accounting chapters

During the fiscal year ended 2014, a company had revenues of $400,000, operating expenses of $280,000 and an income tax rate of 30 percent on income before income taxes. What was the company's 2014 net income?

84,000; Revenue $400,000 minus operating expenses of $280,000 equals pretax income of $120,000 times 30% tax rate equals income tax expense of $36,000. Pretax income $120,000 minus income tax expense of $36,000 equals of $84,000.

Describe what the accrual basis of accounting is?

Accrual basis of accounting means that revenue is recorded as earned when goods or services are provided to customers regardless of whether cash is collected and expenses are recorded when the goods/services are used up in operating the company (incurred); therefore, net income reflects accrual timing on the income statement.

what is the effect on the financial statements when a company fails to accrue revenue earned at fiscal year end?

Accrued revenue adjustments increase an asset, some type of "receivable" and would increase revenue which would cause net income and stockholders' equity to increase. Failure to record this adjustment would understate assets and understate revenue, net income and stockholders' equity.

What would be the adjusting entry for accrued rent expense owed to the landlord but not paid at the end of the accounting period?

An accrued expense for rent would increase rent expense by a debit (causing stockholders' equity to decrease) and would increase rent payable (or accrued expense payable) a liability by a credit.

Under the percentage of net credit sales method, Ajax Company estimates bad debts to be 2.0% of net credit sales. Net credit sales for the year equal $40,000,000. What would be the adjusting entry at the end of the year for bad debts expense?

Bad debts expense under the percentage of net credit sales method would equal $800,000 ($40,000,000 X 2.0%). The adjusting journal entry would involve a debit to bad debts expense (+E, -SE) and a credit to the allowance for doubtful accounts (+XA, -A). The effect of this adjustment is to increase an expense which comes back to the balance sheet as a decrease in stockholders' equity and an increase to a "contra asset" which decreases total assets.

Tinker's 2015 cost of goods sold was $750,000 and 2014 cost of goods sold was $770,000. The inventory at the end of 2015 was $188,000 and $208,000 at the end of 2014. Compute Tinker's average days to sell its inventory during 2015.

Before the average days to sell inventory can be calculated, the inventory turnover ratio must be calculated. The formula for inventory turnover takes cost of goods sold and divides it by "average" inventory. For 2015, the numerator would be $750,000 cost of goods sold (we do not use the prior year's cost of goods sold) and the denominator would be the average of ending inventory for both 2015 and 2014 which is $198,000 ($188,000 plus $208,000 then divided by 2). The inventory turnover ratio is 3.79 (750,000/198,000). The turnover ratio is then divided into 365 days in a year to compute 96.3 days to sell inventory. Note: Whenever a ratio uses a balance sheet number (merchandise inventory) and compares it to an income statement number (cost of goods sold) or a statement of cash flow number, the balance sheet item must be "averaged". The income statement and statement of cash flows reflects numbers for a period of time typically a year whereas the balance sheet represents an amount at a moment in time. By averaging the balance sheet item, it simulates the amount over the period of time.

For a retailer like Wal-Mart which is typically the largest expense on the income statement?

Cost of goods sold (cost of sales) is typically the largest expense for retailers as it represents the cost of the inventory purchased and then sold to customers. The difference between net sales and cost of goods sold is called gross profit or markup.

Define current assets.

Current assets are assets owned by the company that are expected to be used, liquidated, or sold within a year of the balance sheet date. These assets are considered to be liquid and are therefore providing coverage of current liabilities or obligations due within one year.

A landlord collected $5,000 cash from a tenant for December 2015's rent but the tenant's rent for December is $8,000. What amount would be recorded for December rent revenue?

December rent revenue would be $8,000 the amount earned by providing the tenant occupancy. To balance out the $8,000 credit to the rent revenue account there would be two debits, one for $5,000 for cash and the other for $3,000 rent revenue receivable.

Where would a gain on the sale of a stock investment be reported on the income statement?

Gains on sale or disposal of assets are considered peripheral activities and are not central, ongoing operating activities so they appear below income from operations under other revenues, gains, expenses, or losses (non-operating activities).

Earnings per share is calculated by dividing net income by the number of common shares outstanding. What would cause the EPS ratio to increase?

Increasing net income in the numerator will increase if revenue increases or if expenses are decreased as both increase net income. Reducing the number of common stock shares in the denominator by buying back shares of stock and removing them from the investors' hands would cause the ratio to increase.

Where would interest expense be reported on the income statement?

Interest expense is reported under other revenues, gains, expenses or losses (non-operating activities) with is reported below income from operations because interest is related to borrowing money and is not considered a central, ongoing operating activity but rather a peripheral activity.

How much is Colby Corporation's net income based on the following information: Operating revenues were $199,700 Operating expenses were $111,000 Interest expense was $9,200 Gain from sale of plant and equipment was $3,300 Dividend payments to Colby's stockholders were $7,700 Income tax expense was $36,000 Prepaid rent was $5,000

Operating revenue $199,700 -Operating expenses 111,000 = Income from operations 88,000 Non-operating items: Gain on sale 3,300 Interest exp. (9,200) -Non-operating expense (5,900) =Income before taxes 82,800 -Income tax expense 36,000 =Net income $46,800

Milliken Company paid $2.2 million to purchase stock in another company, $1.0 million to repurchase treasury shares, $.5 million to buy short-term investments, sold used equipment for $.8 million when its book value was $.6 million, and purchased new equipment for $3.4 million. What was the net cash flow from investing activities?

The cash paid to repurchase treasury shares is a financing activity and should be eliminated while the rest of the cash flow events are investing. Cash was used to purchase stock in another company, buy short-term investments, and purchase of equipment. The investing inflows was the cash received from sale of its used equipment (book value is not used on the statement of cash flows just the "actual" cash received. Purchase of stock $(2.2) Purchase of short-term investment (0.5) Sold equipment .8 Purchased equipment (3.4) Total $(5.3)

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. What was the net cash flow from financing activities?

There were two financing cash flows: Repaid note payable $(2,300,000) Payment of dividends (20,000) Cash outflow for financing activities (2,320,000) * The interest paid is an operating cash outflow and would not appear as investing or financing activity.

A company purchased 1,000 shares of treasury stock for $38,000 cash. What would be the journal entry to record this repurchase of shares?

There would be a debit to a contra stockholders' equity account called "treasury stock" for the 38,000 causing total stockholders' equity to decrease and the asset cash would decrease by the same amount. Treasury stock 38,000 Cash 38,000

When a customer pays an auto repair shop for work previously completed and for which the customer was billed, what journal entry would be recorded?

There would be a debit to the asset, cash to increase the account and the credit is to another asset, accounts receivable to decrease it.

What accounts would be affected by a deferred revenue adjustment?

A deferred revenue adjustment would require a reduction to an unearned revenue (liability account) by a debit for the portion now earned of the cash previously received and a credit to a revenue account to increase that account.

Define an external exchange and give an example.

An external exchange involves transfer between our company and another entity. Examples would be selling product to a customer, purchasing supplies from a vendor, paying wages to our employees.

Which of the following costs would not affect cost of goods sold (would not be an inventory cost)? Inventory inspection costs. Inventory preparation costs. Inventory-related selling costs. Freight charges incurred to bring inventory to the warehouse (terms FOB shipping point).

Any costs to delivery inventory to our company, costs of inspecting inventory and costs of preparing inventory for sale would be added to the cost to buy the inventory; however, any costs of "selling" inventory is not included in inventory. Selling costs are not part of cost of goods sold but rather are listed as part of selling, general and administrative expenses.

What is the effect on the balance sheet of paying a note payable with cash?

Cash which is an asset decreases on the left side of the equation while notes payable which is a liability decreases on the right side of the equation.

When cash is received from a customer prior to delivery of the goods or services, what journal entry would be recorded?

Cash which is an asset increases by a debit and unearned revenue which is a liability increases by a credit.

What is the effect on the balance sheet of borrowing money by signing a note?

Cash which is an asset will increase on the left side of the equation while notes payable which is a liability increases on the right side of the equation.

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 dates should Discount Paper Supply record sales revenue?

Discount Paper Supply should record revenue when the goods are provided to the customer which would be September 1. Revenue is earned when the goods/services are provided to the customer, there is persuasive evidence of an arrangement for customer payment (invoice), the price is fixed or determinable, and collection of the receivable is reasonably assured.

List the correct order of the steps in the accounting cycle both during the period and at the end of the accounting period.

During the period: (1) Analyze transactions, (2) Record journal entries in the general journal and (3) Post amounts to the accounts in the general ledger. At the end of the period: (4) Prepare a trial balance to determine if debits equal credits-unadjusted trial balance, (5) Adjust revenues and expenses and related balance sheet accounts (record in a journal and post to the ledger), (6) Prepare a complete set of financial statements and disseminate it to users, (7) Close revenues, gains, expenses, and losses to Retained Earnings (record in journal and post to ledger).

When any adjusting entry is prepared what financial statements are affected?

Every adjusting entry affects a balance sheet account (either increasing or decreasing) an asset or liability account and the income statement by either increasing revenue or increasing an expense. When a revenue increases the effect comes back to the balance sheet as an increase in stockholders' equity but an increase in an expense causes stockholders' equity to decrease.

On April 1, 2014, the premium on a one-year insurance policy was purchased for $3,000 cash with the insurance coverage beginning on that date. The books are adjusted only at year-end. Which of the following correctly describes the effect on the financial statements of the December 31, 2014 adjusting entry?

From April 1st through December 31st, nine months have gone by so 9/12s of the one year policy has now expired and would necessitate a debit to insurance expense for $2,250 ($3,000 X 9/12) and a credit prepaid insurance for the same amount. The effect is a decrease in an asset and an increase in an expense which would cause retained earnings to decrease.

A company's January 1, 2014 balance sheet reported total assets of $120,000 and total liabilities of $40,000. During January 2014, the following transactions occurred: (A) the company issued stock and collected cash totaling $30,000; (B) the company paid an account payable of $6,000; (C) the company purchased supplies for $1,000 with cash; (D) the company purchased land for $60,000 paying $10,000 with cash and signing a note payable for the balance. What is total stockholders' equity after the transactions above?

First "beginning" stockholders' equity on January 1, 2014 equals $80,000 ($120,000 assets minus $40,000 in liabilities). Transaction (a) would increase assets and increase stockholders' equity by $30,000 so stockholders' equity would now be $110,000. Transaction (b) decreases an asset and liability so it has no effect on stockholders' equity. Transaction (c) increased and decreased assets so there is no effect on stockholders' equity. Transaction (d) increased assets by a net of $50,000 and increased a liability by $50,000 so there is no effect on stockholders' equity. So ending stockholders' equity equals $110,000.

Laurer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Units Cost/unit 1/1 Beg. inventory 100 $ 800 5/5 Purchase 200 900 8/10 Purchase 300 1,000 10/15 Purchase 200 1,100 During the year, Lauer sold 750 laptop computers. What was cost of goods sold using the FIFO cost flow assumption?

First we have to calculate the total cost of beginning inventory and each of the three purchases. Beginning inventory is $80,000 ($800 X 100), the first purchase is $180,000 ($900 X 200), the second purchase is $300,000 ($1,000 X 300), and the third purchase is $220,000 ($1,100 X 200). We then add the four costs to compute goods available for sale of $780,000. The total units available for sale is 800 units (100 + 200 + 300 + 200). Since 750 units were sold only 50 units remain in ending inventory. Under FIFO cost flow the ending inventory would be the most recent unit costs which is the third batch purchased at a unit cost of $1,100 X 50 would equal ending inventory of $55,000. We can then subtract the ending inventory from goods available for sale to derive cost of goods sold of $725,000 ($780,000 - $55,000).

Which of the following statements is correct when inventory unit costs are "increasing"? LIFO will result in lower net income and a higher inventory valuation than will FIFO. LIFO will result in higher net income and lower inventory valuation than will FIFO. FIFO will result in lower net income and a lower inventory valuation than will LIFO. FIFO will result in higher net income and a higher inventory valuation than will LIFO.

