Accounting Crash Course
During 2014, Clayton Co. reported the following revenues and expenses: Revenues: $10,000 Expenses included: $1,000 of raw material costs $3,000 in new equipment purchased at year-end $1,000 in executive salaries $2,000 in factory labor $800 in recurring general legal expenses $300 in sales commissions $400 in travel expenses $200 in office supplies What is Clayton's gross profit margin?
58% Gross profit = Revenues - COGS = Revenues - Raw materials - factory labor = $10,000 - $1,000 - $2,000 = $10,000 - $3,000 = $7,000 Gross profit margin (GPM) = (Revenues - Expenses)/Revenues = $7,000 / $10,000 = 70%
Amazonia, an online retailer, lost $50 million in inventory due to a fire. Which of the following journal entries will likely occur as a result? $50 million debit to inventory and $50 million credit to retained earnings $50 million debit to inventory and $50 million credit to cash $50 million credit to inventory and $50 million debit to retained earnings $50 million credit to inventory and $50 million debit to cash
$50 million credit to inventory and $50 million debit to cash An inventory write down will get recognized on the income statement (usually within COGS or other operating expenses), with a corresponding reduction to the inventory balance.
Which of these activities are credits? The impact on inventory from a company recognizing $12 in COGS expense. The impact on treasury stock from a company repurchasing $30 in shares. The impact on debt from a $15 principal paydown. The impact on accounts receivable from a $10 customer payment. 1 and 4 2 and 4 2 and 3 1 and 2 3 and 4
1 and 4 The impact on inventory from a company recognizing $12 in COGS expense. Yes: This lowers inventory and is thus a credit. The impact on treasury stock from a company repurchasing $30 in shares. No: This lowers treasury stock (makes the account more negative) and is thus a debit. The impact on debt from a $15 principal paydown. No: This lowers debt and is thus a debit. The impact on accounts receivable from a $10 customer payment. Yes: This lowers A/R and is thus a credit.
The "matching principle" states that: Costs associated with making a product must be recognized at the end of the production process. Costs associated with making a product must be recognized immediately as incurred. Costs associated with making a product must be recognized during the same period as revenue generated from that product. Costs associated with making a product must be recorded during the same period as the sales, general, and administrative expenses that are also associated with the product.
Costs associated with making a product must be recognized during the same period as revenue generated from that product.
Clayton Corp. has provided the following information: Operating (excluding COGS) expenses were $345,000; Operating income was $215,000; Net sales were $1,100,000; Interest expense was $71,000; Loss on sale of investments was $87,000; Income tax expense was $58,000. What was Clayton's gross profit? $618,000 $469,000 $540,000 $560,000
$618,000 Gross profit equals net sales less cost of goods sold. The other way to look at it is to work backwards, realizing that: Operating income = Net sales - All operating expenses Since you're given operating income and all operating expenses other than COGS, you can simply add back operating expenses to operating income to arrive at gross profit: Gross profit ($560,000) equals operating expenses ($345,000) plus Operating Income ($215,000). Interest expense is recognized on the income statement below operating income, as are income taxes and loss on investments, which therefore have no impact on gross profit.
Warren Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Warren's managers concluded that the total useful life would be four years, rather than five years. There was no change in the estimated residual value. What is the amount of depreciation that Warren should record for year 3 under the straight-line depreciation method? $15,500 $16,500 $8,250 $11,000
$8,250 The annual depreciation expense in year 1 and year 2 is $11,000, calculated as ($60,000 - $5,000) ÷ 5. As a result of the $11k in annual depreciation, by the end of year 2/beginning of year 3, you will have depreciated $22k from the original book value, leaving you with a net amount of $60k - $22k = $38k at the beginning of year 3. Now the useful life assumption has changed to 4 years, meaning there are now only two years left to depreciate the asset. No change was made to the residual value assumption, meaning that there is now $38k in book value, with a residual value remaining at $5k. That means that $33k ($38k - $5k) is the amount that will be depreciated over the next two years, and using straight-line depreciation that amounts $16.5k per year ($33k / 2 years ). Therefore, year 3 depreciation expense will be $16.5k (and so will year 4, for that matter).
During 2018, Clayton Co. reported the following activities: The company recognized revenues of $10,000 during the period. The company recognized cost of goods sold of $1,250 The company recognized $4,000 in operating expenses for salaries, rent, utilities, and other selling, general and administrative expenses. The company paid taxes in the amount of 25% of pretax income. In addition, the company purchased a new machine for $5,000 at the beginning of the year. The machine had a useful life of 20 years and no residual value, depreciated using the straight-line method. Company borrowed $5,000 at the beginning of the year. During the year, the company paid down $1,000 of the loan principal. During the year, the company paid $500 in interest on the loan The company had 10,000 shares outstanding at the beginning of the year and issued 5,000 new shares at the middle of the year. Based on the information provided above, what is Clayton's earnings per share?
