acc 291 including final

ACC 291 Includes WileyPLUS + Final

WEEK 1 JUMP TO PAGE 1

WEEK 1 SUMMARY 1

DISCUSSION QUESTIONS (MULTIPLE OPTIONS) 4


WILEYPLUS ASSIGNMENT 7

WILEYPLUS PRACTICE QUIZ 14

WEEK 2 TEAM REFLECTION 22

WEEK 2 SUMMARY 28






WEEK 3 SUMMARY 54






WEEK 4 SUMMARY 79






RATIO ANALYSIS MEMO 108

PROFITABILITY RATIOS TEAM ASSIGNMENT 111

LIQUIDITY, HORIZONTAL, VERTICAL ANALYSIS PURCHASED SEPARATELY –CLICK ON LINK)

INDIVIDUAL PAPER 114

FINAL EXAM JUMP TO PAGE 117

http://www.scribd.com/doc/127661424/ACC-291-Week-5-Liquidity-Horizontal-Vertical-Analysis-EXCEL-Spreadsheet

1

Week1

ACC 291

University of Phoenix

Weekly Summary (Week 1)

3 Options to Choose From or Mix and Match

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Weekly Summary for Week 1

Response Option 1 This week I learned about different methods that deal with bad debt and the means to log these

debts into journals. There are three main methods of figuring the amount of bad debt, which are

the sales percentage method, receivable method, and the write-off method. When

companies make sales on credit or are payable in later dates of 30 days, 60 days, or 90 days they

estimate some of the debt will be uncollectible. Depending on which method a company comes

up with a percentage of debt that is based on sales or allotment will not be paid and will be

charged to the bad debt expense. GAAP only recognizes the sales percentage and receivable

methods because of the matching principle that is required. Which method that a company uses

depends on the needs of each company. Another factor is if the bad debt is need for tax purposes.

A company may chose to try each method and see which one fits their needs the best.

I personally see that the percentage of sales method to be the best method for the ease of this

method. A company can base bad debt on a percentage of sales. For instance, if a company

reports sales of 1 million dollars in a period then let us say that 5% of sales is deemed

uncollectible then the bad debt expense would be 50,000 dollars. That amount would be debited

into the bad debt entry of the income statement. I believe this method is simpler to use and less

errors would be made in the statement.

Response Option 2

This week was very interesting to me because I had to reread the things that I learned in my

accounting classes that I had before just to bring me up to speed so I would have a better

understanding of what we were learning.

This week what I learned was the different methods that companies could use when it comes to

dealing with their bad debt. There are three different methods that they have to choose from and

those three methods are direct write-off, sales percentage, and receivable method. I also learned

that depending on the company and their needs for dealing with their bad debt is how they would

choose which one of these three methods that they would choose to use. A company would need

to try all three methods to see which one they should use.

One thing that helped me to understand all of this better would be the example of a company

who has sales done by credit cards and they are set up to be payable at later dates like 30, 60, or

even 90 days later, then they will estimate that some of that debt will be non-collectible when the

sale was made.

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I also learned that even though all three methods can be used by business, there are only two of

them recognized by the GAAP. The GAAP only recognizes sales percentage and receivable

method because of the matching principles that are involved. The GAAP does not recognize the

direct write-off methods even though a company can use it when it comes to dealing with their

bad debt.

Response Option 3

During this first week of class I think that the most important thing I learned is that, as with

revenue recognition, the recording of bad debt expense should be tied to the revenue period and

not necessarily the time when the bad debt expense occurred. This is important because both the

revenue and the expenses will impact both the income statement and balance sheet. It is

important to tie the two together so that the statements reflect the most correct “picture” of the

reporting period. For example if the revenue was recognized in one period and the bad debt

expense in another then the results for both periods would be skewed, the revenue not impacted

by the expense would seem excessive and the expense without the offsetting revenue would also

be a dramatic hit to profitability. For this reason the percentage of sales method would be the

choice to provide the most accurate overall view of the financial health of the company.

In contrast the direct write-off method has the advantage of only writing off the actual bad debt

incurred when it is incurred. The disadvantage is that the bad debt is almost always recorded in a

period other than when the income is recognized. This again skews the financial statements and

can give an inaccurate picture of the health of the company. Both internal and external users of

the information provided in the financial statements depend on them being consistently accurate

over time. In order to make sound managerial, lending and investment decisions users need this

consistency and accuracy over a period of time.

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ACC 291


Week 1 Discussion Questions 1-2

Question 1: How are bad debts accounted for under the direct write-off method? What are the

advantages and disadvantages of this method?

Question 2: Why would you select the percentage of sales method for calculating doubtful

accounts instead of the percentage of receivables method?

Multiple Response Options

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Discussion Question 1: How are bad debts accounted for under the direct write-off method?

What are the advantages and disadvantages of this method?

Response Option 1

Bad debt expense is incurred when a sum owed to the business and thought to be collectible

becomes uncollectible. Direct write-off method and allowance method are the accounting

methods used to record this phenomenon on the accounting ledger. Direct write-off method is the

simpler, and in a sense, the more reliable method. Direct write-off method is where the business

records bad debt expense at the time when the business determines that the receivable has

become uncollectible.

The most important advantage compared to allowance method is that direct write-off is simpler

and much easier to perform. The second advantage of direct write-off is that its figures are more

reliable than the ones produced through estimation under allowance method. The direct write-off

method is simple and factual, involving no estimates. But it does have certain disadvantages in

reporting the bad debt expense and accounts receivable value, as well as earnings in general.

Since there is usually a significant amount of time between a credit sale and the write off of a

bad account, the bad debt expense will occur in a much later period than the revenue from the

sale. This is a problem under the matching principle.

NOTE: It should be noted that the Internal Revenue Service requires the direct write off method.

They prefer to see the tax deduction for bad debt expense only when an account receivable is

actually written off instead of allowing a deduction for an anticipated potential loss.

Response Option 2

Under the direct write-off method debts are accounted for by charging the loss to the bad debt

expenses. One major disadvantage of using this method is that it makes the income statement and

balance sheet less useful. This occurs because the bad debt is not usually recorded in the same

accounting period as the revenue was. This can cause the accounting period that the debt was

written off in look like the company made hardly anything when in actuality they did. Another

disadvantage of using this method is that it may deter potential investors from investing in that

company. Personally, I would be hesitant on investing in a company if a few financial statements

look good and then the next one looks really bad. I would find myself wondering whether that

company is financially sound and would most likely invest my money elsewhere. The main

advantage that I can think of with this method is that it may make the previous accounting period

look really good because that period could be the one where there was a great deal of sales,

which can make a company look very appealing to potential investors. That is if they invest

before the next accounting period is over and financial statements are prepared.

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Discussion Question 2: Why would you select the percentage of sales method for calculating

doubtful accounts instead of the percentage of receivables method?

Response Option 1

Percentage of receivables and percentage of sales are two accounting allowance methods used to

reconcile customer accounts deemed noncollectable. When allowed by generally accepted

accounting principles (GAAP), these two strategies are preferred over direct write-off of bad

debt expenses. Percentage of receivables and percentage of sales provide a business with the

ability to accurately estimate the expected bad debt losses they will have in each succeeding

fiscal reporting period. Percentage of sales is accounted for on the annual income statement.

Percentage of sales method makes the assumption that a percentage of credit sales for an

accounting period is noncollectable. Using this method, bad debt is computed by multiplying

credit sales by an estimated percentage considered noncollectable. The allowance for bad debt is

posted as an expense subtracted from gross income, reducing net income for the reporting period.

This method is used for bad credit directly provided to a customer by the company, not for credit

card sales. Using percentage of sales and percentage of receivables to account for bad debt

expenses is not allowed for calculation of income tax by the IRS.

I have read so much information on both and it seems that they are both acceptable but by

different parties and for various reasons.

Response Option 2

The decision to use percentage of sales versus percentage of receivable method is management

preference. Both offer pro's and con's. Percentage of sales method for calculating uncollectables

is better coming from an income statement point of view. The percentage of receivables is better

when coming from a balance sheet point of view. POS basis estimates what percentage of credit

card sales will be uncollectable, where POR basis estimates what percentage of receivables will

result in losses from uncollectable accounts. Personally i would prefer to use the percentage of

sales basis over the percentage of receivables basis on numerous accounts. First being that it is

easier from a track sheet stand point to track credit sales rather than receivable

accounts. Another reason i would prefer the percentage of sales basis is time itself. POS is used

to track annual sales and anticipated losses for the entire year. POR is a period tracking and

accounting system. It only partially predicts losses from a sales period aspect.

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Week2

ACC 291

WileyPLUS Week 2 Assignment

Questions 1-6

Exercise E8-3 Exercise BE9-13 Exercise Do It! 9-4 Exercise E9-9

Exercise E9-10 Problem P9-5A




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Question 1

The ledger of Hixson Company at the end of the current year shows Accounts Receivable $120,000, Sales $840,000, and Sales Returns and Allowances $30,000.

If Hixson uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Hixson determines that Fell's $1,400 balance is

uncollectible.

If Allowance for Doubtful Accounts has a credit balance of $2,100 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable.

If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.

Question 2

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Information related to plant assets, natural resources, and intangibles at the end of 2011 for Spain Company is as follows: buildings $1,100,000; accumulated depreciation-buildings $650,000; goodwill $410,000; coal mine $500,000; accumulated depletion-coal mine $108,000. Complete the partial balance sheet of Spain Company for these items. (List assets with smallest net book value first.

Enter all amounts as positive amounts and subtract where necessary.)

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Question 5

Beka Company owns equipment that cost $50,000 when purchased on January 1, 2008. It has been depreciated using the straight-line method based on estimated salvage value of $5,000 and an estimated useful life of 5 years.

Prepare Beka Company's journal entries to record the sale of the equipment in these four independent situations.

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Journalize the above transactions. The company uses straight-line depreciation for buildings and equipment. The buildings are estimated to have a 50-year life and no salvage value. The equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of sale or retirement. (For multiple debit/credit entries, list amounts from largest to smallest eg 10, 5, 3, 2.)

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Complete the plant assets section of Jimenez's balance sheet at December 31, 2012. (List in the same order as the partial balance sheet presented in the problem. Enter all amounts as positive amounts and subtract where necessary.)