First, it is important to understand that the companies' replacement costs are rising (inflation) so the more recent costs are the higher unit costs and the older costs are lower. In statement one, LIFO will result in lower net income but will report "lower" not higher inventory valuation so that statement is incorrect. In statement two, LIFO will not result in "higher" net income but will have lower inventory valuation so that statement is incorrect. In statement three, FIFO will not result in "lower" net income or "lower" inventory valuation so that statement is incorrect. In statement four, FIFO will result in higher net income and higher inventory valuation than LIFO so that statement is correct.

Which of the following statements is false? Companies do not have to use the same inventory method for all items of inventory. Companies do not have to consistently use the same inventory costing methods. Use of the LIFO inventory method during a period of increasing unit costs may create a conflict of interest between the owners and managers. A company choosing to maximize stockholders' equity during the period of increasing unit costs should use the FIFO inventory method.

For statement one, it is true that companies can use different inventory cost flow assumptions for different types of inventory; they do not have to use just one cost flow assumption for all inventory. Statement two is false because once an inventory cost flow assumption is adopted for inventory costing, that method must be used "consistently" from one year to the next. In statement three, use of LIFO inventory method may create conflict between owners and managers. Owners want to report the highest earnings which tends to increase the stocks' value while managers want to pay the least amount of taxes thereby preserving cash. LIFO costing during inflation will report the lowest amount of net income but will lead to paying the lowest amount of taxes. This occurs because LIFO assigns the older, lower costs to ending inventory and the more recent, higher costs to cost of goods sold. In statement four, use of FIFO during a period of inflation will lead to reporting higher net income because the older, lower unit costs are assigned to cost of goods sold which will maximize stockholders' equity since net income is closed to retained earnings. Statement four is true.

What would cause the total asset turnover which is calculated by dividing sales by average total assets to decrease?

If sales revenue decreases in the numerator, then the ratio would decrease. If average total assets increase in the denominator then the ratio would decrease.

What is the impact on the financial statement when a company "fails" to record depreciation expense at fiscal year end?

If the depreciation adjusting entry was not recorded would fail to increase depreciation expense so net income and stockholders' equity will be overstated. At the same time, the contra asset, accumulated depreciation would not be recorded; since the contra asset is deducted to get the book value of fixed assets, failure to record the adjustment would overstate the assets.

Wilmington Company reported pretax income of $25,000 during 2014 and $30,000 during 2015. Later it was discovered that the ending inventory for 2014 was understated by $2,000 (and was not corrected in 2014). What is the correct pretax income for each year?

In 2014, reported income was $25,000 but because ending inventory was "understated", cost of goods sold was overstated making net income understated so the correct net income for 2014 should be $27,000. In 2015, reported income was $30,000 which means it is overstated by $2,000 so net income is $28,000. This is because the understated ending inventory would become beginning inventory which would cause cost of goods sold to be understated and net income was overstated.

The CHS Company has provided the following information: Accounts receivable written-off as uncollectible during the year amounted to $11,500. The accounts receivable balance at the beginning of the year was $150,000. The accounts receivable balance at the end of the year was $210,000. The allowance for doubtful accounts balance at the beginning of the year was $14,000. The allowance for doubtful accounts balance at the end of the year "after" the recording of bad debt expense was $12,900. Credit sales during the year totaled $900,000. How much was CHS Company's bad debt expense?

In order to "back into" the amount of bad debts expense, it is important to recognize what the adjusting journal entry for recording bad debts expense entails; it requires a debit to the expense, bad debts expense, and a credit to the contra asset, allowance for doubtful accounts. So if we set up a T-account for the allowance for doubtful accounts with the beginning balance of $14,000 on the credit side and then at the bottom show the ending credit balance after adjustment for bad debts of $12,900 we can then analyze the debits and credits that occurred during the year. The allowance account is debited when accounts are written off and since $11,500 was written off as uncollectible the $14,000 beginning balance would have decreased to $2,500 credit balance before adjusting for bad debts at the end of year. Since the ending balance in the allowance account was $12,900 after adjustment, the bad debts expense must be $10,400 ($12,900 minus $2,500) which would have been the credit to the account for the bad debts adjustment at the end of the year.

The CHS Company has provided the following information: Accounts receivable written-off as uncollectible during the year amounted to $11,500. The accounts receivable balance at the beginning of the year was $150,000. The accounts receivable balance at the end of the year was $210,000. The allowance for doubtful accounts balance at the beginning of the year was $14,000. The allowance for doubtful accounts balance at the end of the year "after" the recording of bad debt expense was $12,900. Credit sales during the year totaled $900,000. How much cash was received from collections of accounts receivable?

In order to determine cash collections from accounts receivable, we have to focus on the T-account for accounts receivable; this asset increases on the debit side when we sell on credit and then decreases by a credit when customer accounts are written off as uncollectible and when cash is collected. The beginning debit balance in accounts receivable was $150,000 and the ending debit balance was $210,000. The balance would have increased by $900,000 for the amount of credit sales ($150,000 plus $900,000) to $1,050,000 but then it would have decreased when the account was credited for the amounts written off $11,500 ($1,050,000 minus $11,500) which equals $1,038,500; since the ending balance is $210,000, we would deduct that amount from the $1,038,500 ($1,038,500 minus $210,000) to compute the cash collected which equals $828,500. An alternate calculation would be to take the credit sales of $900,000 (debit to accounts receivable) minus the increase in accounts receivable $60,000 (ending balance $210,000 minus beginning balance $150,00) to get $840,000. We would then subtract the accounts written off as uncollectible $11,500 from the $840,000 to get cash collected $828,500. Remember when accounts receivable increases by $60,000 it represents the portion of credit sales not collected!

Flyer Company has provided the following information "prior" to any year-end bad debt adjustment: Cash sales $150,000 Credit sales, net $450,000 Selling and administrative expenses $110,000 Sales returns and allowances $30,000 Gross profit $490,000 Accounts receivable $110,000 Sales discounts $14,000 Allowance for doubtful accounts "credit" balance $1,200 Flyer estimates bad debt expense assuming that 1.5% of credit sales have historically been uncollectible. What is the balance in the allowance for doubtful accounts "after" bad debt expense is recorded?

In this case, Flyer is using the percentage of net credit sales so when the $450,000 of net credit sales is multiplied by the 1.5% estimated portion that is uncollectible, bad debts expense equals $6,750 ($450,000 X 1.5%); this method estimates the bad debts expense for the period. Since there is already a credit balance of $1,200 in the allowance for doubtful accounts, when we credit the allowance account for $6,750 (estimated bad debts expense), the credit balance increases to $7,950 ($1,200 plus $6,750). The balance in the allowance for doubtful accounts after the adjustment for bad debts expense is $7,950.

Coleman Company has provided the following information: beginning inventory, $100,000; cost of goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory purchases?

In this problem, you have to work backwards but the formula to calculate COGS is: Beginning inventory + Purchases = Goods available for sale - Ending inventory = Cost of goods sold. Since we know cost of goods sold is $450,000 and ending inventory is $80,000, we will add these two amounts (reverse the mathematical function) to back into goods available for sale which is $530,000. We then deduct beginning inventory $100,000 from goods available for sale $530,000 to get $430,000 of purchases. To prove the answer plug in numbers to the regular formula: BI 100,000 + Purchases 430,000 = Goods available for sale 530,000 - EI 80,000 = Cost of goods sold 450,000.

On January 1, 2015, Pyle Company purchased an asset that cost $50,000 and had no estimated residual value. The estimated useful life of the asset is 8 years and straight-line depreciation is used. An error was made in 2015 because the total amount of the asset's cost was debited to an "expense" account and no depreciation expense was recorded for 2015. Pretax income for 2015 was $42,000. How much is the correct 2015 pretax income?

Instead of debiting $50,000 to an asset account and then computing the annual depreciation expense $6,250 (($50,000 - 0) / 8) and deducting that expense to derive pretax income, the entire $50,000 was deducted to derive the $42,000 pretax income. We would first add back the $50,000 to the $42,000 to get $92,000 then deduct the depreciation expense of $6,250 to get 2015 pretax income of $85,750.

Which of the following statements is correct when inventory unit costs are decreasing? LIFO will result in lower net income and a higher inventory valuation than will FIFO. LIFO will result in higher net income and a higher inventory valuation than will FIFO. FIFO will result in higher net income and a higher inventory valuation than will LIFO. FIFO will result in higher net income and a lower inventory valuation than will LIFO.

It is important to understand that the company is experiencing decreasing replacement costs (deflation); this means that the more recent unit costs are the lower costs while the older unit costs are the higher costs. In statement one, LIFO will not result in "lower" net income but will have a higher inventory value so statement one is incorrect. In statement two, LIFO will result in higher net income and a higher inventory valuation than will FIFO so statement two is correct. In statement three, FIFO will not result in "higher" net income and "higher" inventory valuation so statement three is incorrect. In statement four, FIFO will not result in "higher" net income but will have a lower inventory valuation than LIFO so statement four is incorrect.

Goods shipped by Latimer Company were shipped to a customer in December 27, 2013 with terms of FOB destination. The customer received the goods on January 4, 2014. Would Latimer include this sale in the 2013 income statement and if so, why?

Latimer would not include this in sales revenue for 2013 because the shipping terms of FOB destination means that Latimer still owns the inventory and has risk of loss during shipping until the goods reach the customer (destination). This sale will be recorded for 2014; if the terms were FOB shipping point (Latimer) it would be recorded in 2013 sales.

Which of the following statements is incorrect for a manufacturing entity? Inventory is transferred from work in process to finished goods. Raw materials are transferred into work in process. Finished goods inventory eventually becomes cost of goods sold. Cost of goods sold is recognized when the manufacturing process is completed.

Manufacturing companies have three inventory accounts: Raw material, work in process and finished goods. Raw material records the cost of purchased components/parts and then when parts are send to the manufacturing departments, it is transferred to work in process so the second statement is correct. When the products are completed and leave the factory, costs are transferred from work in process into finished goods so statement one is correct. When the completed goods are sold, finished goods inventory becomes cost of goods sold so statement three is correct. However, statement four is incorrect because cost of goods sold is not recognized until the product is sold.

Based on the following information for Lantz Company, compute income before income taxes? Cash sales totaled $255,000 Credit sales totaled $479,000 Cash collections from customers for services yet to be provided totaled $88,000 A $22,000 loss from the sale of property and equipment occurred 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 Unearned revenue was $4,000

Net sales $734,000 -Cost of goods sold 336,000 =Gross profit 398,000 -Operating expenses: Rent 36,000 Salaries 49,000 Other 79,000 -Total expenses 164,000 =Income from operations 234,000 Non-operating items: Loss on sale (22,000) Interest income 7,700 Interest exp. (19,900) -Total non-operating items (34,200) =Income before taxes $199,800

What is the effect on the balance sheet of purchasing supplies for cash?

No effect because one asset supplies will increase but another asset cash decreases so there is no change in total assets.

What is the effect on the balance sheet of purchasing stock of another company with cash?

No effect on total assets since one asset, investment in stock increases while another asset, cash decreases.

What effect does signing a contract for cleaning services have on the balance?

No effect since a contract to perform does not involve an exchange of value at the time the contract is signed.

Is recording interest revenue when the cash is collected but not yet earned proper application of the revenue realization principle?

No, revenue should only be recorded only when it is earned not necessarily when cash is received. The entry should have involved an increase to the asset, cash by a debit and a credit to the liability, unearned interest revenue to increase that account.

When a company received a $50,000 cash deposit from a customer on October 15 but will not deliver the goods until November 20 then the October 15th entry would involve a debit to the asset, cash and a credit to sales revenue.

No, there would be a debit to the asset cash but the credit should be to unearned revenue on October 15th. The November 20th entry would be a debit to unearned revenue and a credit to sales revenue.

Identify the types of transactions that can affect the balance sheet only but assure that is remains in balance.

One asset can decrease while another increases, an asset can increase and be offset by an increase in a liability or stockholders' equity, an asset can decrease and be offset by a decrease in a liability or stockholders' equity. A transaction can also cause a decrease in stockholders' equity and an increase in a liability.

When a company earns operating revenue, what is the effect of the revenue portion of the transaction?

