Financial Accounting
The Cash T-account has a beginning balance of $12,000. During the year, the company received cash of $5,000 from customers. A further $2,000 was received in advance for services to be performed in the next year. Finally, $8,000 was credited to the amount. What is the ending balance of cash?
$11,000: 12,000 + 5,000 + 2,000 - 8,000.
Company A has an accrual basis net income of $175,000 and the following related items: 1) Depreciation expense of $85,000 2) Accounts receivable decrease of $15,000 3) Inventory increase of $24,000 4) Accounts payable increase of $18,000. How much is Company A's net cash flow from operating activities?
$175,000 + 85,000 + 15,000 - 24,000 + 18,000 = 269,000.
Gross margin ratio definition
(Revenue - Cost of goods sold [COGS]) / Revenue
3 questions: On the last day of December 2019, Company A entered into a transaction that resulted in a receipt of $300,000 cash in advance related to services that will be provided during January 2020. During December of 2019, the company also performed $165,000 of services which were neither billed nor paid. Prior to December adjustments and before these two transactions were recorded, the company had revenue of $1,4425,790 at December 31, 2019. There are no other prepaid services yet to be delivered, and during the month all outstanding accounts receivable from prior months were collected. 1) If company A makes the appropriate adjusting entry, how much revenue will be reflected on the December 31, 2019 income statement? 2) If company A makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as unearned revenue? 3) If company A makes the appropriate adjusting entry, how much will be reported on the December 31, 2019 balance sheet as accounts receivable?
1) 1,425,790 + 165,000 = 1,590,790 2) 300,000 3) 165,000
Company A purchases $100,000 of inventory during the year, has beginning of the year inventory of $15,000, and sells $85,000 of inventory during the year for $150,000. What is the company's inventory balance to be reported on its balance sheet at year end?
15,000 + 100,000 - 85000 = 30,000
Under which section of a statement of cash flows would the proceeds received from the sale of long-term depreciable assets most likely appear? 1) Operating cash flow 2) Investing cash flow 3) Financing cash flow 4) Long-term assets
2) Investing cash flows. The proceeds (cash received) should be reported under investing activities as a cash inflow on the statement of cash flows.
On which financial statement and at what amounts are accounts receivable reported? 1) Balance sheet at the amount owned by customers 2) Income statement at the net uncollectible amount 3) Income statement at the amount written off 4) Balance sheet at the net realizable value
4) Balance sheet at the net realizable value. Accounts receivable are reported on the balance sheet at the amount expected to be collected which is accounts receivable less allowance for uncollectible accounts, also known as net realizable value.
If a company issues 10,000 shares of $1 par value common stock at a market price of $50 per share, which of the following is the correct balance sheet entry? 1) Increase common stock and cash by $10,000 2) Increase cash by $500,000 and increase earned capital by $500,000 3) Increase revenues by $500,000 4) Increase cash by $500,000 and increase contributed capital by $500,000
4) Increase cash by $500,000 and increase contributed capital by $500,000. Cash increases by the number of shares issued times the market price; contributed capital also increases by the same amount. The latter is broken down into two segments: 1) common stock, which increases by the original par value of the shares sold, and 2) additional paid-in capital, which makes up the balance. Revenue is an income statement category and therefore irrelevant in this case.
Which of the following does not occur when a company receives additional information that requires it to increase its expectations of uncollectible accounts receivable? 1) Accounts receivable (net) is reduced 2) Bad debt expense is increased 3) Net income is reduced 4) The allowance account is decreased
4) The allowance account is decreased. The allowance account is increased, resulting from additional bad debt expense. The increased expense leads to a reduction of profit and retained earnings.
On January 1, 2021, XYZ issued $700,000, 5% bonds for $685,000, with market rate of 6%. The bonds pay interest on June 30 and December 31. How much is the interest expense on the bonds for the first interest payment on June 30, 2021?
685,000 * 6% * 6/12 = 20,550.
Is this added to or subtracted from net income: $1,000 in depreciation and amortization
Added to net income
Is this added to or subtracted from net income: A decrease in accounts receivable
Added to net income
Is this added to or subtracted from net income: An increase in accounts payable
Added to net income
Company A purchased $3,000 worth of equipment on credit. What is the effect of this transaction (A, L, & SE)?
Assets increase by $3,000, liabilities increase by $3,000.