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ACC 291

WileyPLUS Week 2 Practice

Chapter 9 Practice Quiz 1

Questions 1-16




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Question 3

Micah Bartlett Company purchased equipment on January 1, 2010, at a total invoice cost of $400,000.

The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The amount of accumulated depreciation at December 31, 2011, if the straight-line method of depreciation is used, is:

Question 4

Ann Torbert purchased a truck for $11,000 on January 1, 2010. The truck will have an estimated salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in accumulated depreciation at December 31, 2011, can be computed by the following formula:

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Question 5

Jefferson Company purchased a piece of equipment on January 1, 2011. The equipment cost $60,000

and had an estimated life of 8 years and a salvage value of $8,000. What was the depreciation expense for the asset for 2012 under the double-declining-balance method?

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Question 7

Able Towing Company purchased a tow truck for $60,000 on January 1, 2011. It was originally

depreciated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On December 31, 2013, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2013) and the salvage value to $2,000. What was the depreciation expense for 2013?

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Question 9

Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2011. The machine was purchased for $80,000 on January 1, 2007, and was depreciated on a straight-line basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the amount of the gain or loss recorded at the time of the sale?

Question 10

Maggie Sharrer Company expects to extract 20 million tons of coal from a mine that cost $12 million.

If no salvage value is expected, and 2 million tons are mined and sold in the first year, the entry to record depletion will include a:

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Question 12

Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to develop a patent granted on January 2, 2011. On July 31, 2011, Beyerlein paid $35,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2011, should be:

Question 14

Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets of $200,000, and ending total assets of $300,000. What was the company's asset turnover ratio?

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Question 15

Schopenhauer Company exchanged an old machine, with a book value of $39,000 and a fair market value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial substance. At what amount should the machine acquired in the exchange be recorded on Schopenhauer's books?

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ACC 291

Learning Team Reflection (Week 2)

Accounting Liabilities




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The percentage of sales method and the percentage of receivables method are two

accounting allowance methods that are used to reconcile customer accounts that are deemed as

non-collectable. The percentage of sales method is the method of estimating cash requirements

by expressing revenues and expenses as percentages of sales and then using those percentages to

construct a balance sheet that has projected the revenue amount the company expects to receive.

Another method of estimating how much account receivables will eventually be non-collectable

is the percentage of receivables method. The percentage of receivables method estimates the

percent of receivables are lost due to non-collectable debts. Both methods are typically preferred

over the direct write off method.

Tangible assets are anything that has a physical existence, meaning it can be seen or felt.

Intangible assets are anything that a company owns that doesn’t have a physical existence, such

as information or copyrights. A fixed asset is a physical item; they are listed on balance sheets as

assets, as opposed to being expenses on an income statement. Intangible assets are reported

under the long-term assets section. The three depreciation methods used in accounting are the

Straight-Line, Accelerated, and Declining Balance. The Straight-Line method is the most

commonly used method for calculating depreciation because it is the simplest. This method can

be used for any depreciable property aside from those that are required to use the accelerated

depreciation. The Straight-Line method is used for internal books and the formula for straight-

line depreciation equals the as set’s depreciable basis divided by its estimated longevity. The

Accelerated Cost Recovery System is a method for recovering the cost of personal and real

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property that has a shorter useful life. The Declining Balance is the less common form, the IRS

requires it when an assets’ life is longer than three years. The straight-line method is most

commonly used because it is the easiest, with the implementation of the equation.

When a company acquires plant assets, it records a debit transaction in the land account

and records a credit transaction in the cash account. To record a disposal or retirement of plant

assets, an entry is made for accumulated depreciation and equipment. If the item has fully

depreciated, or it has been fully paid off by the company, then the entire amount of the cost of

the asset is entered as a debit to the accumulated depreciation account and a credit to the

equipment account. This will “zero out” the equipment account and show that nothing is owing

any longer for it. When the sale of an asset occurs, depreciation must first be accounted for, then

the math can be done to find out if the sale will result in a gain or a loss. If the item has fully

depreciated, or its book value is zero, any sale amount above $0 will result in a gain. To record

this entry, a credit amount is entered for the sale price of the asset. Another credit amount is

recorded to enter the accumulated depreciation. To show the total cost of the equipment, a debit

entry is entered with the cost paid for the equipment. If we add the amount the equipment sold

for to the accumulated depreciation expense and subtract from that sum the cost of the office

furniture, we will arrive at the gain on disposal. This number is then entered as a debit amount.

While revenue and capital expenditures can refer to the same types of assets, they are

different from one another. Revenue expenditures refer to the minor amounts recorded to show

amounts paid for upkeep of assets while capital expenditures refer to expenses paid for the

improvement of assets (Weygandt, Kimmel & Kieso, 2010). Companies record revenue

expenses as debits to the maintenance expense account as they happen. Capital expenses are

recorded as debits to the asset being improved.

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Accounts Payable, Notes Payable, and Accrued Expenses are all expenses that a company

pays or is going to pay. Accounts Payable is recorded for an expense that is going to be paid in a

short period of time and normally paid in full, in a short period of time. Notes Payable is an

expense that normally is paid over a longer period of time and is a more legal expense to pay.

For example, if a company buys a piece of equipment that is going to be paid off over long

period of time. Accrued expenses are expenses that are carried over from one pay period to

another. Salaries would be considered an accrued expense when it is recorded in the previous

month and then paid in the current month.

The journal entry to Issue bonds at face value is a debit to Cash and a credit to Bonds

Payable (to record sale of bonds at face Value. It will appear as follows:

1-Jan Cash 200000

Bonds Payable 200000

(to record sale of Bonds at Face

Value)

To record periodic interest of bonds it is a debit to Bonds Interest Expense and a Credit to Cash

1-Jul Bond Interest Expense 20000

Cash 20000

(to record payment of bond

interest)

At December 31, a company will need to recognize interest expense incurred since July 1 with

the following adjusting entry:

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31-Dec Bond Interest Expense 20000

Bond Interest Payable 20000

(to accrue bond interest)

When Bonds mature and are redeemed the journal entry is a debit to bonds payable and a credit

to cash

1-Jul Bonds Payable 200000

Cash 200000

(to record redemption of bonds at

maturity)

To record Amortization

1-Jul Bond Interest Expense 20500

Discount on Bonds Payable 500

Cash 20000

(to record payment of bond interest and

amortization of Bond discount)

Straight-Line Depreciation

Company A buys a piece of equipment for $100,000, salvage value is $10,000 and useful life of

equipment is 10 yrs.

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Cost - Salvage.Value = Depreciable.Cost

100000 -10,000 = 90,000

Depreciable.Cost ¸Useful.Life = Annual.Depreciation

90000 /10 = 9000

Units of Activity

Depreciation based on the clicks of the new piece of equipment. 100000 clicks on equipment is

life of the equipment, units used in first year were 9000.

Depreciable.Cost ¸Total.Units = Depreciation.Cost

9000 ¸100000 = .09

Depreciable.Cost *Units.of .Year = Annual.Depreciation

.09*9000 = 810

Amortization Expenses

Company A has created a new patented good, the patent cost Company A 60,000 for 10 yrs. The

recorded entry every year for the patent would look like:

Amortization Expense 6000

Accumulated Amortization 6000

Reference

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken,

NJ: John Wiley & Sons.

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ACC 291




Quality Work



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Response Option 1 Cost allocation is known as depreciation for plant and equipment, depletion for natural resources,

and amortization for intangibles. The process often is confused with measuring a decline in fair

value of an asset. Since the value of things fluctuates over time, valuations are as of a specific

date e.g., the end of the accounting quarter or year. Many companies use several methods of depreciation; it is acceptable and necessary in some

cases to use more than one method. It is also common for companies to depreciate its plant assets

by using the straight line method on its financial statements, while using an accelerated

method on its income tax return.

Valuation is the process of determining the current worth of an asset or company. Depreciation is

a method of allocating the cost of a tangible asset over its useful life. Amortization is a deduction

of capital expenses over a specific period of time, usually over the asset's life. Depletion assists

in accurately identifying the value of the assets on the balance sheet.

Unearned revenue is the collection of cash before a good or service is provided to a client. It is

often considered a liability because it is merely an estimate of what a company hopes to make in

the future and has not been taxed. Also, in some instances clients may prepay for a good or

service to receive a sales discount or to meet the terms of a contractual obligation. Any company

that accepts advance payments or deposits for any services or products it may deliver in the

future should report the income as unearned revenue.

Companies issue bonds to finance operations. Most companies can borrow from banks, but view

direct borrowing from a bank as more restrictive and expensive than selling debt on the open

market through a bond issue. Just because you’re buying from a discount broker does not mean

you’re buying bonds at a discount.

Response Option 2

The objectives for week 2 were to differentiate between accounts payable, notes payable and

accrued expenses. The readings also discussed the types of bonds and showed journal entries to

record issuing of bonds, periodic interest, amortization of bond premiums and discounts, and

retiring bonds. Finally, we went over calculating depreciation expenses using multiple

methods. This was one of the more intensive objectives of the week with the amount of methods

and calculations needed to calculate depreciation and depletion.

Chapter nine discussed the different types of assets reported during the financial cycle. The

assets fall under several categories, from plant assets, natural resources, and intangible

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assets. Plant assets include items like buildings and equipment. Natural resources include items

like coalmines. Finally, intangible assets include copyrights, patents, and goodwill. The cost

allocation used for each type of asset uses a different account. Plant assets use accumulated

depreciation and can be calculated using the straight-line, units-of-activity, and declining balance

methods. Natural resources use depletion and tend to use the units-of-activity method to

calculate cost allocation. Intangible assets amortize the related costs based upon useful

life. These costs also include the expenses uses to defend patents and copyrights. Unearned

income is also a liability until the service is provided to match the income received.

Chapter ten discussed both current and long-term liabilities Current liabilities include payments

due within a year or the end of the accounting cycle, whichever is longer. These liabilities can

include employee salaries, portions or all of accounts payable, and interest payable. Long-term

liabilities include the remainder of the accounts and note payable not due within the year. Bonds

are also another form of long-term liabilities. Bonds are sold to generate capital for future

business needs. These bonds can be sold at discount, face value, or premium. The determining

factor is the market interest and the contractual interest rates.