0.24 Loan borrowing and any principal paydown is not captured within the income statement, only the associated interest expense. EPS requires that we calculate shares on a weighted average basis. Since half of the year the share count was 10,000 and the other half was 15,000, the weighted average was 12,500 (50% x 10,000 + 50% x 15,000).
Which of the following are company assets? Cash A loan Revenue earned by the company A car owned by the company CEO A year's worth of utilities prepaid by the company Money owed by the company to suppliers 1 and 3 2 and 4 1 and 5 3 and 4 3 and 5
1 and 5 Cash. YES: Cash is usually the first asset listed on the balance sheet. A loan obligation. No: this is a liability. Revenue earned by the company. No: This goes on the income statement. A car owned by the company CEO. No: A car be owned by company to qualify as asset. A year's worth of utilities prepaid by the company. YES: This is recognized as a prepaid expenses asset on the balance sheet. Money owed by the company to suppliers. No: Accounts payable are a liability.
Which of the following are company assets (Choose all that apply)? Inventory Money owed to the company from customers The value of trademarks developed internally by a company under US GAAP The value of trademarks acquired by a company Dividends a company issue to shareholders 1, 3 and 4 1, 3 and 5 1, 2 and 4 2, 3 and 5 1, 3 and 5
1, 2 and 4 Inventory. Yes Money owed to the company from customers. Yes: This describes accounts receivable which are an asset. The value of trademarks developed internally by a company under US GAAP. No: While these may have significant value, the principle of conservatism and historical cost means that its value cannot be reflected on a GAAP balance sheet above the costs originally incurred to attain the trademark, which may be capitalized (the IFRS does allow remeasurement to fair value). The value of trademarks acquired by a company. Yes: While the value of internally developed trademarks cannot be reflected as an asset on the balance sheet, when a company acquires a trademark from another company, the value of that is recognized on the balance sheet. Dividends a company issue to shareholders. No: Dividends are a reduction of retained earnings and are not an asset.
Which of these items are current liabilities? Cash. Money owed to suppliers within 30 days. Taxes owed and due. A 5-year bank loan due this year. 1, 2 and 3 1, 3 and 4 2 and 3 only 2, 3 and 4 3 and 4 only
2, 3, and 4 Cash. No: Cash is a current asset. Money owed to suppliers within 30 days. Yes: This describes accounts payable, and is a current liability. Taxes owed and due. Yes: This describes accrued taxes, which are usually due quarterly and are a current liability. A 5-year bank loan due this year. Yes: Long term debt migrates from a long term liability to a current liability on the balance sheet once it becomes due within 12 months.
Which of these activities are debits? The impact to retained earnings from a company recording $100 in revenue. The impact on PP&E of a company purchasing a $50 fixed asset. The impact on retained earnings of $15 in depreciation expense. The impact on cash from a company borrowing a $50 loan. 1, 2 and 3 2, 3 and 4 1, 3 and 4 2 and 3 only All of the above
2,3, and 4 The impact to retained earnings from a company recording $100 in revenue. No: This is a credit. The impact on PP&E of a company purchasing a $50 fixed asset. Yes. The impact on retained earnings of $15 in depreciation expense. Yes: This lowers retained earnings and thus a debit. The impact on cash from a company borrowing a $50 loan. Yes: Cash goes up and thus a debit.
Jones Company has provided the following information: Cash sales totaled $255,000. Credit sales totaled $479,000. Interest income was $7,700. Interest expense was $19,900. Cost of goods sold was $336,000. Rent expense was $36,000. Salaries expense was $49,000. Other operating expenses totaled $79,000. How much was Jones' operating income?
234,000 Operating revenues = $734,000 = $255,000 + $479,000. Operating expenses = $500,000 = $336,000 + $36,000 + $49,000 + $79,000. Operating income = $234,000 = $734,000 - $500,000.
During 2014, Widge-widge reported the following revenues and expenses: Revenues: $10,000 Expenses included: $1,000 of raw material costs $3,000 in new equipment purchased at year-end $1,000 in executive salaries $2,000 in factory labor $800 in recurring general legal expenses $300 in sales commissions $400 in travel expenses $500 in product delivery costs What is Widge-widge's operating (EBIT) profit margin?