Operating revenue increases a revenue account which is reported on the income statement which in turn increases net income; when net income increases, it will be closed into retained earnings so retained earnings under stockholders' equity on the balance sheet will increase.

What is operating revenue and where is is reported on the income statement?

Operating revenue which is connected to the central, ongoing operating activities such as sale of goods and services are reported at the very top of the income statement. For Lowe's, sales of their products and installation services are the source of their operating revenue.

RKJ Company has provided the following: 100,000 shares of $5 par value common stock are authorized. 70,000 shares have been issued. 65,000 shares are outstanding. How many shares are held in treasury by RKJ Company?

RKJ Company has 5,000 shares held in treasury which is the difference between the 70,000 shares issued and the 65,000 shares outstanding.

When employees have performed work for the company but they have not been paid by the company, what journal entry would be recorded.

Salaries or wages expense would be debited to increase (recognize an expense incurred) the account and a credit would be recorded under the liability salaries payable to increase the obligation.

Which of the following transactions would result in an increase in the current ratio? Collection of cash from an account receivable. Selling shares of stock to stockholders in exchange for cash. Purchasing a building with cash. Declaration of a cash dividend by the board of directors.

Selling shares of stock to stockholders in exchange for cash. The current ratio is computed by dividing current assets by current liabilities. Cash coming in from the issuance/sale of our stock increases current assets and there is no effect on current liabilities so there is an increase in the current ratio. Collection of cash from an accounts receivable increases on current asset and decreases another so there is no effect on the ratio. Purchasing a building with cash would cause current assets to decrease and therefore the ratio would decrease. Buildings are long-term assets not current assets. Declaration of a cash dividend would increase dividends payable which is a current liability which will decrease the ratio. The declaration would also cause a decrease to retained earnings which has no effect on the ratio.

What is the effect on net income in 2015 if the following occurred; beginning inventory is overstated by $1,300 while ending inventory is understated by $700?

Since beginning inventory is overstated by $1,300, it will be added to purchases which will make goods available for sale be overstated by $1,300. Since ending inventory would be deducted from goods available for sale, a $700 understatement would be added to the $1,300 overstatement of beginning inventory making cost of goods sold overstated by $2,000; this in turn will make net income "understated" by $2,000.

What journal entry would be recorded if on December 31, 2014, Avery Corporation paid $10,000 for next year's insurance policy?

Since the insurance still has economic utility to the company on December 31, 2014, there would be a debit to an asset, prepaid insurance (expense) and a credit to the asset, cash for $10,000. Each month that passes in 2015, a portion of the insurance expires and would be shifted from the asset, prepaid insurance into the expense account called insurance expense.

The Conner Company's August 31, 2014 cash balance on its books "after" adjustment was $90,000. As of August 31, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 31, 2014 reconciled bank statement balance?

Since the reconciled balance on Conner Company's books equals $90,000, that means that the reconciled bank statement balance must also be $90,000.

What is the journal entry to close a revenue account with a $280,000 balance and an expense account with a $160,000 balance?

Since the revenue account has a normal credit balance, revenue would be closed by a debit of $280,000. Since expenses have normal debit balances, expenses would be closed out by crediting the account for $160,000. Since the debit for $280,000 is greater than the credit of $160,000, we would need another credit to balance it out and that credit would be to transfer $120,000 of net income to the credit side of retained earnings.

A company using the periodic inventory system correctly recorded a purchase of merchandise, but the merchandise was not included in the physical inventory count at the end of the accounting period. What effect will the error cause on net income and ending inventory?

Since, the items were not included in the physical count in a "periodic" system, the ending inventory will be understated causing cost of goods sold to be overstated. When cost of goods sold is overstated, net income will be understated. Therefore, both ending inventory and net income are understated.

Superior has provided the following information for its recent year of operation: The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000. The additional paid-in capital account balance increased $2,500 during the year. The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was $91,000. Net income was $26,000. How much did Superior sell its common stock for during the year?

Superior sold its stock for $7,500. When stock is issued for cash, that asset would increase $7,500. There would then be an increase to common stock for $5,000 (representing the par value for the shares issued) and then additional paid in capital would increase by $2,500 (for the excess of market price above par value).

The cash records and the bank statement of Frankel Company showed the following at the end of February 2014: Outstanding checks as of the "beginning" of February 2014, $8,000; checks written by Frankel Company according to its books during February 2014, $50,000; and checks cleared by the bank during February 2014, $54,000. How much were the outstanding checks at the end of February 2014?

The "beginning" outstanding checks (end of January/beginning of February) equaled $8,000. During the month of February, the bank statement showed $54,000 cleared or cashed while the company's books showed Frankel only writing out $50,000 in February. Therefore, the outstanding checks would have decreased by $4,000 to $4,000 outstanding at the end of February (beginning outstanding checks, $8,000 minus the decrease in outstanding checks, $4,000 equals the remaining outstanding checks, $4,000).

Mama Luna Pizza Company determined that dough, sauce, cheese and other ingredients cost $8,700 were used to make pizzas during July. What effect would this have on the income statement?

The $8,700 would be considered cost of food and paper products (cost of sales) which is an expense on the income statement would be deducted from sales revenue to determine the gross profit of the company.

On December 31, 2014, Krug Company reported total liabilities of $180,000 prior to the following adjusting entries: Depreciation expense was $31,000 Accrued service revenues totaled $29,000 Accrued expenses totaled $12,000 Insurance used totaled $9,000 (previously recorded as prepaid insurance) Rent revenue earned totals $7,000 (the rent was initially prepaid by the tenant and credited to unearned rent revenue) How much was Krug's total liabilities after the adjusting entries?

The accrued expenses would cause a liability (payable) to increase by $12,000 so liabilities would be $192,000 ($180,000 + $12,000). The unearned rent revenue account for the deferred revenue adjustment would be reduced by $7,000 so liabilities would be $185,000. The other entries affected assets not a liability (see 14 above).

Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. It was determined that the replacement cost is $18 per unit. Using the lower of cost or market rule, what amount should be reported on the balance sheet for for each unit in inventory.

The actual cost paid for the units in inventory is $20 per unit; under lower of cost or market rule (LCM) we would compare that $20 cost to its replacement cost (entrance value) and its selling price (exit value). Since the exit value of $30 what it can be sold for is greater than the actual cost of $20, that value would not be used. However, the replacement cost of $18 is below the actual $20 cost so the units would be assigned a cost of $18 per unit in order to apply conservatism and not overstate the value of our asset.

The Roscoe Company's March 31, 2014 bank statement balance showed $70,000. As of March 31, 2014, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 31, 2014 cash balance after adjustments on the company's books?

The adjusted company's book balance has to equal the adjusted bank statement balance once the reconciliation is completed. The two most common adjustments to the bank statement are to deduct outstanding checks and add deposits in transit. To compute the reconciled bank statement balance, we start with the $70,000 bank statement balance, deduct the $22,000 of outstanding checks and add the $15,000 of deposits in transit which equals $63,000 as the adjusted bank statement balance which must also equal the adjusted book balance.

What type of adjusting entry involves a debit to supplies expense and credit to supplies?

The adjustment is a deferred expense adjustment to record a reduction in previously purchased supplies an asset when they were purchased for the portion now used up.

What type of adjusting entry would involve a debit to interest expense and a credit to interest payable?

The adjustment is an accrued expense adjustment to record an expense incurred but not yet paid.

What type of entry involves a debit to interest receivable and a credit to interest revenue?

The adjustment is an accrued revenue adjustment to record interest revenue earned with the passage of time as the company holds an investment asset but cash not yet received so the debit is to a receivable (asset) to show that cash will be collected in the future.

On December 31, 2014, Krug Company reported total assets of $390,000 prior to the following adjusting entries: Depreciation expense was $31,000 Accrued service revenues totaled $29,000 Accrued expenses totaled $12,000 Insurance used totaled $9,000 (previously recorded as prepaid insurance) Rent revenue earned totals $7,000 (the rent was initially prepaid by the tenant and credited to unearned rent revenue) How much was Krug's total assets after the adjusting entries?

The depreciation adjustment would increase the contra asset (accumulated depreciation) by $31,000 so assets decrease to $359,000 ($390,000 - $31,000). Accrued service revenue would increase a receivable so assets increase to $388,000 ($359,000 + 29,000). Accrued expenses have no effect on assets. The insurance adjustment reduced prepaid insurance (asset) by $9,000 so assets equal $379,000 ($388,000 - $9,000). The unearned rent adjustment has no effect on assets. So total assets would be $379,000.

On December 31, 2014, Krug Company reported net income of $150,000 prior to the following adjusting entries: Depreciation expense was $31,000 Accrued service revenues totaled $29,000 Accrued expenses totaled $12,000 Insurance used totaled $9,000 (previously recorded as prepaid insurance) Rent revenue earned totals $7,000 (the rent was initially prepaid by the tenant and credited to unearned rent revenue) How much was Krug's net income after the adjusting entries?

The depreciation expense would reduce net income by $31,000 to $119,000 ($150,000 - $31,000). The accrued revenue would increase net income by $29,000 to $148,000 ($119,000 + $29,000). The accrued expense would decrease net income by $12,000 to $136,000 ($148,000 - $12,000). The deferred expense adjustment for insurance would reduce net income by $9,000 to $127,000 ($136,000 - $9,000). The deferred revenue adjustment would increase net income by $7,000 to $134,000 ($127,000 + $7,000). Note: All five adjustments affect net income; "every" adjustment affects either a revenue or an expense account.

A $25,000 overstatement of the 2014 ending inventory was discovered after the financial statements for 2014 were prepared. Which of the following describes the effect of the inventory error on the 2015 financial statements? Net income and stockholders' equity are both understated. Net income is understated and stockholders' equity is correct. Net income and stockholders' equity are both overstated. Net income and stockholders' equity are both unaffected.

The effect of the $25,000 overstatement of ending inventory in 2014 would cause cost of goods sold to be "understated" and therefore would cause gross profit and net income to be "overstated". Since income is closed to retained earnings, it would cause an overstatement of retained earnings in 2014. The overstated ending inventory will roll over and become "beginning" inventory for 2015 and since we add purchases to beginning inventory to compute goods available for sale, goods available for sale will be overstated. If ending inventory in 2015 is correct when it is deducted from goods available for sale, cost of goods sold in 2015 will be "overstated" which will cause net income to be understated. When the understated net income is closed to retained earnings is will offset the overstated amount in retained earnings from the end of 2014. Statement one is incorrect because stockholders' equity will not be understated in 2014; it will be correct. Statement two is correct because while net income is understated, stockholders' equity is correct. Statement three is incorrect because neither net income nor stockholders' equity will be overstated. Statement four is incorrect because net income is understated.

A customer was billed $2,000 on December 8, 2015 with terms of 2/10, n/30. The customer paid the bill on December 17, 2015. What journal entry would be recorded on December 17, 2015 and would there be any effect on net sales as a result of that transaction?

The entry on December 17th would recognize the sales discount of 2% off of the $2,000 invoice price since the bill was paid within 10 days of the invoice date. The entry would include a debit to the asset, cash (+A) for $1,960, a debit to the contra revenue account, sales discounts (+XR, -R, -SE) for $40, and then a credit to the asset, accounts receivable (-A) for $2,000. There would be a reduction in net sales due to the December 17th entry by $40 for the increase in sales discounts which is a contra revenue and is deducted to derive net sales.

When land which cost $20,000 at time of purchase is sold for $29,000, what is the effect on the income statement?

The entry to record the sale of land would involve a debit to the asset, cash for $29,000 and a credit to another asset, land for 20,000; the $9,000 difference would be recorded as a gain on sale of land and it is that gain which will increase net income on the income statement.

A company accepts a Visa credit card for a sale of $150; the credit card company charges a 1% fee to the retailer. What journal entry would be recorded for the sale and what is the effect on net sales as a result of the transaction?

The entry would include a debit to the asset, cash (+A) for $148.50, a debit to the contra revenue, credit card discounts (+XR, -R, -SE) for $1.50 and a credit to a revenue account, sales revenue (+R, +SE) for $150. The effect on net sales would be an increase of $148.50 because sales revenue increases $150 but a contra revenue, credit card discounts for $1.50 would be deducted to calculate net sales.

