) would require modification in either of the
two independent situations described below.
Deferred Income Taxes
Assume that a deferred income tax liability account had
experienced a credit change of $1 million for the year.
($ in millions)
Entry (10) Income tax expense ($9 - 0) ..................... 9
T21-22
21-34 Intermediate Accounting, 8/e
INCOME TAXES
Additional Consideration
Extraordinary Gain or an Extraordinary Loss
(continued)
ORDINARY LOSS EXTRAORDINARY LOSS
Income tax expense (10)
Income before E.O. items $13
NET INCOME
The balance in the retained earnings account at the end of the
year includes an increase due to net income.
If we are to account for all changes in each of the accounts,
T21-24
21-36 Intermediate Accounting, 8/e
SHORT-TERM INVESTMENTS
The balance in short-term investments increased from zero to
T21-25
LAND
We discovered in a previous transaction that a sale of land
caused a $10 million reduction in the account. Yet, the
account shows a net increase of $20 million.
T21-26
21-38 Intermediate Accounting, 8/e
BUILDINGS AND EQUIPMENT
We determined earlier that the buildings and equipment
account was reduced by $14 million from the sale of used
BONDS PAYABLE
The balance in the bonds payable account decreased during
the year by $15 million. Cash was paid to retire $15 million
T21-28
21-40 Intermediate Accounting, 8/e
COMMON STOCK
The common stock account balance increased by $30 million.
Two transactions, a stock dividend and a sale of new shares of
common stock, combined to cause the increase.
1. To record a "small" stock dividend, we “capitalize” retained
earnings for the market value of the shares distributed in this
case, 1 million shares times $13 per share, or $13 million. The
entry is:
2. The sale of 2 million shares of common stock at $13 per share
is represented by the following summary entry:

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