40% Operating Profit (EBIT) = Revenues - (COGS + SG&A) Revenues: $10,000 COGS + SG&A: $1,000 + $1,000 + $2,000 + $800 + $300 + $400 + $500 = $6,000 Operating Profit (EBIT): $10,000 - $6,000 = $4,000
Which of the following are company liabilities (select all the apply)? Employee wages earned and paid Treasury stock Interest payments on a loan The possibility that employees will go on strike Funds owed to suppliers Earned wages owed to employees 2 and 5 3 and 5 3 and 6 5 and 6 4 and 5 2 and 6
5 and 6 Employee wages earned and paid. No: These are expensed on the income statement with a corresponding reduction to cash. Treasury stock. No: This is recognized in the shareholders equity section of the balance sheet. Interest payments on a loan. No: Interest expense is recognized on the income statement with a corresponding reduction to cash. Only the principal of the loan is recognized as a liability. The possibility that employees will go on strike. No: This is not measurable and occurrence is not probable and is therefore not recognized on the balance sheet. Funds owed to suppliers. Yes: This describes accounts payable and is a liability. Earned wages owed to employees. Yes: This describes accrued expenses and is a liability.
Clayton Corp. has provided the following information: Gross profit was $620,000; Cost of goods sold was $380,000; Net income was $400,000. What was Clayton's gross profit margin? 40% 61.3% 62% 155%
62% Gross profit ($620,000) equals sales (X) minus cost of goods sold ($380,000). Therefore, Sales = Gross profit ($620,000) plus Cost of goods sold ($380,000). Sales = $1,000,000. Gross profit percentage = Gross profit divided by Sales = $620,000 ÷ $1,000,000 = 62%.
Imagine two identical companies, with only one difference - Company A reports using LIFO, while Company B reports using FIFO. Assume that prices of inventories steadily rise over time. Which of the following is correct? Company A will report lower net income than company B. Company A will report higher PP&E than company B. Company A will report higher total assets than company B. Company A and Company B will have identical shareholders equity balances.
Company A will report lower net income than company B. Company A will report lower net income than company B. Yes: This occurs because Company A will report higher cost of goods sold and thus lower gross profit, and thus lower net income. Company A reports higher cost of goods sold because the most recently purchased inventories are the ones that are recognized first in COGS, and more recent inventories are priced higher than older inventories. Company A will report higher PP&E than company B. No: LIFO/FIFO impacts inventory not PP&E. Company A will report higher total assets than company B. No: Company A carries inventory at lower value on the balance sheet and this lower total assets. Company A and Company B will have identical shareholders equity balances. No: Because company A will report lower net income, retained earnings will be lower for company A and thus lower shareholders equity.
A company that sells smartphones and other computer devices has collected $500,000 in cash and an additional $100,000 is due within the next 30 days for sales that it has made. It has already shipped all the merchandise. Which of the following show the correct journal entries for these activities? Debit cash for $500,000, Debit Accounts Receivable for $100,000, Credit Retained Earnings for $500,000, Credit Deferred Revenue for $100,000. Credit cash for $500,000, Credit Accounts Receivable for $100,000, Debit Retained Earnings for $600,000. Debit cash for $500,000, Debit Accounts Receivable for $100,000, Credit Retained Earnings for $600,000. Debit cash for $500,000, Debit Accounts Receivable for $100,000, Credit Inventory for $600,000. Credit cash for $500,000, Credit Accounts Receivable for $100,000, Debit Inventory for $600,000.
Debit cash for $500,000, Debit Accounts Receivable for $100,000, Credit Retained Earnings for $600,000. Debit raises cash and A/R, while the corresponding entry is credit that raises retained earnings via revenue. All $600,000 is recognized as revenue because the revenue was earned.
A company that sells smartphones prepays $20,000 to cover the next 12 months' worth of utilities. Which of the following shows the correct journal entries for these activities? Debit retained earnings for $20,000 and credit cash for $20,000. Credit retained earnings for $20,000 and debit cash for $20,000. Debit prepaid expenses for $20,000 and credit cash for $20,000. Credit prepaid expenses for $20,000 and debit cash for $20,000.
Debit prepaid expenses for $20,000 and credit cash for $20,000. Prepaid expenses is an asset that is recognized on the balance sheet to reflect the prepayment. Debiting increases the asset with a corresponding reduction (credit) in the cash asset. This first entry is incorrect because the expense is not recognized until the period in which it is matched to the period in which it is being used (the matching principle). As a result, there is no retained earnings impact until later.
On June 30, 2020, a company that sells smartphones prepaid $50,000 to cover the next 12 months' worth of utilities. 6 months later, the company reports their annual results. Assuming no adjustments have been made since the original journal entries, what journal entries should be made when reporting the annual results? No adjustment is required until June 30, 2021. Credit prepaid expenses for $25,000 and debit retained earnings for $25,000. Debit prepaid expenses for $25,000 and credit retained earnings for $25,000. Debit prepaid expenses for $25,000 and credit cash for $25,000.