Dillon Company uses the allowance method to account for bad debts. What would be the entry to write off a customer account for $1,000? What effect does this write off have on the balance sheet and the income statement?

The journal entry for the write off of a customer account would be a debit to the contra asset, allowance for doubtful accounts (-XA, +A) and a credit to the asset, accounts receivable (-A) for $1,000 each. There is no effect for this transaction on either the balance sheet or the income statement because the write off simply has the effect of offsetting a decrease in a contra asset with a decrease in an asset; therefore, total assets stay the same and no other element on the balance sheet or income statement is affected.

What would be the journal entry to record a return of $500 by a credit customer who had not yet paid the bill? What is the effect on net sales of the entry?

The journal entry to record a customer return before they pay the bill will involve a debit to a contra revenue account, sales returns and allowances (+XR, -R, -SE) for $500 and then a credit to the asset, accounts receivable (-A) for $500. When you debit the contra revenue, sales returns and allowances, it reduces net sales. Net sales is a computed amount which takes sales revenue minus the contra revenue accounts of sales returns and allowances, sales discounts and credit card discounts.

Which of the following statements does not accurately describe the lower of cost or market (LCM) valuation method? The journal entry to write-down inventory decreases gross profit. The journal entry to write-down inventory decreases current assets. The journal entry to write-down inventory does not affect pretax income. The journal entry to write-down inventory increases cost of goods sold.

The journal entry to write-down inventory under LCM includes a debit to cost of goods sold (+E, -SE) and a credit to merchandise inventory (-A). Statement one is true since the debit increases cost of goods sold and since sales minus cost of goods sold equals gross profit, the write-down would decrease gross profit. Statement two is true since the credit to merchandise inventory reduces that "current" asset. Statement three is false because the write-down of inventory reduces gross profit which means all the subsequent profit measures all the way through net income would decrease; therefore, it would affect pretax income. Statement four is true since we debit cost of goods sold causing that expense to increase.

During the audit of Montane Company's 2015 financial statements, the auditors discovered that 2015 ending inventory had been overstated by $8,000 and the 2015 beginning inventory was overstated by $5,000. Before the effect of these errors, 2015 pretax income had been computed as $100,000. What should be reported as the correct 2015 pretax income?

The overstatement of beginning inventory would overstate cost of goods sold but the overstatement of ending inventory would understate cost of goods sold. So we would take the $8,000 error minus the $5,000 error to get "overstated" cost of goods sold equal to $3,000. The pretax income would be reported at $97,000 ($100,000 minus $3,000).

What is the time period assumption?

The time period assumption divides the long life of a business into a series of shorter time periods (month, quarter or year) so that financial statements can be prepared and reported to provide timely information to external parties.

When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value (net of the allowance for doubtful accounts). When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this entry will have what effect on the financial statements?

The write off of a customer account under the allowance method of accounting for bad debts NEVER has any effect on the financial statements as the reduction in the contra asset, allowance for doubtful accounts is offset by the reduction in the asset, accounts receivable so total assets is unaffected and no other element on the financial statements is affected.

What is the journal entry (identify debits/credits) to record cash received $50,000 from the issuance of stock where 5,000 shares are issued with a $1 par value.

There is a debit to cash (increase) for $50,000 and two credits (increases) to common stock $5,000 ($1 par X 5,000 shares) and to additional paid in capital $45,000 ($50,000 market value minus $5,000 par value).

What is the journal entry if a delivery truck is purchased for $5,000 cash and by signing a note payable for $25,000.

There is a debit to the asset, equipment (increase) for $30,000 and two credits one to cash $5,000 (decrease) and notes payable $25,000 (increase).

What is the journal entry to record utilities incurred for energy used during the current fiscal period but the bill has not been paid?

This is an accrued expense adjustment where utilities expense is incurred but not paid. There would be a debit to increase utilities expense and a credit to increase the liability utilities payable.

What is the effect of accrued salaries that are not paid at the end of the fiscal period?

This is an accrued expense; the entry would be a debit to increase salaries expense (which will decrease stockholders' equity) and a credit to the liability, salaries payable.

What is the effect of a debit to the asset supplies and credit to another asset cash?

This records the purchase of supplies for cash so one asset increases and another asset decreases so total assets remain unchanged.

What is the primary objectives of financial reporting?

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

In reconciling the company's book balance, what are the typical items that would be added during the reconciliation and which would be deducted?

Typically, any direct deposits noted on the bank statement made by customers, collections of notes receivable made directly to the bank, and any interest earned on the account would be added to the book balance. Deductions would include direct deductions/payments noted on the bank statement and service fees charged by the bank. Errors made by the company could be either added to or deducted from the book balance during the reconciliation depending on whether the error understated or overstated cash, respectively.

Newark Company provided the following information: Cash sales $450,000 Credit sales $1,350,000 Selling and administrative expenses $330,000 Sales returns and allowances $90,000 Gross profit, $1,360,000 Increase in accounts receivable $55,000 Bad debt expense $33,000 Sales discounts $43,000 Net income What is the effect of collections from customers on cash flow from operating activities using the "indirect" method?

Under the "indirect" method net income would be adjusted for the change in accounts receivable as a type 3 adjustment. Since accounts receivable increased, the $55,000 increase would be deducted from net income of $1,030,00 (since the increase in accounts receivable means that $55,000 of reported sales were not collected yet); so the effect on operating cash flows would be $975,000 cash inflow.

Flyer Company has provided the following information "prior" to any year-end bad debt adjustment: Cash sales $150,000 Credit sales, net $450,000 Selling and administrative expenses $110,000 Sales returns and allowances $30,000 Gross profit $490,000 Accounts receivable $110,000 Sales discounts $14,000 Allowance for doubtful accounts "credit" balance $1,200 Flyer prepares an aging of accounts receivable and the result shows that 5% of accounts receivable is estimated to be uncollectible. How much is bad debt expense?

Under the aging of accounts receivable method, the estimate equals the desired ending balance in the allowance for doubtful accounts so 5% of $110,000 equals $5,500. Since there is already a credit balance in the allowance for doubtful accounts of $1,200, the difference between the desired new balance and the existing balance would require an adjustment of $4,300 for bad debts expense ($5,500 minus $1,200).

When credit terms for a sale are 2/15, n/40, the customer saves by paying the invoice early. What percent (rounded to one decimal place) would this savings amount to on an "annual" basis? If the customer can borrow money from a bank at 10% annual interest if they do not have cash on hand to pay the bill within the discount period, would it be advantageous for them to borrow money to pay the invoice within 15 days?

We can calculate the annualized percentage by taking the discount rate, 2% divided by the percentage that the customer will pay 98% (complement of the discount rate) and then multiplying that percentage by the fraction of 365 days in the year divided by the 25 days which is the difference between the 40 days in the credit period and the 15 days in the discount period. So 2/98 X 365/25 = 29.8%. Yes, it would be advantageous to pay the bill within the 15 day discount period because the annualized savings from taking the discount is 29.8% and they are only paying the bank 10.0% so "net" savings would be 19.8%.

Laurer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Units Cost/unit 1/1 Beg. inventory 100 $ 800 5/5 Purchase 200 900 8/10 Purchase 300 1,000 10/15 Purchase 200 1,100 During the year, Lauer sold 750 laptop computers. How much is cost of goods sold under weighted average cost flow assumption.

We would do the exact first steps of computing the total cost of the beginning inventory and the three purchases to derive $780,000 of goods available for sale and 800 units available for sale. Since 750 units were sold, units in ending inventory is 50 units. The weighted average unit cost is computed by taking $780,000 goods available for sale divided by the 800 units available for sale to get $975 cost per unit. We can then multiply the units sold 750 times the $975 per unit to get cost of goods sold of $731,250. The same unit cost of $975 would be multiplied times the 50 units in ending inventory to get the dollar amount in inventory which is $48,750.

Laurer Corporation uses the periodic inventory system and has provided the following information about one of its laptop computers: Date Transaction Units Cost/unit 1/1 Beg. inventory 100 $ 800 5/5 Purchase 200 900 8/10 Purchase 300 1,000 10/15 Purchase 200 1,100 During the year, Lauer sold 750 laptop computers. What was ending inventory using the LIFO cost flow assumption?

We would do the exact first steps of computing the total cost of the beginning inventory and the three purchases to derive $780,000 of goods available for sale and 800 units available for sale. Since 750 units were sold, units in ending inventory is 50 units. Under LIFO cost flow, the ending inventory units would reflect the oldest unit costs which are those from beginning inventory. Ending inventory will equal $40,000 (50 X $800).

What is the effect of the "declaration" of a $5,000 dividend by JLH Company on its financial statements?

When a dividend is declared, retained earnings under stockholders' equity would decrease. Since the dividend is declared but not "paid", a liability called dividends payable would increase.

QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2015: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end, 2014 was $0.6 billion and at year-end 2015 it had increased to $0.8 billion. How much is the 2015 LIFO cost of goods sold?

When the LIFO Reserve figure increases by $0.2 billion from 2014 to 2015 ($0.8 minus $0.6), it means the LIFO cost of goods sold has to be greater than the FIFO cost of goods sold by the "increase" in the reserve. So FIFO cost of goods sold which is $22 billion would have the $0.2 billion added to it to compute LIFO cost of goods sold of $22.2 billion.

Dora Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock. The market price per share was $9 on the declaration date and was $10 on the distribution date. What would be the journal entry recorded when the dividend is declared but not distributed?

A 10% stock dividend is a small stock dividend so the market price on the date of declaration of $9 would be used to capitalize the issuance of the 20,000 shares. The $5 par value would be recorded in the common stock to be distributed account (a temporary legal capital account until the shares are issued) and the $4 excess of market price above par value would be recorded in the additional paid in capital from a stock dividend; retained earnings would be decreased by $180,000 (20,000 shares X $9 market price). Retained earnings 180,000 Common stock to be distributed 100,000 Additional paid in capital, stock dividend 80,000

A company declares a 2-for-1 stock split when there are 1,000,000 shares issued and outstanding and the par value is $1 per share. What will be the number of shares outstanding after the split, what is the par value per share after the split and what is the effect on total stockholders' equity?

A 2-for-1 stock split will double the shares issued and outstanding to 2,000,000 while reducing the par value to $.50 per share. The common stock account will still have a value of $1,000,000 before and after the split

Which events would cause retained earnings to decrease?

A net loss caused by expenses exceeding revenue and by dividends declared.

When would a company report a net loss on the income statement?

A net loss would be reported on the income statement when expenses (losses) are greater than or exceed revenues (gains).

Which of the following costs associated with a land purchase is not a component of the land cost reported on a balance sheet? The payment of delinquent property taxes. The incurrence of legal fees to effect transfer of the property. The cost of title insurance. The land's appraised value.

Again, the general rule for determining the cost of fixed assets acquired by purchase is to include any cost to acquire and prepare the asset for its intended use. Payment of delinquent property taxes, incurrence of legal fees to transfer ownership, and the title insurance would be included in the acquisition cost of the land. However, the land's appraised value would not be included; instead, the land's actual cost (exchange value) would be used.

On January 1, 2015, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle has an estimated 6-year life and a $4,000 residual value. What is the vehicle's book value as of December 31, 2016 assuming Wasson uses the straight-line depreciation method?

Annual depreciation under straight-line is $6,000 (($40,000 - $4,000) / 6). At the end of 2016 which is the end of year 2, the accumulated depreciation of $12,000 would be deducted for the $40,000 cost to get a book value of $28,000.

In what order are assets listed on the balance sheet?

Assets are listed in order of liquidity or their ability to be converted to cash or in which they are used up. Current assets are those that will be used, liquidated, or sold within one year and non-current assets are those with a useful life extending beyond a year.

On October 1, 2015, Donna Equipment signed a one-year, 8% interest-bearing note payable for $50,000, Assuming that Donna Equipment maintains its books on a calendar year basis, how much interest expense should be reported in the 2016 income statement?