According to U.S. GAAP, which criteria must be met in order to recognize a contingent liability? 1) The obligation is certain to require payment at some point in the future 2) The obligation is probable 3) The obligation is estimable 4) The obligation is reasonably possible
Both 2 and 3. Contingent liabilities are only recognized when the amount is probable and estimable. An obligation that is guaranteed at some point in the future is a definite liability. Contingencies that are reasonably possible do not need to be reported.
A company bills customers for services provided. The customers have not yet been paid. Which of the following is one part of recording this transaction: 1) Debit Service Revenue, 2) Credit Cash, 3) Debit Accounts Receivable, 4) Credit Unearned Revenue
Debit accounts receivable. Rationale: The journal entry includes a debit to accounts receivable and a credit to revenue.
T/F: If stockholders' equity is $100,000 on January 1, 2021, and decreases to $90,000 on December 31, 2021, this could only be due to a dividend payment of $10,000.
False: A reduction in stockholders' equity could also be due to a net loss for the year.
Classify the following as operating, investing, or financing cash flow: Paid to purchase treasury stock
Financing
Classify the following as operating, investing, or financing cash flow: Received as dividends
Financing
Classify the following as operating, investing, or financing cash flow: Received from issuance of common stock
Financing
Company A has a 'total sales and revenue' [revenue] of $53,800, a cost of goods sold of $36,630; what is their gross margin ratio?
Gross margin ratio = (53,800 - 36,630) / 53,800 = 0.32.
Does this increase, decrease, or have no effect on ROA: If Company A had paid off some of its accounts payable in January
Higher: Total assets decreases as cash decreases, total liabilities decreases, net income stays the same.
What effects would the accrual of $200 of interest on a note payable have on financial statements? I. Balance sheet: Liabilities are decreased by $200 II. Income statement: Expenses are increased by $200 III. Balance sheet: Retained earnings are decreased by $200 IV. Balance sheet: Cash assets are decreased by $200 V. Balance sheet: Liabilities are increased by $200 The answer is multiple of these.
II, III, and V. Interest is recorded on the balance sheet as an accrued liability, increasing liabilities by $200, decreasing retained earnings by $200, and adding $200 to expenses on the income statement. Since no cash is spent to pay the note or the interest, cash assets are not affected.
Return on Assets (ROA) definition
Net income divided by Total assets
Does this increase, decrease, or have no effect on ROA: If Company A had paid rent for a store location in January 2017? The payment covers rent for the first quarter of fiscal year 2018.
No change. Cash decreases and prepaid rent (asset) increases, both by the same amount. Total assets is therefore unchanged. Net income is unchanged, so ROA does not change.
Classify the following as operating, investing, or financing cash flow: Paid as interest to creditors
Operating
Classify the following as operating, investing, or financing cash flow: Paid to settle a note payable
Operating
Classify the following as operating, investing, or financing cash flow: Received as a lawsuit settlement
Operating
Classify the following as operating, investing, or financing cash flow: Received for services rendered
Operating
1) What was the dollar amount of Accounts receivable written off by Cisco in the fiscal year ending July 29, 2017? 2) What effect did the write-off have on Net Income for the fiscal year ending July 29, 2017? 3) What effect did this write-off have on Total Assets as of July 29, 2017? 4) What was the amount of cash collected from customers in fiscal year ending July 29, 2017? Assume that all sales are on credit, and zero recoveries. 5) What percentage of Accounts receivable did Cisco not expect to collect in fiscal year ending July 29, 2017? How does this compare to the percentage at the end of fiscal year ending July 30, 2016? 6) What might explain the trend in this percentage calculated?
See financial statements of Cisco on iPad.
1) Did Exxon Mobil incur "LIFO liquidation" in 2012? If yes, what is the effect on Net Income reported by Exxon Mobil in 2012? 2) What is the effect of "LIFO liquidation" on COGS reported by Exxon Mobil in 2012? 3) What is the size of LIFO reserve recorded by ExxonMobil in 2012? 4) Did Exxon Mobil save income taxes in fiscal year 2012 by using LIFO (instead of FIFO) as their cost flow assumption? How much? 5) Did Exxon Mobil save income taxes cumulatively over the years since inception (up to the end of 2012) by using LIFO (instead of FIFO) as their cost flow assumption? How much?
See financial statements of ExxonMobil on iPad.