Debit prepaid expenses for $25,000 and credit retained earnings for $25,000. Since the company has now used utilities for half of the prepayment period, the expense must be recognized on the income statement (debit to retained earnings), with a corresponding reduction (credit) to the prepaid expenses asset.
The regulating body that oversees the development of accounting standards in the U.S. is: SFAS GAAP FASB IASB
FASB formulates accounting standards through the issuance of Statements of Financial Accounting Standards (SFAS). These statements make up the body of accounting rules known as the Generally Accepted Accounting Principles (GAAP). IASB oversees international financial reporting standards (IFRS).
Which of the following statements is TRUE? GAAP requires that firms show recorded values for acquired intangible assets such as patents and trademarks on their financial statements. GAAP requires that firms show recorded values for intangible assets such as employee and customer loyalty. GAAP requires that financial statements accurately reflects the market value of internally-developed trademarks such as the value of the Coca-Cola brand name. All of the above.
GAAP requires that firms show recorded values for acquired intangible assets such as patents and trademarks on their financial statements. GAAP requires that firms only show measurable activities, such as the value of acquired intangible assets. Assets such as employee, customer loyalty and internally-developed trademarks are not shown on financial statements because they're difficult to quantify.
Which of the following statements is TRUE? Publicly traded US companies are required to file four 10-Q's and one 10-K annually. All US companies are required to file three 10-Q's and one 10-K annually. Publicly traded US companies are required to file three 10-Q's and one 10-K annually. Publicly traded US companies are required to file one 10-K annually; 10-Q's are typically filed but are technically voluntary.
Publicly traded US companies are required to file three 10-Q's and one 10-K annually. Publicly-traded US companies must file three quarterly (10-Q) reports at the end of their 1Q, 2Q and 3Q, and a 10-K at the end of their fiscal year.
Which of the following statements is FALSE? Revenue is not recognized at the time of delivery of goods and services if cash is received after delivery of the goods and services. Collecting cash after delivery of a good or service does not create revenue on the income statement on the date of collection. Revenue is recognized at the time of delivery of the goods or services regardless of if cash is received. A liability is created when cash is received prior to delivery of the goods or services.
Revenue is not recognized at the time of delivery of goods and services if cash is received after delivery of the goods and services. Revenue is recognized at the time of delivery of goods and services regardless of when the cash is received.
A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. On which of the following dates should Discount Paper Supply record sales revenue? September 13 October 1 September 1 September 30
September 1 Sales revenue should be recorded on the date of sale.
he income statement is designed to measure: The liquidity of a firm. How solvent a company has been. The income of a firm at a point in time. Cash inflows/outflows generated over a period of time. The profits of a firm over a period of time.
The profits of a firm over a period of time. The income statement is designed to show the profitability of a business (revenues less expenses) over a period of time (usually a quarter or year). The income statement is an accrual measure of profits and thus not the best measure of cash flows. It is also a poor measure of a company's liquidity or solvency, which involves an analysis of a company's short term and long term assets and liabilities, respectively. The balance sheet is designed to show a firm's financial position, while the cash flow statement shows the amount of cash generated by a firm.
Which of the following best describes the objective of depreciation? To report the asset on the balance sheet at the estimated amount for which the asset could be sold on the balance sheet date. To estimate the remaining useful life of the asset. To allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue. To estimate the current market value of the asset.
To estimate the remaining useful life of the asset. Depreciation is a process of allocating to expense a portion of a tangible asset's cost in the period of benefit in which revenue is earned.
On January 1, 2020, a company purchases equipment with a useful life of 5 years for $50 million. The company uses straight-line depreciation and has assumed no residual value for the company. On January 1, 2023, the company sells the equipment for $45 million. Which of the following is correct? When the company sells the equipment, it will recognize a $15 million gain on sale on the income statement. When the company sells the equipment, it will recognize a $5 million loss on sale on the income statement. When the company sells the equipment, it will recognize a $25 million gain on sale on the income statement. When the company sells the equipment, it will recognize a $45 million gain on sale on the income statement.
When the company sells the equipment, it will recognize a $25 million gain on sale on the income statement. 3 years after purchase, the equipment will have a net book value of $50 million - $30 million = $20 million. The $50 million is the original purchase price (gross PP&E). The $30 million is the accumulated depreciation, calculated as $10 million in annual depreciation expense ($50 million / 5 years) x 3 years. The gain on sale recognized on the income statement is the sale price ($45 million) less the net book value ($20 million) = $25 million.