At fiscal year end, December 31, 2015, three months of interest would have been recorded for October through December 2015. That means the 9 months remaining on the one-year note will be recognized as an expense for 2016. Interest is calculated by taking the $50,000 principal times the annual interest rate of 8% times 9/12ths of a year equals $3,000. Thus $1,000 was recognized in 2015 and then $3,000 will be recognized in 2016.

Warren Company plans to depreciate a new building using the double declining balance depreciation method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. Assuming the first year's depreciation was recorded correctly, what would be the amount of depreciation expense for the second year and the building's book value?

At the start of year two, the remaining book value of $736,000 is multiplied by 2/25 to get $58,880 of depreciation expense in year two. That depreciation is then deducted from the $736,000 to get book value at the end of year two of $677,120 ($736,000 minus $58,880).

What is the journal entry to record a previously declared dividend for $200,000?

At the time of declaration, the entry would have been a debit to retained earnings to cause that stockholders' equity account to decrease and because the dividend was not paid there would be a credit to the liability dividends payable. The entry to pay the previously declared dividend would include a debit to the liability dividends payable and a credit to the asset cash for $200,000 Dividends payable 200,000 Cash 200,000

How are creditor and investor claims reported on the balance sheet?

Both creditor and investor claims represent the right side of the accounting equation; creditor claims are called liabilities and investor claims are called stockholders' equity.

Which of the following is not a tangible asset? Buildings Land Equipment Copyright

Buildings, land a equipment are tangible assets as they have "physical" substance. The copyright is "not" a tangible asset; it is an intangible because it has no physical substance and represents a legal right to control distribution of written or printed words, music, etc.

Which of the following would not be considered a cash equivalent? A 30-day certificate of deposit. A ten-year treasury note purchased over nine years ago, which matures in two months. A three-month treasury bill. A ten-year treasury note purchased two months before its maturity.

Cash equivalents are highly liquid, short-term investments with an original maturity of three months or less at the time of purchase. The date of maturity from the time it was originally purchased is so short that its value is not expected to fluctuate. The first item is a cash equivalent as it has a 30-day date of maturity. The second item is not a cash equivalent because it had a 10-year maturity when it was originally purchased despite the fact that it is now coming due in two months. The third item is a cash equivalent as it has an original maturity of three-months. The fourth item is a cash equivalent because it has an original maturity at the time we purchase it of two months and its value is not expected to change for the two months we own it.

Husky Company has provided the following information for its most recent year of operation: Cash collected from customers totaled $89,300. Cash borrowed from banks totaled $31,700. Cash paid to employees for salaries totaled $32,100. Cash received from selling Husky common stock to stockholders totaled $41,000. Cash payments to banks for repayments of money borrowed totaled $7,500. Cash paid to suppliers totaled $9,600. Land costing $25,000 was sold for $25,000 cash. Cash paid for dividends to stockholders' totaled $3,300. How much was cash flow from operating activities?

Cash flow from operations would be cash collected from customers $89,300 minus cash paid to employees, ($32,100), minus cash paid to suppliers ($9,600) equals $47,600. Note bracketed amounts are cash outflows.

Husky Company has provided the following information for its most recent year of operation: Cash collected from customers totaled $89,300. Cash borrowed from banks totaled $31,700. Cash paid to employees for salaries totaled $32,100. Cash received from selling Husky common stock to stockholders totaled $41,000. Cash payments to banks for repayments of money borrowed totaled $7,500. Cash paid to suppliers totaled $9,600. Land costing $25,000 was sold for $25,000 cash. Cash paid for dividends to stockholders' totaled $3,300. How much was cash flow from financing activities?

Cash inflow from financing activities would be $61,900 which is cash from bank borrowing $31,700, plus cash from issuance of Husky's common stock $41,000 minus cash repayment of borrowed money ($7,500) minus cash paid for dividends ($3,300). Note bracketed amounts are cash outflows.

Husky Company has provided the following information for its most recent year of operation: Cash collected from customers totaled $89,300. Cash borrowed from banks totaled $31,700. Cash paid to employees for salaries totaled $32,100. Cash received from selling Husky common stock to stockholders totaled $41,000. Cash payments to banks for repayments of money borrowed totaled $7,500. Cash paid to suppliers totaled $9,600. Land costing $25,000 was sold for $25,000 cash. Cash paid for dividends to stockholders' totaled $3,300. How much was cash flow from investing activities?

Cash outflow for investing activities would be the cash paid to purchase land ($25,000). Note bracketed amounts are cash outflows.

Which of the following is not a current liability? Unearned revenue Accounts payable Note payable due in three years Accrued expenses payable

Current liabilities are those that will mature or be due within one year or the operating cycle whichever is longer. Unearned revenue represents deposits or gift cards which are typically satisfied within one year so these are current liabilities Accounts payable are amounts owed to suppliers and are typically paid within 30 or 60 days so these are current liabilities. The note payable which is not due for three years is not a current liability, it is long-term. Accrued expenses payable are for items like wages incurred, income taxes incurred, and interest expense incurred but not yet paid. This is a current liability as they will be satisfied within the year.

What is the primary objective of depreciation of fixed assets?

Depreciation is the systemmatic allocation of the cost of long-lived, tangible assets over the estimated useful lives in order to fulfill the matching rule. Depreciating an asset over its life allocates the cost to the periods benefited by the use of the asset to help the company generate revenue.

Warren Company plans to depreciate a new building using the double declining balance depreciation method. The building cost $800,000. The estimated residual value of the building is $50,000 and it has an expected useful life of 25 years. What is the building's book value at the end of the first year?

Double declining balance takes the assets book value (which at the start of the first year is its acquisition cost) and multiples by double the straight-line rate which is 2/25 (2 represents 200% as a decimal and 25 is the estimated useful life). When $800,000 X 2/25 the first year's depreciation of $64,000. The book value is the acquisition cost of $800,000 minus the accumulated depreciation which is $64,000 at the end of year one which equals $736,000. Note: this method does not deduct the residual value in computing depreciation expense but the asset still cannot be depreciated below the $50,000 residual value.

Kirova Company has provided the following information: Number of issued common shares, 900,000 Net income, $1,000,000 Number of authorized common shares, 1,000,000 Number of outstanding common shares, 800,000 Number of treasury shares, 100,000 What is Kirova's earnings per share?

Earnings per share is computed by dividing net income (minus any preferred stock dividends) divided by the shares outstanding. For Kirova, net income of $1,000,000 is divided by 800,000 shares outstanding to get $1.25 for earnings per share.

What is the journal entry if Smith Company issues 10,000 shares of its $10 par value common stock and pays $20,000 cash in exchange for a building? The market price of Smith's stock on the exchange date was $35 per share and the building's book value on the books of the seller was $200,000?

First the building's book value on the seller's book is irrelevant. The building should be recorded at its "fair" value if known or the fair value of the consideration given up to acquire the asset. Smith Company gave up $20,000 of cash and 10,000 shares at a market value of $35 per share or $350,000. So the building will be put on the book for $370,000 by a debit to that asset account. There will then be three credits to cash for $20,000, common stock for $100,000 ($10 par value X 10,000) and the remainder of the value of the stock will be credited to additional paid in capital for $250,000. Building 370,000 Cash 20,000 Common stock 100,000 Additional paid in capital 350,000

On March 1, 2016 Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that 200,000 barrels of oil can be produced over the remaining life of the well and the residual value of the well will be zero. During 2016, 15,000 barrels of oil were produced and 10,000 barrels were sold. What amount of depletion will be expensed in 2016?

For natural resources, the units of production method is used to compute depletion. The depletion rate for each barrel is computed by taking the cost of $1,000,000 minus residual value of zero divided by the estimated barrels that can be extracted 200,000 to get a depletion rate of $5 per barrel. Since 15,000 barrels were extracted, $5 depletion cost would be assigned to those barrels which is $75,000; this cost would be charged into "inventory" as an increase in the asset while the credit would be to accumulated depletion (a contra asset). Since only 10,000 barrels were "sold", the depletion expense that would hit the income statement for 2016 would be $50,000 ($5 X 10,000). The journal entry would be a debit to depletion expense for $50,000 and a credit to inventory for $50,000. This would leave $25,000 of the depletion in inventory.

What is the continuity assumption?

It is the assumption that the company will remain economically viable and continue to operate successfully for the forseeable future. This assumption allows businesses to measure the balance sheet elements using a mixed-attribute measurement model. Most elements are recorded at their cash-equivalent value on the date of the transaction which is called historical cost or just cost principle. There are conditions in which some values for assets and liabilities might be adjusted based on future conditions.

Describe liabilities and stockholders' equity.

Liabilities and stockholders' equity which are found on the balance sheet represent the sources of financing of a company's assets (economic resources) and are found on the right side of the accounting equation. Liabilities are amounts owed to creditors and stockholders' equity represents the owners' financing both invested and earned equity.

RM Company, a manufacturer, has provided the following information pertaining to its recent year of operation: Net income, $300,000 Accounts payable increased, $24,000 Prepaid rent decreased, $10,000 Depreciation expense, $35,000 Accounts receivable increased, $34,000 Gain on sale of a building, $11,000 Wages payable decreased, $21,000 Unearned revenue increased, $44,000 Using the indirect method, how much was RM's net cash provided by operating activities?

Net income $300,000 + Depreciation expense 35,000 - Gain on sale of building (11,000) + Accounts payable increase 24,000 + Prepaid rent decrease 10,000 - Accounts receivable increase (34,000) - Wages payable decrease (21,000) + Unearned revenue increase 44,000 Cash inflow from operations $347,000

What is the difference between net income and net cash flow from operations?

Net income is measured under accrual timing on the income statement (revenues are recorded when earned not necessarily when cash is collected and expenses are recorded when incurred not necessarily when cash is paid). Net cash flow from operations is cash timing because it includes cash collected from revenue sources and cash paid for expenses.

Melanie Corp. borrowed $100,000 cash on September 1, 2015, and signed a one-year 6%, interest-bearing note payable. The interest and principal are both due on August 31, 2016. Assume that the appropriate adjusting entry was made on December 31, 2015 and that no adjusting entries have been made during 2016. Which of the following would be the required journal entry to pay the note on August 31, 2016?

On December 31, 2015, four months of interest would have been accrued so $2,000 would have been recorded as a debit to interest expense and a credit to interest payable ($100,000 X 6% X 4/12). That then means that $4,000 will be recorded as interest expense in 2016 ($100,000 X 6% X 8/12). In addition the notes payable will be decreased by a debit for $100,000, interest expense will be debited for $4,000 and there will also be a debit to interest payable for the $2,000 accrued but not paid in 2015. That will then be balanced by a credit to the asset cash for $106,000. Notes payable 100,000 Interest expense 4,000 Interest payable 2,000 Cash 106,000

Dora Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock. The market price per share was $9 on the declaration date and was $10 on the distribution date. What would be the journal entry recorded when the shares are distributed?

On the date of issuance of the shares, there would be a debit to the temporary legal capital account, common stock to be distributed for $100,000 and a credit to the permanent legal capital account, common stock for $100,000. The common stock account has to represent the par value times the shares "issued" so we could not credit common stock until the shares were actually issued. Common stock to be distributed 100,000 Common stock 100,000

Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next 10 years. The first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. Each of the annual payments is?

Once the down payment is made, there is a balance in the liability account of $400,000 which is the "present" value at the time of purchase. Since there are 10 annual payments at a rate of 10%, we would look of the factor on the present value of an annuity table where n=10, i=10% which is 6.145. Since we do not know the "annual" payments but rather know the total known value, we will take the $400,000 and divide by the 6.145 to compute the annual payments which is $65,094.

During 2016, Thomas Corporation repurchased some shares of its own common stock. What effect did this transaction have on 2016's total stockholders' equity and earnings per share.

Repurchase of treasury shares reduces total stockholders' equity as a contra account called treasury stock is debited and its total is deducted from total stockholders' equity. Repurchase of treasury shares will increase earnings per share because they are no longer outstanding so the denominator will decrease driving the ratio up.

What transactions cause changes in retained earnings

Retained earnings increase when revenue (gain) is earned which causes net income to increase and decreases when expenses (losses) are incurred causing net income to decrease. These effects fall through the income statement. Dividends declared which are reported on the statement of stockholders' equity causes retained earnings to decrease.