Most of this week’s reading seemed to focus on journalizing bonds during their life cycle and the

calculation of depreciation and depletion. The amount of methods used makes the information

this week difficult to retain, but also shows the importance of calculating depreciation

correctly. Each method has its own advantages and is used for different types of assets.

Response Option 3

During week 2 we learned about depreciation, depletion, amortization, and valuation. We learned

what each of these means and how a company would use them in their accounting program. We

also learned that must companies will use more than one these methods depending on what they

are doing. Most companies will use what is known as the straight line method when doing their

financial statements while they will use an accelerated method when doing their tax return.

The other topic that we learned about in week 2 was what unearned income is, why it is called a

liability, and which types of companies have unearned income. Not all business have unearned

income but business that receive a down payment for their goods or services which the customer

will receive at a later time then what they down payment was made. We also learned that

unearned income will stay as so until the goods or services was either done or provided.

The next topic that we learned about this week was why companies sell off bonds to help finance

any projects that they may need help paying for. We also learned that when a company is selling

off their bounds they can sell then at either a discount, face value, or at a premium. This is

determined by the market interest and the contractual interest.

The weeks reading was focused on how to calculate depreciation and depletion, also the

journalizing of bounds during their life cycles. Due to the amount of different methods that we

covered this week I would have to say that I had a hard time grasping all of the information.

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ACC 291



Question 1: What are the differences among valuation, depreciation, amortization, and depletion?

Is it appropriate to calculate depreciation using two different methods? Why?

Question 2: What types of industries have unearned revenue? Why is unearned revenue

considered a liability? When is the unearned revenue recognized in the financial statements?


Quality Work



32

Discussion Question 1: What are the differences among valuation, depreciation, amortization,

and depletion? Is it appropriate to calculate depreciation using two

different methods? Why?

Response Option 1

Valuation is the process of determining what the value of something such as financial assets or

liabilities. Depreciation is the downside of valuation. The allocation of the cost of is an asset to

expense over its useful life in a rational and systematic manner. It is the decrease in the value of

certain properties such as assets. Amortization stands for the systematic allocation of the

depreciable value of an asset throughout the duration of its useful life. Depletion the allocation of

the cost of a natural resource to expense in a rational and systematic manner over the resource's

useful life. They are different in the means of the way they help maintain accounts of any type.

It is appropriate to calculate depreciation using two different methods. Many companies will use

one method for financial statements while using another to calculate information on tax returns.

Using the straight-line method is commonly used for the financial statement. The reason why

there is different methods available for use is due to different assets such as the three classes of

plant assets: land improvements, buildings, and equipment as well as taxes.

Response Option 2

Cost allocation is known as depreciation for plant and equipment, depletion for natural resources,

and amortization for intangibles. The process often is confused with measuring a decline in fair

value of an asset. For example, let's say our delivery truck purchased for $6,420 can be sold for

$4,000 at the end of one year but we intend to keep it for the full five-year estimated life. It has

experienced a decline in value of $2,420 ($6,420 −$4,000). However, depreciation is a process

of cost allocation, not valuation. We would not record depreciation expense of $2,240 for year

one of the truck's life. Instead, we would distribute the cost of the asset, less any anticipated

residual value, over the estimated useful life in a systematic and rational manner that attempts to

match revenues with the use of the asset, not the decline in its value. In finance, valuation

analysis is required for many reasons including tax assessment, wills and estates, divorce

settlements, business analysis, and basic bookkeeping and accounting. Since the value of things

fluctuate over time, valuations are as of a specific date e.g., the end of the accounting quarter or

year.

Many companies use two or more methods of depreciation, from reading yes it is appropriate

and necessary in some cases. It is acceptable and common for companies to depreciate its plant

assets by using the straight-line method on its financial statements, while using an accelerated

33

method on its income tax return. A company could also be depreciating its equipment over

ten years for its financial statements, while using seven years for its income tax return. Even the

depreciation for financial statements could consist of some assets being depreciated using the

units of production or units of activity method, while other assets are depreciated using the

straight-line method.

Discussion Question 2: What types of industries have unearned revenue? Why is unearned

revenue considered a liability? When is the unearned revenue recognized

in the financial statements?

Response Option 1

By definition, unearned revenue is the collection of cash before a good or service is provided to a

client. In some instances, clients may prepay for a good or service to receive a sales discount or

to meet the terms of a contractual obligation. Any company that accepts advance payments or

deposits for any services or products it may deliver in the future should report the income as

unearned revenue. For instance, an airline that receives advance payment for tickets should

record the transactions as unearned revenue; some professional service providers such as

accounting and legal firms that accept deposits should record them as unearned revenue. Also

magazine companies offering a subscription fee may record it as unearned revenue and carry it

as a liability. However, when the subscription period is finished, then it may report it as earned

revenue.

Unearned income is often considered a liability because it is merely an estimate of what a

company hopes to make in the future and has not been taxed. If a business starts treating this

number like cash on hand instead of just an estimate, it can project earnings incorrectly and

cause problems for business planning. Unearned revenue on a financial statement allows an

investor to see the amount of money a company has collected without yet providing the goods

and/or services to satisfy the obligation. Companies that have larger

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Response Option 2

Unearned revenue is when a company accepts an advanced payment or deposit for their goods or

services they sell/offer. There are many companies that follow this practice therefore they have

some type of unearned revenue. A dry cleaner would have unearned revenue on items that have

deposits left on them; they offer a service and accept advanced payments or deposits before even

doing the service. The same goes for buying a train ticket in advanced because a person may

buy a ticket in May for June and never use it so that revenue would unearned to the company.

Unearned revenue is a liability because it really is not money earned by the company but an

amount that has been estimated they will or should earned on a product or service sold. This can

be a problem because if it was to be recorded as income earned it would not be true as the

income was never actually earned.

Unearned revenue is recognized once the services or goods have been paid for on the financial

statements.

35

Week3

ACC 291


Questions 1-8

Exercise E9-7 Exercise E10-5 Exercise E10-10 Exercise E10-11

Exercise E10-15 Exercise E10-18 Problem P10-5A Problem P10-9A




36

Question 1

Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011. The truck has an expected salvage value of $2,000, and is expected to be driven 100,000 miles over its estimated useful life of 8 years. Actual miles driven were 15,000 in 2011 and 12,000 in 2012.

Compute depreciation expense for 2011 and 2012 using (1) the straight-line method, (2) the units-of-activity method, and (3) the double-declining balance method. (Round cost per mile to 2 decimal places, e.g. 10.50. Use rounded amount for future calculations. Round final answers to 0 decimal places, e.g. 125.)

Assume that Brainiac uses the straight-line method. (1) Prepare the journal entry to record 2011 depreciation. (2) Show how the truck would be reported in the December 31, 2011, balance sheet. (Enter all amounts as positive amounts and subtract where necessary.)

37

Question 2

Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73.

What was Walls's net pay for the week? (Round answer to 2 decimal places, e.g. 10.50.)

Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries Payable; not Cash.) (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5,

3, 2. Round answers to 2 decimal places, e.g. 10.50.)

Record the issuing of the check for Walls's pay in the general journal. (Round answers to 2 decimal places, e.g. 10.50.)

38

Question 3

On January 1, Neuer Company issued $500,000, 10%, 10-year bonds at par. Interest is payable semiannually on July 1 and January 1.

Prepare journal entries to record the following.

39

Question 4

On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value. Interest is payable semiannually on July 1 and January 1.

Prepare journal entries to record the following events.

40

Question 5

Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2011. The terms provide for semiannual installment payments of $20,000 on June 30 and December 31.

Prepare the journal entries to record the mortgage loan and the first two installment payments. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

41

Question 6

Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for $562,613. This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Hrabik uses the effective-interest method to amortize bond premium or discount.

Prepare the journal entries to record the following. (Round answers to 0 decimal places, e.g. 125. Use rounded amounts for future computations.)

The payment of interest and the discount amortization on July 1, 2011, assuming that interest was not

accrued on June 30. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

The accrual of interest and the discount amortization on December 31, 2011. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

42

Question 7

Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31, 2010. The proceeds from the note are to be used in financing a new research laboratory. The terms of the note provide for semiannual installment payments, exclusive of real estate taxes and insurance, of

$29,433. Payments are due June 30 and December 31.

Complete the installment payments schedule for the first 2 years. (Round answers to 0 decimal places, e.g. 125. Use rounded amounts for future calculations.)

Prepare the entries for (1) the loan and (2) the first two installment payments. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2. Round answer to 0 decimal places, e.g. 125.)

Show how the total mortgage liability should be reported on the balance sheet at December 31, 2011. (Round answer to 0 decimal places, e.g. 125.)

43

Question 8

Elkins Company sold $2,500,000, 8%, 10-year bonds on July 1, 2011. The bonds were dated July 1, 2011, and pay interest July 1 and January 1. Elkins Company uses the straight-line method to amortize bond premium or discount. Assume no interest is accrued on June 30.

Prepare all the necessary journal entries to record the issuance of the bonds and bond interest

expense for 2011, assuming that the bonds sold at 104. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

Prepare journal entries as in the previous part of the question assuming that the bonds sold at 98. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

Show balance sheet presentation for each bond issue at December 31, 2011. (Enter all amounts as positive amounts and subtract where necessary.)

44

ACC 291



Questions 1-18


45



Question 1

The time period for classifying a liability as current is one year or the operating cycle, whichever is:

Question 2

To be classified as a current liability, a debt must be expected to be paid:

Question 3

Maggie Sharrer Company borrows $88,500 on September 1, 2011, from Sandwich State Bank by signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2011?

46

Question 4

Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes of 5%, the amount to be credited to Sales is:

Question 5

Employer payroll taxes do not include:

Question 6

47

Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1.

What amount should Sensible report as a current liability for Unearned Insurance Premiums at December 31?

Question 7

The term used for bonds that are unsecured is:

Question 8

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a premium, this indicates that:

Question 9

48

Gester Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment

of semiannual interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a:

Question 10

Colson Inc. converts $600,000 of bonds sold at face value into 10,000 shares of common stock, par

value $1. Both the bonds and the stock have a market value of $760,000. What amount should be credited to Paid-in Capital in Excess of Par as a result of the conversion?

Question 11

Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in

three annual installments of $200,000, each payable at the end of the year. What is the amount of interest expense that should be recognized by Andrews Inc. in the second year?