Suppose that AMAT repurchased all of its long-term debt as of October 27, 2019. How much would AMAT have paid for the repurchase?
See notes on AMAT #2 At the fair value of long-term debt = $5.5 billion from the note related to fair values on page 79 (under the category "other")
What is the net book value of AMAT's intangibles as of October 27, 2019?
See notes on AMAT #2 Goodwill + Purchased technology and other intangible assets, net: from the balance sheet = 3,399 + 156 = 3,555
Assume that AMAT will not acquire any intangible assets in fiscal year 2020. What is your best estimate of the total net book value of all intangible assets at the end of fiscal year 2020?
See notes on AMAT #2 Net book value (found above) - future estimated amortization expense (found in note 10) = 3,555 - 52 = 3,503
How would net income for 2019 be affected if AMAT had repurchased all of its long-term debt? Ignore any tax effects.
See notes on AMAT #2 Net income decreases by $0.8 billion. Fair value (from above) = 5.5 billion Carrying amount = 4.7 billion (from balance sheet) 4.7 - 5.5 = 0.8 billion loss.
What is the accumulated depreciation associated with PP&E as of October 27, 2019?
See notes on AMAT #2 $2,542 from Note 8.
What is the depreciation expense associated with PP&E that AMAT recorded in fiscal year 2019?
See notes on AMAT #2 $306 from Note 8.
What is the original acquisition cost of AMAT's PP&E as of October 27, 2019?
See notes on AMAT #2 $4,071 from Note 8
What is the amount of accumulated depreciation associated with this sale of PP&E (182)? Assume all investments in new fixed assets were made in cash and there was no material impairment of PP&E.
See notes on AMAT #2 Accumulated depreciation BB + current period depreciation - accumulated depreciation associated with PP&E sold = Accumulated depreciation EB. Thus, 2405 + 306 - x = 2542 x = 169
AMAT sold some PP&E in 2019. What is your best estimate of the amount of PP&E sold? Assume all investments in new fixed assets (capital expenditures) were made in cash and there was no material impairment of PP&E.
See notes on AMAT #2 Gross PP&E BB + new PP&E investments - PP&E sold = Gross PP&E EB 3812 + 441 - x = 4017 x = 182
What is the total cash provided by operating activities for AMAT in fiscal year 2019?
See notes on AMAT. $3,247 million — From the statement of cash flows.
Accounts receivables are generally classified as current assets because they are expected to be collected in one year or the operating cycle. However, a large corporation such as Caterpillar can also have long-term receivables that are due more than one year. These are classified under non-current assets on the balance sheet. For the following questions, focus on the receivables of Cat Financial (the financial subsidiary of Caterpillar). Include both current and non-current receivables. The receivables of Cat financial are classified on the balance sheet as "Receivable — finance" and "Long-term receivables — finance". Ignore receivables related to "trade and other". What was the amount of total receivables (current and non-current) owed to Cat Financial as of December 31, 2019?
See notes on Caterpillar Gross accounts receivable = 9,336 + 12,651 + 410 = 22,397 (From the balance sheet and notes related to the Allowance for Credit Losses)
What is the net book value (in millions) of Caterpillar's Inventories as of December 31, 2019?
See notes on Caterpillar. $11,266 million. Amount classified as "Inventories" on the balance sheet.
In 2017, the closure of a facility in Belgium resulted in a liquidation of LIFO inventory. How did this LIFO liquidation affect the income taxes Caterpillar incurred in fiscal year 2017? By how much?
See notes on Caterpillar. It increased income taxes. LIFO liquidation reduced COGS by $66 million and therefore increased the income before taxes by the same amount. This resulted in additional income taxes of $66 * 25% = $16.5 million.
Companies often cite income tax considerations as a primary reason for favoring LIFO over other inventory cost flow assumptions. Did Caterpillar save income taxes cumulatively over the years since inception (up to and including fiscal year 2019) by using LIFO as its inventory cost flow assumption? Assume a constant tax rate of 25%. By how much?
See notes on Caterpillar. Yes, they saved income taxes. Cumulative tax savings are 25% of the difference between cumulative COGS under LIFO and cumulative COGS under FIFO. Since the difference between those two equals the LIFO reserve (also the difference in ending balances between FIFO and LIFO), cumulative tax savings can be calculated as 25% of LIFO reserve: 2086*0.25 = 521.5
Does Cat Financial expect to collect 100% of outstanding receivables as of December 31, 2019? If not, specify the percentage that Cat Financial does not expect to collect.