Which stockholders' equity account is affected by operations and how is it affected?

Retained earnings increases by the amount of net income or decreases by the net loss; income or loss is the difference between revenues minus expenses which result from operating activities.

Madrid Company has provided the following data (ignore income taxes): 2014 revenues were $77,500 2014 net income was $33,900 Dividends declared and paid during 2014 totaled $5,700 Total assets at December 31, 2014 were $217,000 Total stockholders' equity at December 31, 2014 was $123,000 Retained earnings at December 31, 2014 were $83,000 By how much as Madrid's retained earnings changed from January 1, 2014 to December 31, 2014?

Retained earnings increases by the amount of net income which is $33,900 for the year and decreases by the dividends declared which were $5,700 to derive the $83,000 ending retained earnings balance on December 31, 2014. Working backward to the beginning retained earnings on January 1, 2014 requires the mathematical functions be reversed. Start with ending retained earnings $83,000 minus net income $33,900 plus dividends $5,700 equals $54,800

When is revenue reported on the income statement? When are expenses reported on the income statement?

Revenue is reported on the income statement when goods or services are provided to customers regardless of whether cash is collected from the customer. Expenses are reported on the income statement when the goods or services have been used/sold by the company (such as supplies, prepaid insurance, inventory or wages) regardless of whether cash has been paid. Accrual timing is used to recognize revenue and expenses.

What is the term for shares of stock currently owned by investors?

Shares currently owned by investors are called outstanding shares. It is important to know the number of outstanding shares since these are the shares that are entitled to receive dividends, the shares that can vote, and the shares used in the calculation of earnings per share (EPS).

What is the term for the shares of stock that have been repurchased and are held by the company?

Shares that have been repurchased and held by the company are called treasury shares. Treasury shares are still issued but they are not outstanding; therefore, treasury shares have no rights and cannot receive a dividend or vote. Treasury shares are excluded in the calculation of earnings per share.

During 2014, Rock Company's cash balance increased from $79,000 to $91,300. Rock's net cash flow from operating activities was $37,300 and its net cash flow from financing activities was $11,100. How much was Rock's net cash flow from investing activities?

Since cash flowed in from operating activities $37,300 and cash flowed in from financing was $11,100 (remember outflows would be bracketed amounts) so these would have caused cash to increase by $48,400. However, the cash balance only increased by $12,300 (beginning balance $91,300 minus ending balance $79,000). So taking the cash inflow of $48,400 from operating and financing minus the net increase in cash $12,300 would mean that cash outflow connected to investing activities must be ($36,100).

Madrid Company has provided the following data (ignore income taxes): 2014 revenues were $77,500 2014 net income was $33,900 Dividends declared and paid during 2014 totaled $5,700 Total assets at December 31, 2014 were $217,000 Total stockholders' equity at December 31, 2014 was $123,000 Retained earnings at December 31, 2014 were $83,000 How much is contributed capital (common stock and additional paid in capital) at December 31, 2014?

Stockholders' equity at $123,000 on December 31, 2014 is comprised of retained earnings and contributed capital (common stock plus additional paid in capital). Since retained earnings is $83,000 on December 31, 2014, then contributed capital must be $40,000 ($123,000 minus $83,000).

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and one payment of $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The building reported on the balance sheet as of the purchase date is?

The 9 annual payments of $50,000 would be discounted to present value using the annuity table where n=9, i=10% and the factor from the table is 5.759 X 50,000 = $287,950. Then the $100,000 payment at the end of year 10 is discounted by present value of a single sum table where n=10, i=10% and the factor is .386 X100,000 = $38,600. The building would also include the $90,000 down payment. The total of the building would be $416,550. Down payment $ 90,000 PVA $287,950 PVSS 38,600 Total $416,550

During 2014, Canton Company's assets increased $95,500 and the liabilities decreased $17,300. Canton Company's stockholders' equity at December 31, 2014 (the end of the year) was $211,500. What was the amount of stockholders' equity at January 1, 2014 (the beginning of the year).

The accounting equation shows that assets equal liabilities plus stockholders' equity. So if we start with ending stockholders' equity of $211,500 and want to back into beginning stockholders' equity, we would deduct the increase in assets $95,500 (because if assets increased then so would stockholders' equity to balance the equation. Since liabilities decreased by $17,300 so would stockholders' equity to balance the equation so to back into the beginning balance, the decrease in liabilities would be deducted from ending stockholders' equity. So $211,500 minus $95,500, minus $17,300 equals $98,700.

Which of the following transactions will decrease the accounts payable turnover ratio? Using cash to pay an accounts payable balance. Selling inventory on account assuming a perpetual inventory system. Selling inventory for cash assuming a perpetual inventory system. A customer returns inventory sold on account.

The accounts payable ratio is computed by dividing cost of goods sold by average accounts payable. The first transaction would cause accounts payable in the denominator to decrease so the ratio would increase as there was no effect on the numerator. In the second transaction selling inventory on account using the perpetual system. There would be two entries involving a debit to accounts receivable to increase the asset and a credit to sales revenue which increases stockholders' equity so this entry has no effect on the ratio. The debit to cost of goods sold increases the expense in the numerator of the ratio and the credit to merchandise inventory has no effect. So the ratio will increase. In the third transaction selling inventory for cash will have the same effect; the first transaction is a debit to the asset cash and a credit to sales revenue to increase stockholders' equity and there is no effect on the ratio. The second transaction increases cost of goods sold (an expense) in the numerator of the ratio and the decrease to inventory has no effect so again the ratio will increase. The fourth transaction involves a debit to the asset merchandise inventory and a credit to cost of goods sold; the decrease in cost of goods sold which is the numerator of the ratio will cause the ratio to decrease.

Which of the following would not be the result of the adjusting journal entry to record accrued interest expense? A decrease to net income. A decrease to stockholders' equity. An increase in liabilities. A decrease in current assets.

The adjusting journal entry for accrued interest expense would involve a debit to the interest expense account and a credit to interest payable. The first and second statements would be the result of the adjustment because an increase in an expense decreases net income which decreases stockholders' equity via retained earnings. The third statement will result from the adjustment because the increase in interest payable is a current liability. The fourth statement will not result from the adjusting entry as no asset is affected.

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2015. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2017. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2015, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable of $317,520. On Straight Industries' balance sheet for the year ended December 31, 2015 (the end of the first year) the book value of the liability for notes payable, including accrued interest would be?

The amount of the present value of the note payable would increase by the accrued interest at the end of each year. The accrued interest at the end of the first year, December 31, 2015 would be $25,402 (rounded to the nearest dollar). The $25,402 would cause the note to increase to $342,922 ($317,520 plus $25,402). The adjusting journal entry on December 31, 2015: Interest expense 25,402 Notes payable 25,402 This entry would increase the note payable balance to $342,922.

Describe what is found on a balance sheet.

The balance sheet contains three elements; assets represent the items owned by the business, liabilities represent obligations owed to creditors, and stockholders' equity represents the owners' claims against the assets at a moment in time. The balance sheet is said to show financial position.

Which financial statement would you utilize to determine whether a company will be able to pay liabilities which are due in 30 days?

The balance sheet would show cash on hand and other highly liquid assets (readily convertible to cash) and the amount of current liabilities which would be payable within a year. One of the major tests of liquidity which assesses the ability to pay current liabilities is the current ratio which divides current assets by current liabilities.

Which of the following is not a cash flow from financing activities? Issuance of common stock for cash. Borrowing cash on a long-term note payable. Collection of a cash dividend from stock investments. Repayment of principal on a long-term note payable

The first and second events are cash inflow from financing and the fourth event is cash outflow for financing. The third event is cash inflow from an operating activity since we are "receiving" a dividend from an investment in stock held by the company. Even though the investment in stock was created through an investing cash outflow to purchase the shares, when cash dividends are collected, it is operating cash inflow because the dividend income is reported as a peripheral revenue on the income statement and U.S. GAAP requires us to treat it as "operating" not investing inflow.

Which of the following transactions does not result in either a cash inflow or cash outflow? A company purchased some of its own stock from a stockholder. Amortization of a patent. Payment of a cash dividend. Sale of equipment at book value.

The first event does create a financing cash outflow when shares are repurchased. The second event has no effect on cash so this is the correct answer. The third event creates a financing cash outflow. The fourth event creates an investing cash inflow.

Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method? A decrease in utilities payable. Patent amortization expense. A decrease in prepaid rent. A loss on the sale of a depreciable asset.

The first item would be deducted from net income because a decrease in a liability has a negative effect on operating cash flow. Items two, three and four would all be added to net income to compute net cash flow from operations.

Which of the following statements is incorrect? The currently maturing portion of long-term debt must be classified as a current liability. The non-current portion of long-term debt will be correctly reported as a long-term liability. Even when a company plans to refinance the currently maturing debt on a long-term basis, and has the ability to do so, it must still report the currently maturing debt as a current liability. The currently maturing portion of long-term debt is a current liability if it is due within one year from the date of the balance sheet, or within the operating cycle, whichever is longer.

The first statement is correct as any liability coming due within the year must be shown as current since it will affect liquidity. The second statement is correct as the non-current portion of long-term debt does not affect liquidity so it is classified as long-term liability. The third statement is incorrect. Under U.S. GAAP, if a company has the ability and intent to refinance the currently maturing debt, it can be reported as long-term debt since it will not affect liquidity. The company can keep the liability under the long-term category. The fourth statement is correct as the currently maturing portion of long-term debt meets the definition of a current liability and will affect liquidity.

Which of the following is incorrect? Current liabilities are those that will be satisfied within one year or the operating cycle whichever is longer. Liquidity is the ability of the company to meet both current and long-term liabilities. Current liabilities impact a company's liquidity. Working capital is equal to current assets minus current liabilities.

The first statement is correct because current liabilities will be satisfied within a year or the operating cycle whichever is longer. The second statement is incorrect because liquidity tests the ability of the company to meet "current" liabilities. Long-term liabilities affect solvency but not liquidity while current liabilities affect both liquidity and solvency. The third statement is correct because current liabilities impact a company's liquidity. The fourth statement is correct as working capital is the difference between current assets less current liabilities.

Which of the following statements about the capital acquisitions ratio is incorrect? The ratio is computed by dividing cash flow from operations by cash paid for property, plant and equipment. Because the need for investment in property, plant and equipment differs dramatically across industries, a firm's ratio should not be compared with its prior years' ratio or with firms in the same industry. A high ratio indicates more need for outside financing of current and future purchases of property, plant and equipment. The ratio increases when an account receivable is collected.

The first statement is correct. The second statement is correct because different businesses across different industries differ in their need to invest in property, plant and equipment so it is best to compare the company's ratio over time. If you compare within an industry, the companies have to be comparable such as Home Depot and Lowe's that want to expand stores. The third statement is incorrect because a higher ratio means they bring in sufficient cash inflow from operations to invest in property, plant and equipment. The fourth statement is correct because cash flows in from operating activities when an accounts receivable is collected causing the numerator of the ratio to increase.

Which of the following statements about the quality of income ratio is correct? When sales are growing, receivables and inventory normally increase faster than accounts payable so the ratio increases. Seasonal variations in sales have no impact on the quality of income ratio. Failure to accrue appropriation expenses will inflate net income and reduce the quality of income ratio The quality of income ratio is computed by dividing net income by cash flow from operating activities.

The first statement is incorrect because when receivables and inventory grow faster than accounts payable, it makes net cash flow from operations decrease which decreases the ratio (not increase it). The second statement is incorrect because seasonality does impact both net income and operating cash flows so it impacts the ratio. The third statement is correct because not accruing an expense understates expenses which inflates net income. Since the denominator of the ratio is net income it will reduce the quality of income ratio. The quality of income ratio is net cash flow from operations divided by net income.

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial 10,000 down payment was made, the land reported on the balance sheet is?

This calculation is the same as the calculation of the present value for the liability to derive $61,446 but because there was a $10,000 down payment in addition to the 10 future payments to be made so the value of the land is $71,446.