Question 12

49

Howard Corporation issued a 20-year mortgage note payable on January 1, 2011. At December 31, 2011, the unpaid principal balance will be reported as:

Question 13

For 2011, Corn Flake Corporation reported net income of $300,000. Interest expense was $40,000 and income taxes were $100,000. The times interest earned ratio was:

Question 14

The market price of a bond is dependent on:

Question 15

On January 1, Besalius Inc. issued $1,000,000, 9% bonds for $939,000. The market rate of interest

for these bonds is 10%. Interest is payable annually on December 31. Besalius uses the effective-

50

interest method of amortizing bond discount. At the end of the first year, Besalius should report unamortized bond discount of:

Question 16

On January 1, Dias Corporation issued $1,000,000, 10%, 5-year bonds with interest payable on July 1

and January 1. The bonds sold for $1,081,105. The market rate of interest for these bonds was 8%. On the first interest date, using the effective-interest method, the debit entry to Bond Interest

Expense is for (rounded up to the nearest whole dollar):

Question 17

On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on

July 1 and January 1. The entry on July 1 to record payment of bond interest and the amortization of bond discount using the straight-line method will include a:

Question 18

On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on July 1 and January 1. What is the carrying value of the bonds at the end of the third interest period?

51

ACC 291



52



Corporations were reviewed in great detail this week, as well as the limited liability of

stockholders, transferable ownership rights, corporation management, and government

regulations. Privately and publically held corporations vary greatly from the stock issued to the

stockholders. Publically held corporations trade stock regularly to the public and may have

thousands of stockholders. Whereas privately held corporation do not sell stock to the general

public and only has a few stockholders.

Authorized stock is the maximum number of shares that a corporation is permitted by law

to issue. This number is established in the company’s articles of incorporation. Par stock, or Par-

Value Stock is also known as “face-Value” stock. Par Stock is not affected by market value and

a corporation will not issue the same class type of stock under par value. The value of No-Par

stock is not designated by the corporate charter and does not display a face value. Its value is

designated by the amount the market buyers are willing to pay for it. When a company purchases

stock back, reducing the amount of issued stock in the open market, it is considered Treasury

Stock. Companies will do this if their stock is undervalued. Sometimes they will used the

treasury stock to issue to employees for benefits or compensation. Common Stock is stock that is

purchased by an individual, entitling them to equal portions of ownership. Common stock gives

the shareholder voting rights on corporate policies and officers on the board of directors.

Preferred stock carries the same rights as common stock, but will receive fixed dividends over

53

common stock that receives a variable dividend.

Treasury stock is defined as the difference between the number of shares issued and the

number of shares outstanding (Accountingcoach.com, n.d.). A debit balance exists in the

Treasury Stock account in the general ledger when a corporation holds treasury stock. The two

methods of recording treasury stock are: the cost method and the par value method. The

underlying assumption of the cost method is that the repurchased shares will be resold. Under the

cost method, the cost of the shares acquired is debited to the Treasury Stock account. If the

corporation were to instead sell some of the treasury stock, the payment would be debited to cash

and the cost of the shares sold is credited to the stockholder's equity account Treasury Stock and

the difference would go to another stockholder's equity account. The par value method is used

when the repurchased shares are retired permanently. The par value and issuing price of the

shares are used to record the transactions (Basu, 2012).

The economy today has made some companies change how they distribute their profits.

Benefits like profit sharing, company stock options, and 401k matching have been looked at to

reduced or eliminate totally. The company I am with has now decided to eliminate the profit

sharing and company stock options; they still match contributions to the employee retirement

funds. This is a much less burden on companies to distribute their profits and gives them the

ability to reinvest the profits that they do make. My hope is that once the economy gets back to

where it once was, the extra company profit benefits will be reinstated.

Works Cited

54

Accountingcoach.com. (n.d.). Treasury Stock, accumulated other comprehensive income.

Retrieved from http://www.accountingcoach.com/online-accounting-course/17Xpg04.html

Basu, C. (n.d.). Accounting method for treasury stock. Retrieved from

http://www.ehow.com/info_8408798_accounting-methods-treasury-stock.html

ACC 291




Quality Work

55




Response Option 1 This week we learned about the financial aspects of being a corporation. We covered many

different areas, which they use in order to do their financials. We learned about the different

things like dividends, stock transactions, investments, and about their retained earnings. Some of

the things that we also learned this week were; depending on which state the corporation is

incorporated in determines which laws they need to follow because even though a corporation is

created by law but the continued existence depends of the statutes of each state.

We also learned that a corporation is spate and distinct from their owners and also by being

under its own name and not the name of its stockholders. By a corporation being separate it will

limit the liability of the stockholders there for they cannot be held liable for any of the

corporation’s debt.

We also learned about how a corporation uses their stocks to help bring in new investments and

they can also use their stocks to reward the investors that they already have. What we learned

about dividends is that a corporation can use them. We also covered the different types of

dividends and those types are cash, property, scrip, and stocks.

Response Option 2

Becoming corporate will allow smaller businesses to take advantage of benefits designed for

larger companies. Some individuals feel that if they form an LLC or S-corp., there will be total

relief that they will have no liabilities carry over from the business's assets to personal assets.

LLC's and S-corps protect the owners and shareholders from some legal matters up to a certain

point but if the plaintiff chooses to sue a company and its owner(s) as defendants in a civil case

nothing can be done. Naming a company is easy but it should be something eye catching and

when you're dealing with investors it had better be good. You should never underestimate how

many choices consumers have, the name of your company should always stand out.

56

So many people question the Whistle Blowing Act, mainly whether or not it is an ethical

decision. Some acts are only done to protect the individual that blows the whistle when they are

just as guilty as the other criminals they actually reported. The Act can violate the confidentiality

of the employee to their employer when the whistle-blower reports an issue outside the company.

The motivating factor is an ethical decision to “right a wrong” rather than receive an award or

avoid penalties and jail time.

Dividends are a way for a company to reward you for investing money into the business. There

are several types of dividends: cash, property, script and liquidating dividends. Many companies

pay dividends in stock so you can avoid paying any taxes until the stock is actually sold. In most

cases you will receive a specific number of extra shares in the company based on the amount you

already own.

Response Option 3

This week I learned that corporations are created as special “legal entities” that give the

corporation many of the rights associated with people. A company may choose this form of

business in order to raise capital, protect shareholders from individual liability and create certain

tax advantages. Submitting an application to the Secretary of the state where the corporation is to

be formed forms a corporation. The application contains the name and purpose of the

corporation, shares of stock to be issued and the names of those forming the corporation and

beginning ownership shares. Some of the advantages of a corporation are the fact that the

corporation is a separate legal entity, liability is limited to the amount invested, the ability to

acquire capital, continuous life and professional management. Some of the disadvantages are the

separation of ownership and management, government regulations and additional tax liability.

I also learned about dividends and that, in most cases they are issued in cash and much less

frequently, in stock. In order to issue dividends there must be sufficient retained earnings,

adequate cash and a declaration of dividends, which must be approved by the board of directors.

Companies issue dividends to provide investors with return on their investment. Many investors

use the dividend history of a corporation as an indication of the desirability of the company as an

investment opportunity. Most corporations issue dividends in cash.

This week we also discussed corporate ethics and the effect that ethics training might have on the

employees of a given corporation in a work environment separate from a person’s upbringing or

innate ethical behavior. The first general consensus was that it would be difficult to train an un-

ethical person to behave in an ethical fashion without sufficient oversight and consequences for

un-ethical behavior. Training would be most effective for those persons that would behave in an

ethical manner if they understood the rules and guidelines. The most glaring cases of un-ethical

behavior have involved those people, generally at the highest levels of management that consider

themselves to be above, or exempt from the rules.

57

I believe that ethical behavior within an organization must begin at the top. Many of the scandals

referenced above involved those at the highest levels of the companies involved. That being said,

ethical standards and practices established and integrated into the organization culture through

education and training can help that organization to avoid some of the pitfalls that lead to

dishonesty and abuse.

ACC 291



Question 1: Why does a company choose to form as a corporation? What are the steps required

to become a corporation? What are the advantages and disadvantages of the corporate form of

doing business?

Question 2: What are the different types of dividends corporations may issue? When should a

corporation pay dividends? Do you prefer a stock dividend or a cash dividend? Why?

Question 3: Why do corporations buy back their own stock? What does it tell you about the

corporation? What effect does the purchase have on the price of a company’s stock?


Quality Work

58



Discussion Question 1: Why does a company choose to form as a corporation? What are the

steps required to become a corporation? What are the advantages and

disadvantages of the corporate form of doing business?

Response Option 1

Becoming a corporate business allows home-based businesses to take advantage of benefits

originally designed for larger companies. Even small businesses, such as those that produce

incomes around $50,000 can benefit from incorporation. Incorporation can build legitimacy for a

business and its services, the sole proprietor business, incorporation also provides benefits by

reducing personal liability or income taxes. The reduction of personal liability or taxes is

achieved by incorporating as a limited liability company (LLC) or as an S-corporation (S-

corp). When the main contributor to a small business is unable to perform his or her duties, these

businesses ultimately fail. Sole proprietorships tend to underscore this risk and impede a

business's reputation as an ongoing entity. Corporate entities can apply to and receive

funding more easily than sole proprietors.

Some drawbacks are that states put conditions on corporate structure, in some cases requiring the

LLC to dissolve once all members have withdrawn. These problems can be avoided by

incorporating in another state. S-corporations are more difficult to form and maintain because

they require the same governance structure as a regular corporation. Articles of incorporation

must be filed with the state, bylaws need to be developed and stock has to be issued.

Corporations must have their own financial accounts and file the names of all officers with the

state. Like corporations, a board of directors is established and it is this board that makes

managerial decisions.

The steps to form a corporation are as follows:

1. Choose an available business name that complies with your state's corporation rules.

2. Appoint the initial directors of your corporation.

3. File formal paperwork, usually called "articles of incorporation," and pay a filing fee that

ranges from $100 to $800, depending on the state where you incorporate.