See notes on Caterpillar. Allowance for doubtful accounts/Gross accounts receivable = 410/22397 = 1.83%
1) What was the net book value of all intangible assets at December 31, 2006? 2) What was the total net book value at December 31, 2006 of all intangible assets that are not subject to amortization? 3) Assume ConocoPhillips will not acquire any intangible assets in fiscal year 2007 (i.e., next year). What is your best estimate of the total net book value of all intangible assets at the end of fiscal year 2007? 4) What was the purchase price of Burlington Resources? 5) How did ConocoPhillips pay for Burlington Resources? 6) What portion of the purchase price could not be allocated to separately identifiable assets (net of liabilities) (aka Goodwill)? What might explain this amount? 7) What was the effect of the acquisition on ConocoPhillips' balance sheet?
See notes on ConocoPhillips on iPad.
1) What is the net book value of long-term debt (current and non-current portion) as of December 31, 2016? 2) On average, has long-term debt (excluding capital lease obligations) been issued at premium, discount, or par? 3) Suppose the company repurchased its long-term debt, excluding capital lease obligations. How much would Dr Pepper Snapple have paid for the repurchase? 4) Is the estimated value of Long-term debt (excluding capital lease obligations) greater than, smaller than, or the same as the net book value? What explains the difference? 5) For the note with a maturity date of November 15, 2022, is the effective rate greater than, less than, or equal to the coupon rate? For the note maturing December 15, 2023? 6) What is the interest expense for a bond? 7) What is the historical interest rate for the bond?
See notes on Dr Pepper Snapple on iPad
1) What is Google's tax expense for fiscal year 2012? 2) What is the amount of income taxes due on Google's tax returns for the fiscal year 2012? 3) How much cash did Google pay for income taxes during 2012? 4) Are the effective tax rates for income generated in the US different from that for income generated outside the US? If different, why? 5) What is the net amount of deferred income taxes on Google's balance sheet as of December 31, 2012? Is it a net asset or liability? 6) Has cumulative depreciation and amortization related to PP&E recognized for financial reporting as of December 31, 2012 been the same, lower than, or higher than the amount recognized for tax purposes?
See notes on Google on iPad
What was the average price per share at which Herman Miller repurchased shares in fiscal year 2017?
See notes on Herman Miller. 23.8 * 1,000,000 / 765,556 = 31.089 (numbers from above a bit)
At the end of fiscal year 2017, Herman Miller's price per share was equal to $32.70. What was the market capitalization of Herman Miller as of the end of fiscal year 2017?
See notes on Herman Miller. 59.7 shares outstanding x $32.7 price per share = $1.95 billion.
1) Recreate the T-account for Gross PP&E and Accumulated Depreciation. A template is provided on the iPad. 2) Calculate the gain or loss from disposal of PP&E.
See notes on L.B. Foster Company on iPad.
Is this added to or subtracted from net income: A decrease in accrued liabilities
Subtracted from net income
Is this added to or subtracted from net income: An increase in inventory
Subtracted from net income
Company A computes a total of $8,120 in estimated losses in 2020. Its Accounts Receivable account has a balance of $250,000 and its Allowance for Uncollectible Accounts has a balance of $1,625 before adjustment for current period losses. How much bad debt expense will Company A report in 2020?
To bring the allowance to the desired balance of $8,120, the company will need to increase the allowance account by $6,495 (or $8,120 - $1,625) resulting in bad debt expense of the same amount.
Debt-to-equity ratio equation
Total liabilities divided by total shareholders' equity.
T/F: Assets must always equal liabilities plus stockholders' equity.
True
FIFO: A conveyor belt, LIFO: A pile of coal
Yes, this is true, good job.