Which of the following is correct? Repayments of principal and interest reduce financing activities cash flow. Purchases of common stock shares for treasury is a cash outflow connected to investing activities. If a company borrows $450 million in long-term notes and repays $380 million of long-term notes, these items must both be disclosed as separately reported items and not netted against each other in the financing section of the statement of cash flows. Issuing common stock in exchange for the purchase of a building creases both a financing activity and investing activity cash flow.

The first statement is incorrect because while repayment of principal is a financing cash outflow, interest paid is an operating cash outflow. The second statement is incorrect because purchases of a company's own stock to be held in treasury is a financing cash outflow. The third statement is true. Investing and financing activities are reported under the "gross" method so we have to show inflows and outflows that affect the investing and financing accounts as two separate line items. The best way to compute the gross method inflows and outflows is to use T-accounts and analyze the changes on the debit and credit sides as separate entries. The fourth statement is incorrect because issuing stock to purchase a building is a "noncash" investing and financing activities and would be reported at the bottom of the cash flow statement or in a footnote related to the statement.

Which of the following items about the statement of cash flows is correct? Noncash expenses such as depreciation are subtracted from net income when using the indirect method for computing cash flow from operating activities. Cash equivalents are highly liquid investments with a maturity at the date of purchase of less than three months. The acquisition of land by issuing bonds payable would not be reported on the statement of cash flows. Cash paid for interest would be classified as a financing cash flow.

The first statement is incorrect since noncash expenses are added to net income to compute operating cash flow. The second statement is correct as cash equivalents are highly liquid investments with a maturity at the date of purchase of less than three months. The third statement is incorrect as issuing bonds for the acquisition of land is a simultaneous noncash investing/financing activity that would be reported below the statement of cash flow or in a footnote to the statement. Cash paid for interest would not be a financing cash flow; because interest expense is a peripheral expense reported on the income statement U.S. GAAP requires the cash collected to be reported as operating cash outflow.

Carter Company disposed of equipment at the end of the eighth year of its estimated life for $10,000 cash. The asset's life was originally estimated to be 10 years. The original cost was $50,000 with an estimated residual value of $5,000. The asset was being depreciated using the straight-line method. What was the gain or loss on the disposal? What journal entry would be recorded for the disposal

The first step is to calculate the annual depreciation which is $4,500 (($50,000 - $5,000) / 10) and update for the eighth year's depreciation so that the accumulated depreciation would be $36,000 (8 years X $4,500). The original cost $50,000 minus $36,000 accumulated depreciation would equal the book value of $14,000. The book value is more than the cash received, $10,000 so a loss will be recorded in the amount of $4,000. Cost 50,000 - Accumulated depreciation 36,000 = Book value 14,000 Cash 10,000 Loss on disposal 4,000 The journal entry would be: Cash 10,000 Accumulated depreciation 36,000 Loss on disposal 4,000 Equipment 50,000

A company reported the following asset and liability balances at the end of 2014 and 2015: 2014 2015 Total assets $6,800,000 $7,600,000 Total liabilities 3,200,000 3,600,000 During 2015, cash dividends of $50,000 were declared and paid, and common stock was issued for $100,000. How much was the 2015 net income?

The first step is to compute beginning and ending total stockholders' equity for 2014 and 2015 which is $3,600,000 and $4,000,000, respectively computed by subtracting liabilities from assets. The second step is to determine the total increase in total stockholders' equity which is $400,000 ($4,000,000 minus $3,600,000). From the increase of $400,000 we would deduct the stock issuance proceeds of $100,000 and add back the dividend of $50,000 which would give us $350,000 which must equal net income for 2015. We can also compute net income by taking beginning stockholders' equity of $3,600,000 minus the dividend $50,000 plus the stock issuance $100,000 which equals $3,650,000. The 2015 stockholders' equity balance of $4,000,000 minus the $3,650,000 equals net income of $350,000.

Which of the following would be subtracted from net income when determining cash flows from operating activities under the indirect method? An increase in accounts payable. Depreciation expense. A decrease in prepaid insurance. A gain on the sale of a depreciable asset.

The first three items would all be added to net income not subtracted. Under the indirect method an increase in accounts payable has a positive indirect effect on cash as does a decrease in prepaid insurance. Since depreciation is a noncash expense that was deducted to compute net income on the income statement, we add it back to net income to convert to cash flow from operations. The fourth item which is a gain on sale of a depreciable asset would be deducted from net income under the indirect method because the gain was added on the income statement to compute net income but the gain is connected to an "investment" asset so we remove the effect of the gain by deducting it.

Which of the following statements is correct? A 2-for-1 common stock split decreases both earnings per share and total stockholders' equity. A 10% common stock dividend decreases both earnings per share and total stockholders' equity. A 2-for-1 common stock split increases both the number of common shares outstanding and total stockholders' equity. A 30% common stock dividend increases the number of common shares outstanding and does not affect total stockholders' equity.

The first three statements are incorrect because splits and stock dividends have "no effect" on stockholders' equity. In all three statements, the first part of the statement is correct but the second part is incorrect. The fourth statement is correct because both the number of shares increase with a 30% common stock dividend and there is "no effect" on total stockholders' equity. A stock dividend reduces retained earnings (and since this is a large stock dividend par value is used for shares issued) but increases the common stock account so there is no effect on total stockholders' equity.

Which of the following describes the primary objective of the balance sheet?

To report the financial position of the reporting entity at a particular point in time, because, the balance sheet shows the assets, liabilities and stockholders' claims against the assets (called financial position) at a moment in time

SRJ Corporation entered into the following transactions: The accrual of interest expense on a on a six-month note payable. Collected cash for services to be provided within the next six months. The reclassification of short-term debt to long-term debt. Which of the above transactions would not cause cash inflow from operations to increase under the indirect method?

The first transaction would increase interest expense and increase interest payable. The increase in interest payable would be added to net income which would cause cash flow from operations to increase. The second transaction increases cash and increases a current liability, unearned revenue and the increase in that current liability would be added to net income to cause cash flow from operations to increase. The third transaction has no effect on cash flow from operations. Debt financing is a "financing" activity and simply reclassifying debt would not cause any cash effect.

Schager Company purchased a computer on January 1, 2015, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the double declining balance depreciation method. What is the accumulated depreciation balance as of December 31, 2016?

The first year's depreciation expense would be $5,000 (25,000 X 2/10) leaving a book value at the end of year one of $20,000. Depreciation expense in year two would be $4,000 ($20,000 X 2/10). Accumulated deprecation would be the total of the depreciation expense in year one and year two for $9,000 ($5,000 + $4,000).

Which statement is false? Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset turnover. Using an accelerated depreciation method instead of the straight-line depreciation method will lead to reporting a higher fixed asset turnover during the earlier years of an asset's life. Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixed asset turnover. Selling off long-lived, productive assets while maintaining sales will lead to a lower fixed asset turnover ratio.

The fixed asset turnover is computed by dividing net sales revenue by average fixed assets. The first statement is true because expensing the assets over a shorter life will cause the book value of the fixed assets to drop more rapidly causing the ratio to be higher than if longer lives were used. The second statement is true for the same reason; use of accelerated depreciation will lead to a lower book value and cause the ratio to be higher during the earlier years of an asset's life. The third statement is true because acquiring more long-lived productive (fixed) assets will lead to a lower ratio. The fourth statement is false because selling off long-lived, productive assets will cause the denominator of the ratio to decrease which will lead to a higher fixed asset turnover ratio.

Which of the following would not "increase" the fixed asset turnover ratio? A decrease in sales revenue A profitable sale of fixed assets for cash Selling manufacturing equipment for a loss. A decrease in operating expenses

The fixed asset turnover ratio is computed by dividing net sales revenue by average fixed assets (property, plant and equipment). The decrease in sales revenue would not increase the fixed asset turnover ratio; it would cause the ratio to decrease so this is the correct answer. Whether you sell fixed assets for a gain or a loss is irrelevant but the sale of fixed assets (manufacturing equipment) would cause the ratio to increase so answers two and three would increase the ratio. A decrease in operating expenses has no impact on either net sales revenue or average fixed assets so it would not increase the ratio.

Which of the following statements is incorrect? Replacement of a truck's tires would be a capital expenditure. Replacement of carpet in an office, damaged by a coffee spill, would be a repair expense. Replacement of a roof on a newly purchased building before using it as a store would be a capital expenditure. The cost of repainting a hallway would be maintenance expense.

The general rule is that ordinary maintenance and repairs are expensed when incurred (called a revenue expenditure); however, if the cost extends the original useful life, improves efficiency or reduces future operating costs, then it should be recorded in the asset account (called a capital expenditure). The first statement is the incorrect statement because replacement of tires on a truck would be considered ordinary maintenance not a capital expenditure. Statements two and four, replacement of the carpet is a repair expense as is repainting the hallway a maintenance expense so those statements are correct. Statement three, replacement of the roof on the newly purchased building would be a capital expenditure (it is also a cost to prepare the asset for its intended use) so it is a true statement.

Which financial statement would you use to determine a company's earnings performance during an accounting period?

The income statement (also referred to as the statement of earnings or statement of operations) shows revenues that have been earned by central, ongoing operations, gains from peripheral sources, expenses that have been incurred by central, ongoing operations and losses from peripheral activities. Revenues plus gains minus expenses and losses equal net income or net earnings.

Darwin Company, a manufacturer, has provided the following information pertaining to its recent year of operation: Net income, $200,000 Accounts receivable increase, $18,000 Prepaid insurance increased, $7,000 Depreciation expense, $25,000 Loss on sale of a building, $22,000 Wages payable increased, $14,000 Unearned revenue decreased, $21,000 Using the indirect method, how much was Darwin's net cash provided by operating activities?

The indirect method starts with net income and makes three types of adjustments: Add back depreciation and other noncash expenses, Add back losses or deduct gains connected to investing or financing activities reported on the income statement, Adjust for the changes in current assets and current liabilities: decrease in assets and increases in liabilities are added to net income while increases in assets and decreases in liabilities are deducted. Net income $200,000 + Depreciation expense 25,000 + Loss on sale of building 22,000 - Increase in accounts receivable (18,000) - Increase in prepaid insurance ( 7,000) + Increase in wages payable 14,000 - Decrease in unearned revenue (21,000) Cash inflow from operations $215,000

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2015. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2017. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2015, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable of $317,520. What would be the interest expense accrued on December 31, 2016 (the second year) assuming the adjusting entry at the end of December 31, 2015 had been made?

The interest expense for year 2 would be the 8% annual rate times the $342,922 balance in notes payable after the adjusting journal entry was made at the end of the first year which is $27,434 (rounded to the nearest dollar). The journal entry on December 31, 2016: Interest expense 27,434 Notes payable 27,434 This would make the notes payable balance $370,356.

Wendell Company provided the following pertaining to its recent year of operation: Common stock with a $10,000 par value and sold for $50,000 cash. Cash dividends totaling $20,000 were declared, of which $15,000 were paid. Net income was $70,000. A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's total stockholders' equity "increase" during the recent year of operation?

The issuance of common stock would have increased total stockholders' equity by a total of $50,000 ($10,000 would increase common stock and $40,000 would increase additional paid in capital). The cash dividends would decrease stockholders' equity by $20,000 the amount "declared". Net income would increase total stockholders' equity by $70,000 and the 5% stock dividend would have "no effect" on total stockholders' equity. Treasury stock being reissued would cause total stockholders' equity to increase by $9,000 for the cost of the shares reissued which entails a credit to treasury stock but would decrease by $2,000 which would be a debit to additional paid in capital for the "loss" on reissuance. Therefore, total stockholders' equity would increase by $107,000. Issuance of stock $50,000 - Dividend declared 20,000 + Net income 70,000 + Reissuance of treasury stock 7,000 Increase $107,000

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial 10,000 down payment was made, the liability reported on the balance sheet is?

The liability is calculated by discounting the 10,000 future payments (10 of them) to their future value at a 10% interest rate. This is an annuity since 10 payments of an equal amount $10,000 annually are being made. Using the present value of an annuity table we use the factor where n=10 payments, i=10%. The factor is 6.145 which is multiplied times the 10,000 annual payments to get $61,446 so the third choice is correct.

What is the term for the maximum shares of stock that can be issued by a company?