59

4. Create corporate "bylaws," which lay out the operating rules for your corporation.

5. Hold the first meeting of the board of directors.

6. Issue stock certificates to the initial owners (shareholders) of the corporation.

7. Obtain any licenses and permits that are required for your business.

Response Option 2

In this week's reading we discover that Chief Justice John Marshall defined a corporation as “an

artificial being, invisible, intangible, and existing only in contemplation of law.” The text

continues to explain that, "This definition is the foundation for the prevailing legal interpretation

that a corporation is an entity separate and distinct from its owners" (Weygandt, 2012). One

reason a company will choose to form a corporation is to separate personal assets and liabilities

from that of the company's. It limits the liability of the shareholders to that of their financial

investments. They will also form a corporation for the purpose of making a profit, or to become

non-profit.

To become a corporation desiring parties must first file an application with the Secretary of State

in the desired state it wishes to operate in. Once they are approved, they may receive an

approved copy of the application, known as a charter. Once the organization receives its

charter, founders will create and organize by-laws explaining the structure the corporation will

operate under.

A corporation may gain advantage of more funding by selling stock to

shareholders. Shareholders will have the ability to vote on major decisions regarding the

corporations. In return, shareholders receive dividends on corporate earnings. Another

advantage is that operation of the business does not cease if an owner dies.

Corporations may hire skilled and qualified individuals to manage the daily operations of the

business and compensate them based on business performance or profitability. The disadvantage

of doing this that the hired individuals may not be totally honest on their reporting in order to

gain a higher compensation.

It can either be an advantage or disadvantage, but state and federal laws and regulations control a

corporation more than a privately owned company. They may regulate the number of shares

allowed as well as require additional taxes.

Reference: Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th

ed.). Hoboken, NJ: John Wiley & Sons.

60

Discussion Question 2: What are the different types of dividends corporations may issue? When

should a corporation pay dividends? Do you prefer a stock dividend or a

cash dividend? Why?

Response Option 1

Dividends are a way for a company to reward you for investing money into the business. Cash

dividends are paid for each share of stock you own in a company. Many companies will issue a

cash dividend to indicate the firm is performing well and to attract new investors. Many

companies pay dividends in stock so you can avoid paying any taxes until the stock is actually

sold. In most cases you will receive a specific number of extra shares in the company based on

the amount you already own. Property dividends are generally issued by companies that are

having financial troubles but still wish to reward shareholders for their investment. A firm

experiencing difficulty raising cash may issue a scrip dividend instead of paying money to

shareholders. Companies that are not meeting expectations and are viewed by its officials as

failing will issue liquidating dividends to shareholders as a way of paying them back for their

investment

I'd prefer the cash dividends because stock dividends tend to cause the price of the company

stock to decline since more shares are being issued to people already holding shares.

Response Option 2

There are four different types of dividends a corporation may issue. The four different types are

the following:

1. Cash dividend, which is a method for a company to pay the stockholders for their shares with

cash

2. Property dividend, which is an alternative to cash or stock paid to stockholders in the form of

assets from the issuing corporation

61

3. Scrip dividend, which is a legal note ensuring stock in the payment of cash.

4. Stock dividend which is a method for a company to pay the stockholders for their shares in

stock

Companies have the right to decide on a predate as to when to pay out the dividends. They may

predate when they are going to pay out their dividends for a number of reasons such as: to

increase the value of stock, to receive the initial money invested, or to finance a project.

I would personally prefer a cash dividend since receiving a stock dividend may cause the market

value of the stock to decrease.

Discussion Question 3: Why do corporations buy back their own stock? What does it tell you

about the corporation? What effect does the purchase have on the price

of a company’s stock?

Response Option 1

A stock buyback which is also known as a "share repurchase", is a company's buying back its

shares from the marketplace. You can think of a buyback as a company investing in itself, or

using its cash to buy its own shares. The idea is simple: because a company can't act as its own

shareholder, the company absorbs repurchased shares, and the number of outstanding shares on

the market is reduced. When this happens, the relative ownership stake of each investor increases

because there are fewer shares, or claims, on the earnings of the company. If there is no news

forthcoming and the share price is falling, the company doesn't have a way to increase demand.

However, a stock buyback allows the company to decrease the supply. The result is the same;

the share price increases. By buying back shares of a company, management may be showing it

is preparing to purchase another company or trying to protect itself against a takeover from

another company. If a company owns more shares of itself it can offer more in a buyout deal.

There are various reasons for a buyback; I am assuming the motive would justify the reason. You

would have to play close attention to recognize some reasons for buyback's because most

companies usually will not let their employees know. Most employees will get so excited about

the cash they will ignore the reasons.

62

Response Option 2

Corporations buy back their own stock for a number of reasons such as:

1. To keep control away from investors or to eliminate a hostile share holds

2. To reduce the number of shares outstanding and to increase the earnings per share.

3. To enhance its market value

The Corporation buying back its own stock may reveal that the corporation is defending itself

against a takeover by ensuring that they are the primary shareholder. The company may also be

trying to increase the value of their corporation or be preparing to purchase another company.

63

Week4

ACC 291


Questions 1-5

Exercise Do It! 11-1 Exercise E11-15 Exercise E11-16 Problem P11-6A

Problem P11-8A


64



Question 1

Indicate whether each of the following statements is true or false.

Question 2

On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.

Complete the tabular summary of the effects of the alternative actions on the components of

stockholders' equity and outstanding shares. (If answer is zero, please enter 0. Do not leave any fields blank.)

65

Question 3

Before preparing financial statements for the current year, the chief accountant for Springer Company

discovered the following errors in the accounts.

1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest

Expense $50,000 and a credit to Cash $50,000. 2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the

market value per share was $16. The only entry made was: Retained Earnings (Dr.) $10,000 and Dividend Payable (Cr.) $10,000. The shares have not been issued.

3. A 4-for-1 stock split involving the issue of 400,000 shares of $5 par value common stock for 100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings $2,000,000 and a credit to Common Stock $2,000,000.

Prepare the correcting entries at December 31. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

66

Question 4

Arnold Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative

preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2011, the ledger contained the following balances

pertaining to stockholders' equity. Preferred Stock $240,000 Paid-in Capital in Excess of Par Value-Preferred 56,000 Common Stock 2,000,000 Paid-in Capital in Excess of Stated Value-Common 5,700,000 Treasury Stock-Common (1,000 shares) 22,000 Paid-in Capital from Treasury Stock 3,000

Retained Earnings 560,000

The preferred stock was issued for land having a fair market value of $296,000. All common stock

issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at

a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2011.

Prepare the journal entries for the: (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

1. Issuance of preferred stock for land.

2. Issuance of common stock for cash. 3. Purchase of common treasury stock for cash. 4. Sale of treasury stock for cash.

67

Complete the stockholders' equity section at December 31, 2011. (Order multiple accounts in the standard format used in the text. Enter all amounts as positive amounts and subtract where

necessary.)

68

Question 5

The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011.

Common Stock ($10 stated value) $1,500,000 Paid-in Capital from Treasury Stock 6,000 Paid-in Capital in Excess of Stated Value-Common Stock 690,000 Paid-in Capital in Excess of Par Value-Preferred Stock 288,400

69

Preferred Stock (8%, $100 par, noncumulative) 400,000 Retained Earnings 776,000 Treasury Stock-Common (8,000 shares) 88,000

Complete the stockholders' equity section at December 31, 2011. (List entries by the format used in the text. Enter all amounts as positive amounts and subtract where necessary.)

Compute the book value per share of the common stock, assuming the preferred stock has a call price of $110 per share. (Round answer to 2 decimal places, e.g. 10.50.)

70

ACC 291



Questions 1-17




Question 1

Which of the following is not an advantage of a corporation?

71

Question 2

Which of the following is a disadvantage of a corporation

Question 3

Which of the following statements is false?

Question 4

ABC Corporation issues 1,000 shares of $10 par value common stock at $12 per share. In recording the transaction, credits are made to:

72

Question 5

XYZ, Inc. sells 100 shares of $5 par value treasury stock at $13 per share. If the cost of acquiring the shares was $10 per share, the entry for the sale should include credits to:

Question 6

In the stockholders' equity section, the cost of treasury stock is deducted from:

Question 7

Preferred stock may have priority over common stock except in:

73

Question 8

M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding

at December 31, 2011. No dividends were declared in 2009 or 2010. If M-Bot wants to pay $375,000 of dividends in 2011, common stockholders will receive:

Question 9

Entries for cash dividends are required on the:

Question 10

Which of the following statements about small stock dividends is true?

74

Question 11

All but one of the following is reported in a retained earnings statement. The exception is:

Question 12

A prior period adjustment is:

Question 13

In the stockholders' equity section of the balance sheet, common stock:

75

Question 14

Which of the following is not reported under additional paid-in capital?

Question 15

Katie Inc. reported net income of $186,000 during 2011 and paid dividends of $26,000 on

commonstock. It also has 10,000 shares of 6%, $100 par value, noncumulative preferred stock outstanding. Common stockholders' equity was $1,200,000 on January 1, 2011, and $1,600,000 on December 31, 2011. The company's return on common stockholders' equity for 2011 is:

Question 16

When a stockholders' equity statement is presented, it is not necessary to prepare a(an):

76

Question 17

The ledger of JFK, Inc. shows common stock, common treasury stock, and no preferred stock. For this company, the formula for computing book value per share is:

77

ACC 291





There are three sections of Statement of Cash Flows: operating, investing, and financing.

Operating activities involve the cash effects of transactions that enter net income, such as

78

services and cash payments to suppliers of inventory and cash receipts from sales of goods and

services. Investing activities involve long term assets and include making and collecting loans,

acquiring and disposing of investments. Financing activities involve liability and stockholders

equity as well as receiving cash from creditors and repaying borrowed loans as well as interest.

One of the most important parts of analyzing a company’s financial performance is being

able to understand the quality of their earnings. “A company that has a high quality of earnings

provides full and transparent information that will not confuse or mislead users of the financial

statements” (Weygandt, 2012). Although this is a very short section in the weekly reading

assignment, the discussion of ethics in regards to financial recording in the workplace is the

result of this topic. With discussion in the media and current events surrounding unethical

practices, businesses must be aware of factors that may confuse those that review their financial

records.