Suppose that Company A had an additional bond and made the following disclosure related to it: $5,000 U.S. Dollar 3.85% coupon notes due 2043. Carrying values: October 27, 2019: $4,952.69 October 28, 2018: $4951.58 i) What is your best estimate of the interest expense that Company A recognized in fiscal year 2019 for these notes? Assume that Company A has not retired or issued additional notes in this category in 2019. ii) What is the historical interest rate for this bond?
i) Coupon payment = 3.85% x 5000 = 192.5 Interest expense = (EB - BB) + Coupon payment = 1.11 + 192.5 = $193.61 ii) Interest expense = BB x discount rate Discount rate = 193.61/4,951.58 = 3.91%
Suppose that an analyst who closely follows Company A thinks that Company A should recognize an additional $10 million increase in the expected doubtful (uncollectible) accounts. How would the following financial statement items change to incorporate the analyst's estimate: higher, lower, or the same? Ignore any tax effects. i) Net income for the fiscal year 2019 ii) Net cash provided by operating activities for the fiscal year 2019? iii) Total assets as of December 31, 2019?
i) Lower — Bad debt expense (provision for credit losses) increases by $10 million. Therefore, net income is lower by $10 million. ii) The same — There was no cash transaction, therefore, no effect on the statement of cash flows. iii) Lower — There is an increase in allowance for bad debt. Therefore, net accounts receivable decreases.
For each transaction listed below, indicate its effects on Company A's Gross Margin Ratio. (0.32) Higher, lower, or the same? i) If they had paid higher cash dividends. ii) If they had incurred additional research and development expenses
i) The same — dividend payment does not affect revenues or COGS. ii) The same — R&D expense is not a part of COGS.
With total liabilities of 10,810 and total assets of 19,024, what is the leverage ratio?
10,810/19,024 = 0.568. Individually those numbers are found on the balance sheet.
T/F: Companies that have property, plant, and equipment that increase in market value should recognize a gain on the income statement in the period the increase in value occurs.
False: Impairment losses must be recognized as a loss on the income statement, but increases in value are not recognized.
T/F: Financial accounting is designed primarily for decision makers within the company
False: It is designed primarily to provide information to decision makers outside of the company.
T/F: A company that uses LIFO must sell its oldest goods first
False: LIFO represents a cost flow, not the physical unit flow.
What is the estimated amount of cash that Herman Miller collected from their customers in fiscal year 2017? Assume that all sales are made on credit.
See notes on sample final solution for T-table.
Leverage ratio definition
Total Liabilities / Total Assets
Company A purchased farm equipment at a cost of $500,000 on January 1, 2020. The equipment has an estimated residual value of $25,000 and an estimated life of 10 years. Question 1: What amount will the company report as total depreciation expense over the 10-year life of the equipment using straight-line depreciation? Question 2: If the company uses the straight-line method, what is the book value on December 31, 2024 (end of the fifth year)?
1) 500,000 - 25,000 = 475,000 2) Accumulated depreciation = [($500,000 - $25,000) / 10] × 5 = $237,500 Book value = $500,000 ‒ $237,500 = $262,500
On August 1, 2021, XYZ Company's balance sheet indicates there are 2,000,000 shares of $12 par value common shares in the Common Stock account and $25,000,000 in the Additional Paid-in Capital account. There are 10,000,000 shares authorized. On August 2, the company splits its stock 4 for 1. Question 1: How many of XYZ's shares of common stock are issued and outstanding immediately after the stock split? Question 2: What is the dollar balance of XYZ's common stock account immediately after the stock split?
1) Immediately after the 4 for 1 stock split, the company has 8,000,000 shares of $3 par value common stock [2,000,000 shares x (4/1) = 8,000,000 shares] issued and outstanding. 2) The dollar balance in the Common Stock account is unchanged by the stock split; the balance remains at $24,000,000 (8,000,000 shares at the new $3 par value per share).
XYZ Company's balance sheet reveals that inventories reported on a LIFO basis are $25,000,000. In a footnote, management stated that the LIFO reserve was $3,500,000. Question 1: How much would XYZ's ending inventory be using FIFO? Question 2: What is the total cumulative tax effect of using LIFO given a 32% income tax rate?
1) LIFO reserve is the difference in inventory carrying amount between the FIFO and LIFO cost methods. To adjust a LIFO inventory value to a FIFO inventory value, the LIFO reserve is added to LIFO inventories. Thus, inventory with FIFO method = 25,000,000 + 3,500,000 = 28,500,000 2) Decrease in income taxes: $3,500,000 × 32% = $1,120,000
Which one of the following selections is not a component of contributed capital? 1) Retained earnings 2) Common stock 3) Additional paid-in capital 4) All of the above
1) Retained earnings. Retained earnings is component of the earned capital section of stockholders' equity.