The maximum shares that a company can issue or sell to investors is called authorized shares. Number of shares authorized are identified in the corporation's charter issued by the state in which the company is domiciled.

CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December 31, 2015. During the year ended December 31, 2016, CBA reported net income of $10,000, declared and paid a cash dividend of $2,000, and issued additional common stock for $20,000. What is total stockholders' equity as of December 31, 2016?

The net income would cause retained earnings to increase by $10,000 but the dividend of $2,000 would decrease retained earnings so total stockholders' equity would increase by $8,000. In addition the issuance of common stock for $20,000 would increase stockholders' equity as well; the overall increase would be $28,000 so by year end, December 31, 2016, total stockholders' equity would equal $113,000.

A company's retained earnings increased (changed from beginning to the end of the year) $375,000 last year and its assets increased $973,000. The company declared a $79,000 cash dividend during the year. What was last year's net income?

The net increase in retained earnings of $375,000 would have included the deduction for the dividend of $79,000 so adding these two numbers would equal the amount of net income which is $454,000 net income. An easy way to test this is to set the beginning retained earnings as equal to zero and ending balance equals $375,000. So beginning retained earnings of 0 plus $454,000 net income minus $79,000 dividends, equals ending retained earnings $375,000.

KAJ Incorporated purchased a machine costing $250,000 by paying $35,000 and signing a $215,000 note payable. How would this transaction be reported within the cash flow from investing activities section of the statement of cash flows?

The only cash effect of the transaction is an outflow for investing activities of $35,000 as analyzing the journal entry shows: Equipment 250,000 Cash 35,000 Note payable 215,000

Describe the operating activities section of the statement of cash flows.

The operating activities section of the statement of cash flows includes revenues that were collected (cash inflows) and expenses that were paid (cash outflow) for the accounting period. Net cash flow from operating activities which is the operating inflows minus the outflows equals net income "cash timing".

Lincoln Restaurants reported net income in 2016 of $45.9 million and depreciation expense of $48.8 million. It also reported additions to property and equipment of $162.9 million. Where would these items be reported on the 2016 statement of cash flows prepared under the indirect method?

The operating activities section under the indirect method begins with net income of $45.9 million and depreciation expense of $48.8 million would be added to net income (the depreciation expense which is a non-cash expense was deducted out to derive net income which is why depreciation is added to net income to convert to cash timing net income). The cash paid for additions to property and equipment would be deducted under the investing activities section of the statement of cash flows.

During 2015, Boogle reported net income of $785 million and net cash inflow from operating activities of $1,196 million. During 2014, Boogle reported net income of $563 million and net cash inflow from operating activities was $1,237 million. Which of the following is incorrect about the quality of income ratios? In 2014 the ratio was 2.2 and in 2015 it was 1.5. The ratio in 2014 was better than the 2015 ratio. Boogle's quality of income ratios indicate poor performance because net income is less than cash flow from operations. The ratio in both years shows the company's ability to generate positive cash flow from its operating activities.

The ratio in 2015 is 1.52 ($1,196 / $785) and in 2014 it was 2.20 ($1,237 / $563). The first two statements are correct because the ratio decreased from 2.2 in 2014 to 1.5 in 2015. The third statement is incorrect because a ratio of greater than one means they have strong quality of income because cash inflow from operations exceeds net income reported under accrual timing. The fourth statement is correct because a ratio over one indicates positive cash from from operations.

How should a contingent liability that is reasonably possible but cannot reasonably be estimated be reported within the financial statements? It must be recorded and reported as a liability. It does not need to be disclosed at all in the balance sheet or footnotes. It must only be disclosed as a note to the financial statements. It must be reported as a liability, but not disclosed in a note.

The rule on reporting contingent liabilities is that if the obligation is probable and can be estimated, it must be recorded and reported as a liability on the balance sheet. If the obligation is probably but cannot be estimated, it is reported in the footnote. If an obligation was reasonably possible whether it can be estimated or not, it is only disclosed in the footnotes with no accrual of a liability. If an obligation is remote, it is not disclosed at all. The first and fourth statements are false as it would not be reported as a liability. The second statement is false because it would need to be disclosed in the footnotes because it is reasonably possible to be an obligation in the future. The third statement is true because it would be disclosed in the notes.

A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million, estimated future cash inflows of $3.7 million, and a fair value of $3.1 million. How much will be written off for the asset's impairment loss? What would be the journal entry for the impairment?

The test for impairment compares the remaining book value of the asset, $4.1 million to the "lower" of the future cash inflows of $3.7 million "or" the fair value of $3.1 million. Since the fair value of $3.1 million is lower than future cash flows, that amount is deducted from the $4.1 million book value to compute the write off amount of $1.0 million. The journal entry would be (in millions): Loss on impaired equipment 1.0 Equipment 1.0

If the 1,000 shares of treasury stock which were repurchased for $38,000 are reissued for $36,000, what would be the journal entry recorded for the reissuance?

The treasury stock account was debited for $38,000 when the shares were repurchased; since they were recorded at cost when repurchased, their cost will be removed by a credit to the treasury stock account for $38,000. There would be a debit to cash for $36,000. Since companies cannot recognize gains or losses on the reissuance of their own shares, there would be a $2,000 debit to additional paid in capital from treasury stock recorded. If there was no credit balance in additional paid in capital from treasury stock or the credit balance is insufficient to record a $2,000 debit, another debit would be recorded to retained earnings for the insufficient balance in additional paid in capital from treasury stock. Cash 36,000 Additional paid in capital, treasury stock 2,000 Treasury stock 38,000

If the 1,000 shares of treasury stock which were repurchased for $38,000 are reissued for $41,000, what would be the journal entry recorded for the reissuance?

The treasury stock account was debited for $38,000 when the shares were repurchased; since they were recorded at cost when repurchased, their cost will be removed by a credit to the treasury stock account for $38,000. There would be a debit to cash for $41,000. Since companies cannot recognize gains or losses on the reissuance of their own shares, there would be a $3,000 credit to additional paid in capital from treasury stock recorded. Cash 41,000 Treasury stock 38,000 Additional paid in capital, treasury stock 3,000

KAJ Incorporated purchased a machine costing $250,000 by paying $35,000 and signing a $215,000 note payable. How would this transaction be reported within the cash flow from financing activities section of the statement of cash flows?

There is no cash effect for financing activities. Only when the "note" payable is paid will cash flow out connected with financing activities. The cash paid was as a down payment for "equipment" which is an investment asset.

Roberts Company sold equipment for $250,000, purchased a building for $6,500,000, sold short-term investments for $280,000, repaid principal on a note payable for $2,300,000 plus $230,000 of interest, and paid cash dividends of $20,000. What was the net cash flow from investing activities?

There were three investing cash flows: Sold equipment $ 250,000 Purchased building (6,500,000) Sold short-term investments 280,000 Cash outflow for investing activities (5,970,000)

If a company holds a patent that cost $9,000,000 when it was purchased from another company who had owned the patent for 5 years, what would be the annual amortization expense for this patent.

Typically, intangibles have zero residual values and since not is mentioned in this situation, it is assumed to be zero in this case. The legal life of a patent is 20 years and the general rule says the patent should be amortized using the straight-line method over the shorter of its legal or useful life. Since there is no mention of a shorter useful life, it is assumed the 20 year legal life would be used. However, since the prior holder of the patent "used" it for 5 of that 20 year legal life so the company will only amortize it over the 15 years of its remaining legal life. Amortization expense equals $600,000 (($9,000,000 - 0) / 15).

Schager Company purchased a computer on January 1, 2015, at a cash cost of $25,000. The estimated useful life is 10 years, and the estimated residual value is $3,000. The company will use the straight-line depreciation method. What is the accumulated depreciation balance as of December 31, 2016?

Under straight-line, each year's depreciation expense would be the same amount. The annual depreciation expense is $2,200 (($25,000 - $3,000)/10). Accumulated depreciation at the end of year two is $4,400.

Bold Company's 2015 income statement reported total sales revenue of $250,000. During 2015, accounts receivable decreased by $20,000 and accounts payable increased $10,000. How much cash was collected from customer during 2015 under the direct method of preparing operating activities cash flow?

Under the direct method, we start with sales revenue off the income statement which is $250,000 (credit to the account for revenue earned during the year) plus the decrease in accounts receivable of $20,000 (which would have involved a credit to accounts receivable to decrease it during the year). Cash collected from customers would equal $270,000. Accounts payable does not affect cash collected from customer but will be used to convert cost of goods sold to cash paid to suppliers along with the change in the inventory account.

A company reported total stockholders' equity of $340,000 on its balance sheet dated December 31, 2015. During the year ended December 31, 2016, the company reported net income of $40,000, declared and paid a cash dividend of $8,000, declared and distributed a 10% stock dividend with a $10,000 market value, purchased treasury stock costing $12,000, and issued additional common stock for $60,000. What is total stockholders' equity as of December 31, 2016?

We start with the December 31, 2015 stockholders' equity total of $340,000 which is increased by the $40,000 net income but decreased by the $8,000 dividend declared. The stock dividend has no effect on total stockholders' equity. The purchase of treasury stock makes total stockholders' equity decrease $12,000 but the issuance of common stock increases total stockholders' equity by $60,000; total stockholders' equity on December 31, 2016 equals $420,000. 12/31/15 total stockholders' equity $340,000 + Net income 40,000 - Dividend declared 8,000 - Repurchase of treasury shares 12,000 + Issuance of common stock 60,000 12/31/16 total stockholders' equity $420,000

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and one payment of $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The liability reported on the balance sheet as of the purchase date and after the initial $90,000 down payment is?

We start with the value of the building is $416,550 would have the $90,000 down payment deducted out. So the liability would be recorded at $326,550.

Which of the following is the result of receiving cash from a customer before products or services are provided? Assets and stockholders' equity increase. Assets and revenue increase. Liabilities and revenues increase. Liabilities and assets increase.

When cash is received but goods or services are not provided causes an increase in the asset cash and an increase in the liability unearned revenue. The first statement is wrong because stockholders' equity did not increase. The second statement is wrong because revenue did not increase. The third statement is false because revenue did not increase. The fourth statement is true because both liabilities and assets increase.

If a company issues 1,000 shares of no-par common stock at a market price of $50 per share, what would be the journal entry.

When no-par stock is issued, the entire market price for the shares issued is credited to common stock and there will be no account on their books or balance sheet called additional paid in capital. Cash 50,000 Common stock 50,000

On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $4,000; and installation cost, $2,500. At what amount will the equipment be recorded on a balance sheet?

When purchasing fixed assets, the general rule is to include any cost to acquire and prepare the asset for its intended use so all four costs will become part of the acquisition cost of the equipment which is $57,500.

What would be the journal entry to record the reissuance of 1,000 shares of treasury stock for $40 per share when they were repurchased at a cost of $44 per share and have a par value of $1?

When the shares were repurchased at $44 per share, the treasury stock account was debited for $44,000 (1,000 shares X $44) and cash was credited for $44,000. When the shares are reissued at $40 per share, the cash account is debited for $40,000 and the treasury stock account would be credited for $44,000 which was the original cost when they were repurchased. There would have to be a debit to additional paid in capital for $4,000 (since gains/losses cannot be recorded on a company's own stock transactions). The par value has no relevance in recording repurchases or reissuance of treasury stock. Par value would be significant if the shares were "retired" at the time they were repurchased. Cash 40,000 Additional paid in capital, treasury stock 4,000 Treasury stock 44,000

SRJ Corporation entered into the following transactions: The accrual of interest expense on a on a six-month note payable. Collected cash for services to be provided within the next six months. The reclassification of short-term debt to long-term debt. Which of the above transactions resulted in an increase in working capital?

Working capital is computed by taking current assets and deducting current liabilities. The first transaction accrued interest would increase interest expense and interest payable. The increase in interest payable which is a current liability would make the working capital decrease. The second transaction would increase the current asset cash and increase the current liability unearned revenue. This would have no effect on working capital as the increase in current assets would be offset by the increase in the current liability. The reclassification of the short-term debt to long-term debt would cause current liabilities to decrease which would make working capital to increase.