Ethics is not always the factor that would hamper the quality of earnings. The application

of different generally accepted accounting practices by companies in the same industry may

result in financial statements that will confuse reviewers if they compare the two. This is known

as alternative accounting methods. Managers that receive high pressure to increase revenue may

find themselves ‘channel stuffing’ or creating incentives to increase revenues in one reporting

period but will have a hard time meeting future expectations. This practice is known as improper

recognition. Companies may also practice improper capitalization of operating expenses by

under-stating liabilities. Some transactions are so transparent that it is hard for reviewers to tell

just how the company is doing financially.

The cash flow statement is one of the most fundamental financial statements. The cash

flow statement gives a detailed record of a company's earnings and expenses. The cash flow

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statement also usually separates cash flow activities into three categories: operating, financing,

and investing (Weygandt, Kimmel, and Kieso, 2012). The cash flow statement can be prepared

using either the direct or indirect method and while both methods deliver the same results they

use different procedures to determine cash flow from operating finances.

The statement of cash flows prepared with the indirect method starts with net income and

then adds or subtracts items to arrive at net cash provided by operating activities. There are three

types of required adjustments: 1) noncash charges such as depreciation, amortization, and

depletion, 2) gains and losses on the sale of plant assets, 3) changes in noncash current asset and

current liability accounts. Many companies choose to prepare their cash flow statements using

the indirect method because accrual accounting provides a better measure of how the company

functions. The indirect method also tends to be less complex (Saint-Leger, n.d.).

References

Saint-Leger. (n.d.). The Advantages of Preparing a Cash Flow Statement Using the Direct

Method. Retrieved from http://smallbusiness.chron.com/advantages-preparing-cash-flow-

statement- using-direct-method-23694.html

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken,

NJ: John Wiley & Sons.

http://smallbusiness.chron.com/advantages-preparing-cash-flow-statement-

http://smallbusiness.chron.com/advantages-preparing-cash-flow-statement-

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ACC 291




Quality Work




81

Response Option 1 This week I learned a lot about cash flow statements. I learned what they are for and when is the

best time to use them. The best time to use a cash flow statement is all the time. This is one of

the most important items you will use in your business. A cash flow statement records all of the

money coming in and out of the company. The best way a company can keep track of all of this

information is to use the three different sections of a cash flow. This will help to make sure that

your cash flow is organized. The three sections are investing, operations, and financing.

Cash from financing and cash from operations is where all of your money comes in from.

Investing is where all of your goes too. When you keep your cash flow organized into these

sections you are sure to make your business work.

I also learned about vertical and horizontal analysis. Vertical analysis is the best way for

cooperate managers and investors to look into a company’s finances. The vertical analysis also

allows investors to look at each period to make sure that it is consistent enough to invest in. A

vertical analysis is the easiest form of cash flow to use but it is not the most accurate so we have

to use it with caution. Vertical analysis uses a benchmark but you must use before you compare

all assets. Horizontal analysis is the best suited for setting up a company for a five year plan. The

horizontal analysis uses a benchmark as well, but it sets it at once usually right in the beginning

of the year.

Response Option 2

The statement of cash flows is critical to a company because it shows the inflow and outflow of

all cash. It allows investors to see if a company is able to pay for its operations and growth in the

upcoming years. Not many companies can survive without generating positive cash flow per

share for their shareholders. Income from tax sheltered retirement plans are not to be included

because the funds might be reinvested and not normally available for reuse. Certain cash inflows,

such as one-time bonus incentives, should not be included in a personal cash flow statement.

Some companies use a sort of combination vertical and horizontal analysis combined. Those type

reports contain financial data from more than one period, with a vertical analysis applied to each

one. This is a bit easier because it allows a person to glance how statement components have

changed in their proportions from one period to the next, without any extra math.

A stock buyback is also called a share repurchase which simply means that a company is buying

back its shares from the marketplace. In other words it’s a company investing in itself, or using

its cash to buy its own shares. There are various reasons for a buyback; we are assuming the

motive would justify the reason. You would have to play close attention to recognize some

reasons for buyback's because most companies usually will not let their employees know. Most

employees get so excited about the cash they ignore the actual reason for the buyback of shares.

82

Response Option 3

This week we learned about statement of cash flows that specifically track the sources of cash

within a company as well as the uses of cash. This is important because the flow of cash within a

company is very much the “life blood” of that company. The statement of cash flows is broken

down into three areas that highlight the cash transactions within three main financial activities

within the company. These sections are: Operating activities, those related to operations that

produce revenues and consume expenses, Investing activities, the acquisition and disposal of

investments and also lending and collection activities and financing activities, captures activities

such as obtaining cash from issuing debt and repayment of debt and obtaining cash from

stockholders, repurchasing shares and declaring dividends.

We also learned about two forms of financial statement analysis. The two forms are the

horizontal and vertical. Horizontal or trend analysis compares data from one time period to the

next and can be expressed in dollar amounts or percentages of increase of decrease. This form of

analysis is a good management tool, as it allows for comparison of items in the financial

statements from one period to the next.

In vertical or common-size analysis data are expressed as a percentage of a base amount, gross

profit as a percent of net sales for example. Vertical analysis can be used for a more in-depth

look at items within the financial statements and can also be used to compare companies of

different sizes. This method is a good way to pick out a company’s financial strengths and

weaknesses relative to previous periods or similar companies.

83

ACC 291



Question 1: Why are companies required to prepare a statement of cash flows? Why is the

statement of cash flows divided into three sections? What does each section tell you about the

operations of a company?

Question 2: Two popular methods of financial statement analysis are horizontal analysis and

vertical analysis. What are the differences between these two methods?


Quality Work



Discussion Question 1:

84

Why are companies required to prepare a statement of cash flows? Why

is the statement of cash flows divided into three sections? What does

each section tell you about the operations of a company?

Response Option 1

Because it shows how much actual cash a company has generated, the statement of cash flows is

critical to understanding a company's fundamentals. It shows how the company is able to pay for

its operations and future growth. Just because a company shows a profit on the income statement

doesn't mean it cannot get into trouble later because of insufficient cash flows. Some industries

are more cash intensive than others but regardless no business can survive in the long run

without generating positive cash flow per share for its shareholders. A company's long-term cash

inflows should always exceed its long-term cash outflows. Companies produce and consume

cash in different ways, so the cash flow statement is divided into three sections: cash flows from

operations, financing and investing. Basically, the sections on operations and financing show

how the company gets its cash, while the investing section shows how the company spends its

cash.

Response Option 2

Companies use a statement of cash flows because it shows where cash came from and how it was

used. The other main financial reports only provide a limited insight into the cash transactions of

the company. While the other main reports utilize the accrual accounting basis, the statement of

cash flows changes the accrual basis using the direct or indirect method. The indirect method is

primarily used, however both are acceptable under generally accepted accounting

principles. The statement of cash flows is divided into three sections and shown in the report in

the following order. Operating activities is reported first, followed by investing activities, and

finally financing activities. Operating activities deals with each transaction that involves both

revenues and expenses. This category is considered important because operating activities are the

best predictor of a company’s ability to generate future cash. This obviously is important

information for investors as well as creditors when evaluating a company’s ability to grow and

move forward. Investors can make educated guesses regarding the future cash flows based on

the statement of cash flows better than viewing the other financial reports that utilize the accrual

accounting basis. Investing activities include the transactions to purchase, sell, or dispose of

company property. Loans and debt collection are also included in the investing activities with

company plant and equipment. Investors can view the statement of cash flows to see if the

company has sufficient cash on hand to pay stockholder dividends and meet future

demands. Finally, financing activities includes receiving cash from stockholders, buying back

company stock, and paying dividends.

Discussion Question 2:

85

Two popular methods of financial statement analysis are horizontal

analysis and vertical analysis. What are the differences between these

two methods?

Response Option 1

Vertical analysis enables investors and corporate management to take a deep look at a company's

finances, with a special emphasis on how financial statement items vary over a period of time.

This type of review requires accounting detailed orientation. Vertical analysis requires the

selection of a benchmark, such as revenues, before comparing various financial items ---

expenses and net income, for example. One of the most important things I noticed when reading

was that vertical financial statement analysis offers valuable information in an easily accessible

format. Easily accessible format really caught my eye, easier doesn't necessarily mean better but

I'd try of course. It also computes an item as a percentage of a total amount, which helps

investors and managers easily evaluate two or more companies operating in similar or different

industries.

Horizontal analysis helps a firm appraise its economic evolution from one period to another.

Unlike vertical analysis, a horizontal review sets the benchmark at a given date, such as the

beginning of the year. For example, horizontal analysis may help investors gauge a company's

cash balance over a five-year period.

Response Option 2

Horizontal analysis, otherwise known as 'trend analysis', is used for evaluating a series of

financial statement data over a specific span of time. For instance, horizontal analysis can

measure net income from year to year, or quarter to quarter. Once the same parameters of data

are evaluated over time, it can determine trends such as an increase or decrease in sales,

expenses, or investments. The changes can be expressed in percentages, dollars, or both. Most

of the time, the data is simple and straight forward. Creditors, investors, and management can

monitor increases and decreases in assets, liabilities, and investments by tracking the analysis

and determining trends in growth or shrinkage in particular areas of concern.

Vertical analysis is used to measure financial statement data by comparing or expressing each

item as a percentage of a base amount. For example, when using the balance sheet, current

assets can be expressed as a percentage of all assets. Each line on the balance sheet will have its

own percentage and when compared to the balance sheet of a different period, the two

percentages can be compared and show how each percentage changed from period to

period. This information is useful in determining how particular lines on the balance sheet

changes. If current liabilities were 40% of all liabilities in one period, then display 30% the next

period, then it can show that a company is remaining current on paying liabilities and not

accruing additional liabilities.

Vertical analysis can also be used to compare companies of different size. This can be useful for

a corporation with several divisions or stores that operate on separate general ledgers.

86

Week5

ACC 291


Questions 1-6

Exercise E13-1; Exercise E13-8; Exercise E14-1; Problem P13-9A;

Problem P13-10A; Problem P14-2A




Exercise E13-1 Question 1

87

Pioneer Corporation had the transactions below during 2011.

Analyze the transactions and indicate whether each transaction resulted in a cash flow from operating activities, investing activities, financing activities, or noncash investing and financing activities.


88

Here are comparative balance sheets for Taguchi Company.

Additional information:

1. Net income for 2011 was $103,000. 2. Cash dividends of $45,000 were declared and paid. 3. Bonds payable amounting to $50,000 were redeemed for cash $50,000. 4. Common stock was issued for $42,000 cash. 5. No equipment was sold during 2011, but land was sold at cost.

Complete the statement of cash flows for 2011 using the indirect method. (List amounts from largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14,

89

10, -17, -5, -1. If amount decreases cash flow, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)


90

Financial information for Blevins Inc. is presented below.

Complete the schedule showing a horizontal analysis for 2012 using 2011 as the base year. (If amount is a decrease, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round percentages to 1 decimal place, e.g. 10.5. List items in the order given in the question.)

Problem P13-9A Question 4

Condensed financial data of Arma Inc. follow.

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1. New plant assets costing $85,000 were purchased for cash during the year.

2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash. 3. Bonds matured and were paid off at face value for cash. 4. A cash dividend of $40,350 was declared and paid during the year.

92

Complete the statement of cash flows using the indirect method. (List amounts from largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14, 10, -17, -5, -1. If amount decreases cash flow, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

93


Condensed financial data of Arma Inc. follow

94


1. New plant assets costing $85,000 were purchased for cash during the year. 2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash. 3. Bonds matured and were paid off at face value for cash. 4. A cash dividend of $40,350 was declared and paid during the year.

Further analysis reveals that accounts payable pertain to merchandise creditors.

Complete the statement of cash flows for Arma Inc. using the direct method. (List amounts from

largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14, 10, -17, -5, -1. If amount decreases cash flow for financing and investing activities, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). List all other amounts as positive.)

95


The comparative statements of Villa Tool Company are presented below.

96

Compute the following ratios for 2012. (Weighted average common shares in 2012 were 57,000, and all sales were on account.) (Round earnings per share, current ratio and acid-test ratio to 2 decimal places, e.g. 10.50. Round other answers to 1 decimal place, e.g. 10.5.)

97

ACC 291



Questions 1-19




98

Question 1

Which of the following is incorrect about the statement of cash flows?

Question 2

Which of the following will not be reported in the statement of cash flows?

Question 3

The statement of cash flows classifies cash receipts and cash payments by these activities:

99

Question 4

Which is an example of a cash flow from an operating activity?

Question 5

Which is an example of a cash flow from an investing activity?

Question 6

Cash dividends paid to stockholders are classified on the statement of cash flows as:

100

Question 7

Which is an example of a cash flow from a financing activity?

Question 8

Which of the following is incorrect about the statement of cash flows?

Question 9

Net income is $132,000, accounts payable increased $10,000 during the year, inventory decreased

$6,000 during the year, and accounts receivable increased $12,000 during the year. Under the indirect method, what is net cash provided by operations?

101

Question 10

Items that are added back to net income in determining cash provided by operating activities under

the indirect method do not include:

Question 11

The following data are available for Allen Clapp Corporation.

102

Question 12

The following data are available for Orange Peels Corporation.

Question 13

The following data are available for Meter Company.

103

Question 14

The statement of cash flows should not be used to evaluate an entity's ability to:

Question 15

Free cash flow provides an indication of a company's ability to:

Question 16

In a worksheet for the statement of cash flows, a decrease in accounts receivable is entered in the reconciling columns as a credit to Accounts Receivable and a debit in the:

104

Question 17

In a worksheet for the statement of cash flows, a worksheet entry that includes a credit to accumulated depreciation will also include a:

Question 18

The beginning balance in accounts receivable is $44,000, the ending balance is $42,000, and sales during the period are $129,000. What are cash receipts from customers?

Question 19

Which of the following items is reported on a cash flow statement prepared by the direct method?

105

ACC 291





106

One of the biggest negative impacts on a corporation is the practice of unethical behavior.

When someone practices accounting unethically, the entire corporation suffers, ranging from the

immediate employees to investors and stakeholders. Unfortunately, there are multiple reasons

why a person might be tempted to behave unethically (Jacobsen, n.d.). The first is simply the

nature of the person. A person's own self-greed may be the cause for he/she to behave

unethically. The person may be attempting to increase their own financial gain, or if the

corporation happens to be their own, the person may be trying to make the corporation appear as

if it is doing better than it actually is. Another reason why a person may behave unethically is

due to corporate pressure. For example, a person may be pressured to alter financial statements

by a client or similarly a CFO may be tempted to alter statements to please board members or

investors. A third and most common reason why a person may behave unethically is simply

because of laziness and a willingness to take shortcuts. Some fail to properly conduct their job

duties which results in improper preparation of financial information. All of the three reasons

listed are situations that lead to unethical accounting practices.

Unethical behavior effects nearly everyone associated with the corporation in question. In

regards to employees, if the person behaving unethically goes without punishment it creates an

environment of mistrust and low morale (Bramble, n.d.). The company's reputation as a whole

also suffers when employees behave unethically not only resulting in the company's value

diminishing, but also making it difficult to hire future employees (Higginbotham, 2010). Finally,

unethical behavior affects stakeholders (Garger, 2010). Stockholders financially benefit when a

corporation runs ethically, likewise, stockholders can take a hit when the corporation behaves

unethically.

107

The Sarbanes- Oxley Act is a United States federal law that was enacted on July 30,

2002. The act governs the accounting practices of all publicly held United State companies

(Nikolas, n.d.). The Sarbanes-Oxley Act implemented many changes. The first being an increase

in corporate responsibility for financial reports. The act required that several certifications were

authorized for financial reports resulting in greater responsibility for the person conducting the

reports. Because the Sarbanes-Oxley Act holds those in practicing accounting to criminal

penalties for any unethical behavior or violations, those preparing financial statements take more

care to compose financial statements accurately. Overall, the Sarbanes-Oxley Act affected

financial statements by ensuring they are prepared as accurately as possible with the threat of

criminal activity if they are not.

Work Cited

Bramble, L. (n.d.). Unethical behavior & employee morale. Retrieved from

http://www.ehow.com/about_6466822_unethical-behavior-employee-morale.html

Garger, J. (2010 , September 25). Business ethics and the bottom line for stockholders. Retrieved

from http://www.brighthub.com/office/finance/articles/18540.aspx

Higginbotham, T. (2010, October 3). Unethical behaviors and their effect on small business.

Retrieved from http://voices.yahoo.com/unethical-behaviors-their-effect-small-business-

6904236.html

Jacobsen , R. (n.d.). Unethical behavior in the workplace. Retrieved from

http://ezinearticles.com/?Unethical-Behavior-In-The-Workplace&id=954264

Nikolas, D. (n.d.). Effects of the sarbanes-oxley act. Retrieved from

http://www.ehow.com/list_6733914_effects-sarbanes_oxley-act.html

108

ACC 291

Ratio Analysis Memo (Week 5)

Berry’s Bug Blasters




109

After analysis of Berry’s Bug Blasters, the liquidity, profitability and solvency ratios

were examined. Our analysis is attached and we will offer our discovery about the company’s

financial position, which may benefit from our analysis, and what our data will reveal about the

company’s performance and position in this memo to the CEO.

After using the horizontal and vertical analysis Berry’s Bug Busters was able to see how

their assets and debts are handled in relation to profits. Liquidity within a business is the ability

to pay current liabilities using current assets. Liquidity ratios are important to a company as well

as employees, creditors and banks.

As of 2008, Berry’s Bug Blasters holds a 15.88% debt to total assets ratio. Solvency is

the long-term financial practicality of a business including its ability to pay off long-term

obligations. Key solvency ratios are debt to equity ratio, debt to capital ratio, debt to assets ratio,

times interest earned ration, and fixed charge coverage ratio.

Profitability is the ability of a business to earn profit for its owners. Profitability ratios are

determined through the analysis of asset turnover, profit margin, return on assets, and return on

common stockholders’ equity. In 2008 every dollar of asset owned Berry’s Bug Blasters sold

$1.68 of goods and services. The profit margin is 6.58%; the return on assets showed the

company received $25.52 profit off every $100 in assets, and stockholder’s equity showed a

3.7%. The collected data shows what kind of financial place the company is at. These ratios are

important for investors and lenders to see how the company is operating and handling their

assets. The ability to pay back debts and bills shows how financially healthy a company works.

All of the ratios show how healthy the company is or not in each specified area.

Overall, the company has made improvements in the past few years, but the last year saw

a slight downward trend as shown in the attached horizontal and vertical analysis. This

110

downward trend is not something yet to be concerned about. The analysis that we have done

shows us where we can make the improvements. In 2008, the collection of accounts receivable

was down compared to previous years. Being able to collect on these accounts will increase net

income. We lost money the third year of operation, but we made money this past year.

Berry’s Bug Blasters can still make improvements and still continue to increase net

income in the future by controlling the expenses, especially the indirect expenses. The direct

expenses will increase or decrease with the amount of sales that we do, but the indirect expenses

is where the company can make a difference in being profitable or not.

Reference

Weygandt, J.J. Kimmel, P.D., & Kieso, D.E. (2010). Financial accounting (7th

ed.).

Hoboken, NJ: John Wiley and Sons.

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ACC 291

Profitability Ratios – Berry’s Bug Blasters (Week 5)




112

Profitability ratios are one of the most frequently used in the financial ration analysis.

We will use profitability ratios to determine Berry’s Bug Blasters’ bottom line, efficiency, and

performance. This is done through analyzing asset turnovers, profit margin, Return on Assets,

and Return on common stockholders’ equity.

Asset Ratio: determined by dividing sales revenue by total assets. In 2008, for every

dollar of assets owned by Berry’s Bug Blasters, they sold $1.68 worth of goods and services.

Profit margin: By dividing net income by sales revenue we can determined that the profit

margin for Berry’s Bug Blasters is 6.58%

Return on Assets: Asset ratio multiplied by Profit Margin. ROA can help us determine

how profitable Berry’s Bug Blasters is compared to total assets. To analyze ROA, divide Net

Income by Total Assets. Berry’s Bug Blasters had a 25.52% Return on assets. This means they

were able to receive $25.52 profit on every $100 in assets.

Return on Common Stockholders’ Equity: Determines corporate profitability. Investors

can measure how Berry’s is using the money they invested. To calculate ROE divide Net Profit

after Taxes by Stockholder’s Equity. The calculation determined in 2008 that Berry’s Bug

Blasters had a 3.7% return on Stockholder’s equity.

113

Calculations

Asset Turnovers:

Asset turnovers= sales revenue/total assets

Asset turnovers= 3,249,580.53/1,932,041.17

Asset Turnovers= 1.68

Profit Margin:

= Profitability (net income)/revenue.

=493,139.75/ 3,249,580.53

= 6.58%

Return on Assets:

ROA= Net Income/Total Assets

ROA= 493.139.75/1,932,041.17

ROA= 25.52%

ROE = Net Profit After Taxes / Stockholders' Equity

ROE= 431,811.49/1,625,235.46

ROE= 3.7%

114

ACC 291

Effect of Unethical Behavior Article Analysis (Week 5)




115

One of the biggest negative impacts on a corporation is the practice of unethical behavior.

When someone practices accounting unethically, the entire corporation suffers, ranging from the

immediate employees to investors and stakeholders. Unfortunately, there are multiple reasons

why a person might be tempted to behave unethically (Jacobsen, n.d.). The first is simply the

nature of the person. A person's own self-greed may be the cause for he/she to behave

unethically. The person may be attempting to increase their own financial gain, or if the

corporation happens to be their own, the person may be trying to make the corporation appear as

if it is doing better than it actually is. Another reason why a person may behave unethically is

due to corporate pressure. For example, a person may be pressured to alter financial statements

by a client or similarly a CFO may be tempted to alter statements to please board members or

investors. A third and most common reason why a person may behave unethically is simply

because of laziness and a willingness to take shortcuts. Some fail to properly conduct their job

duties, which results in improper preparation of financial information. All of the three reasons

listed are situations that lead to unethical accounting practices.

After a wave of scandals in the corporate accounting world over the past decade, most

notably Enron, congress passed an important act that held those practicing accounting more

liable for their actions and worked to ensure a decrease of accounting scandals. The Sarbanes-

Oxley Act is a United States federal law that was enacted on July 30, 2002. The act governs the

accounting practices of all publicly held United State companies (Nikolas, n.d.). The Sarbanes-

Oxley Act implemented many changes, such as increasing corporate responsibility for financial

reports. The act required that several certifications were authorized for financial reports resulting

in greater responsibility for the person conducting the reports. Because the Sarbanes-Oxley Act

holds those practicing accounting to criminal penalties for any unethical behavior or violations,

116

those preparing financial statements take more care to compose financial statements accurately.

Overall, the Sarbanes-Oxley Act affected financial statements by ensuring they are prepared as

accurately as possible with the threat of criminal activity if they are not.

Work Cited

Jacobsen , R. (n.d.). Unethical behavior in the workplace. Retrieved from

http://ezinearticles.com/?Unethical-Behavior-In-The-Workplace&id=954264

Nikolas, D. (n.d.). Effects of the sarbanes-oxley act. Retrieved from

http://www.ehow.com/list_6733914_effects-sarbanes_oxley-act.html

117

FINAL EXAM

ACC 291

FINAL EXAM


1) Intangible assets are the rights and privileges that result from ownership of long-lived

assets that

A. must be generated internally

B. are non-renewable natural resources

C. do not have physical substance D. have been exchanged at a gain

2) Gains on an exchange of plant assets that has commercial substance are

A. deducted from the cost of the new asset acquired

B. deferred

C. not possible

D. recognized immediately

3) Using the percentage of receivables method for recording bad debts expense, estimated

uncollectible accounts are $15,000. If the balance of the Allowance for Doubtful Accounts is

$3,000 credit before adjustment, what is the amount of bad debts expense for that period?

A. $15,000

B. $12,000 C. $18,000

D. $8,000

118

4) When an interest-bearing note matures, the balance in the Notes Payable account is

A. less than the total amount repaid by the borrower B. the difference between the maturity value of the note and the face value of the note

C. equal to the total amount repaid by the owner

D. greater than the total amount repaid by the owner

5) Costs incurred to increase the operating efficiency or useful life of a plant asset are

referred to as

A. capital expenditures B. expense expenditures

C. ordinary repairs

D. revenue expenditures

6) Hilton Company issued a four-year interest-bearing note payable for $300,000 on

January 1, 2011. Each January the company is required to pay $75,000 on the note. How

will this note be reported on the December 31, 2012 balance sheet?

A. Long-term debt, $300,000.

B. Long-term debt, $225,000.

C. Long-term debt, $150,000; Long-term debt due within one year, $75,000. D. Long-term debt, $225,000; Long-term debt due within one year, $75,000.

7) When the effective-interest method of bond discount amortization is used

A. the applicable interest rate used to compute interest expense is the prevailing market interest

rate on the date of each interest payment date

B. the carrying value of the bonds will decrease each period

C. interest expense will not be a constant dollar amount over the life of the bond D. interest paid to bondholders will be a function of the effective-interest rate on the date

the bonds were issued

8) Capital stock to which the charter has assigned a value per share is called

A. par value stock B. no-par value stock

C. stated value stock

D. assigned value stock

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9) Manner, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and

20,000 shares of $1 par value common stock outstanding at December 31, 2011. There were

no dividends declared in 2010. The board of directors declares and pays a $45,000 dividend

in 2011. What is the amount of dividends received by the common stockholders in 2011?

A. $0

B. $25,000

C. $45,000

D. $20,000

10) Two individuals at a retail store work the same cash register. You evaluate this

situation as

A. a violation of establishment of responsibility B. a violation of segregation of duties

C. supporting the establishment of responsibility

D. supporting internal independent verification

11) The Sarbanes-Oxley Act imposed which new penalty for executives?

A. Fines

B. Suspension

C. Criminal prosecution for executives D. Return of ill-gotten gains

12) The Sarbanes-Oxley Act requires that all publicly traded companies maintain a system

of internal controls. Internal controls can be defined as a plan to

A. safeguard assets B. monitor balance sheets

C. control liabilities

D. evaluate capital stock

13) The purchase of treasury stock

A. decreases common stock authorized

B. decreases common stock issued

C. decreases common stock outstanding D. has no effect on common stock outstanding

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14) Which of the following is a fundamental factor in having an effective, ethical corporate

culture?

A. Efficient oversight by the company’s Board of Directors

B. Workplace ethics

C. Code of conduct D. Ethics management programs

15) Dawson Company issued 500 shares of no-par common stock for $4,500. Which of the

following journal entries would be made if the stock has a stated value of $2 per share?

A. Cash: $4,500

Common Stock: 4,500

B. Cash: $4,500

Common Stock: 1,000

Paid-In Capital in Excess of Par 3,500

C. Cash: $4,500

Common Stock: 1,000

Paid-In Capital in Excess of Stated Value 3,500

D. Common Stock: $4,500

Cash: $4,500

16) Hahn Company uses the percentage of sales method for recording bad debts expense.

For the year, cash sales are $300,000 and credit sales are $1,200,000. Management

estimates that 1% is the sales percentage to use. What adjusting entry will Hahn Company

make to record the bad debts expense?

A. Bad Debts Expense: $15,000

Allowances for Doubtful Accounts: $15,000

B. Bad Debts Expense: $12,000

Allowances for Doubtful Accounts: $12,000

C. Bad Debts Expense: $12,000

Accounts Receivable: $12,000

D. Bad Debts Expense: $15,000

Accounts Receivable: $15,000

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17) Blanco, Inc. has the following income statement (in millions):

BLANCO, INC.

Income Statement for the Year Ended December 31, 2011

Net Sales: $200

Cost of Goods Sold: 120

Gross Profit $80

Operating Expenses: $44

Net Income: $36

Using vertical analysis, what percentage is assigned to Net Income?

A. 100%

B. 82%

C. 18% D. 25%

18) Marsh Company has other operating expenses of $240,000. There has been an increase

in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 lower

than in the prior period. Using the direct method of reporting cash flows from operating

activities, what were Marsh's cash payments for operating expenses?

A. $228,000

B. $232,000

C. $200,000

D. $280,000

19) Andrews, Inc. paid $45,000 to buy back 9,000 shares of its $1 par value common stock.

This stock was sold later at a selling price of $6 per share. The entry to record the sale

includes a

A. credit to Paid-In Capital from Treasury Stock for $9,000 B. credit to Retained Earnings for $9,000

C. debit to Pain-In Capital from Treasury Stock for $45,000

D. debit to Retained Earnings for $45,000

20) The book value of an asset is equal to the

A. asset’s market value less its historic cost

B. blue book value relied on by secondary markets

C. replacement cost of the asset

D. asset’s cost less accumulated depreciation

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21) Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset

and are referred to as

A. capital expenditures

B. expense expenditures

C. improvements

D. revenue expenditures

22) The interest charged on a $200,000 note payable, at a rate of 6%, on a 2-month note

would be:

A. $12,000

B. $6,000

C. $3,000

D. $2,000

23) If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the

annual net cash cost of this borrowing if the income tax rate is 30%?

A. $3,000,000

B. $90,000

C. $300,000

D. $210,000

24) A corporation issued $600,000, 10%, 5-year bonds on January 1, 2011 for 648,666,

which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1

and July 1. If the corporation uses the effective-interest method of amortization of bond

premium, the amount of bond interest expense to be recognized on July 1, 2011, is

A. $30,000

B. $24,000

C. $32,434

D. $25,946

25) If a corporation has only one class of stock, it is referred to as

A. classless stock

B. preferred stock

C. solitary stock

D. common stock

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26) ABC, Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and

50,000 shares of $1 par value common stock outstanding at December 31, 2011. What is the

annual dividend on the preferred stock?

A. $50 per share

B. $5,000 in total C. $500 in total

D. $.50 per share

27) When the selling price of treasury stock is greater than its cost, the company credits the

difference to

A. Gain on Sale of Treasury Stock

B. Paid-in Capital from Treasury Stock C. Paid-in Capital in Excess of Par Value

D. Treasury Stock

28) Intangible assets _______

A. should be reported under the heading Property, Plant, and Equipment

B. should be reported as a separate classification on the balance sheet C. should be reported as Current Assets on the balance sheet

D. are not reported on the balance sheet because they lack physical substance

29) Where would the event purchased land for cash appear, if at all, on the indirect

statement of cash flows?

A. Operating activities section

B. Investing activities section C. Financing activities section

D. Does not represent a cash flow

30) In performing a vertical analysis, the base for cost of goods sold is

B. Net Sales

acc 291 including final

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