Which statement is true concerning the straight-line method of depreciation: 1) Depreciation is recognized evenly over the estimated useful life of the asset 2) Purchase cost is expensed in the year of acquisition 3) Depreciation is equal to the proceeds received on sale less the amount paid to acquire the asset. 4) Annual depreciation expense is highest in the early years and decreases over the life of the asset.
1). When using the straight-line method of depreciation, depreciation is recognized evenly over the estimated useful life of the asset.
XYZ began operations in 2018. The company reported $128,000 of depreciation expense on its income statement in 2018 and $84,000 in 2019. On its tax returns, the company deducted $192,000 for depreciation in 2018 and $112,000 in 2019. The 2019 tax return shows a tax obligation (liability) of $132,000 based on a 25% tax rate. Question 1: What is the temporary difference between the book value of depreciable assets and the tax basis of these assets at the end of 2018? Question 2: What is the temporary difference between the book value of depreciable assets and the tax basis of these assets at the end of 2019? Question 3: How much deferred tax liability will XYZ report at the end of 2018? Question 4: What is XYZ's deferred tax liability at the end of 2019?
1: 192,000 - 128,000 = 64,000 2: ($192,000 + $112,000) - ($128,000 + $84,000) = $92,000 3: $64,000 × 25% = $16,000 4: $92,000 × 25% = $23,000
Which of the following transactions that impact current liabilities has a corresponding entry on the income statement? 1) Purchase inventory on credit from Company XYZ on January 1 2) Payment to XYZ on February 1 for a January 1 purchase 3) Interest accrued on a note payable 4) Payment to employees in March for wages earned in February
3) Interest accrued on a note payable. The purchase of inventory on credit is recorded as an increase in both inventory (noncash asset) and accounts payable (liability) on the balance sheet. Payment of accounts payable is recorded as a decrease in cash and accounts payable on the balance sheet. Interest accrued on a note payable is recorded as an increase in current liabilities (interest payable). An increase in interest expense is recorded on the income statement. Payment of accrued wages is recorded as a decrease in both cash and wages payable (liability).
Goodwill can be recorded as an asset when: 1) An offer is received to purchase the business at a price in excess of the value of the assets. 2) A business has above normal profitability compared to other businesses in its industry. 3) A business is purchased and payment is made in excess of the fair value of the net assets. 4) A business can determine that it has created customer goodwill and name recognition.
3). Goodwill is an intangible asset that is only recorded when one company acquires another company at an excess purchase price over the fair market value of its identifiable net assets.
Which of the following does not affect the current liabilities section of the balance sheet? 1) Purchase of inventory on credit 2) Wages owed to employees but not yet paid 3) Insurance bill to be paid next month 4) Sale of goods on credit 5) A probable legal obligation, due within 12 months
4) The sale of goods on credit impacts current assets, accounts receivable. All the other items are liabilities that the company must pay within the next year, current liabilities.
If inventory at the end of the year is understated by $60,000, what will this error cause? (Ignore tax effects) 1) An understatement of cost of goods sold for the year by $60,000 2) An overstatement of gross profit for the year by $60,000 3) An overstatement of inventory for the year by $60,000 4) An understatement of net income for the year by $60,000
A $60,000 understatement of inventory at the end of the year will cause the cost of goods sold to be overstated by $60,000, the gross profit for the year to be understated by $60,000, and net income for the year to be understated by $60,000.
T/F: A statement of cash flows reports on cash flows for operating, investing, and financing activities at a point in time.
False: A statement of cash flows reports over a period of time, not at a point in time.
T/F: According to GAAP revenue recognition criteria, in order for revenue to be recognized on the income statement, an amount must be either realized, realizable, or earned.
False: According to GAAP, revenue must be both realized (realizable) and earned, to be recognized on the income statement.
T/F: Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid.
False: Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not always relate to the receipt or payment of cash.
T/F: Companies should recognize inventory as an expensed when purchased.
False: Companies capitalize inventories when purchased, and expense inventories when sold.
T/F: Depreciating expense is deducted from net income in determining cash flows provided by operating activities under the indirect method
False: Depreciation does not involve cash. It is added back to net income in the operating section of the statement of cash flows under the indirect method because it was deducted in determining net income though it did not use cash.
T/F: Depreciation requires only two estimates — useful life and residual value — both of which are specified by GAAP depending on the asset type.
False: GAAP does not specify useful life and residual value amounts. Managers must estimate these amounts based upon the time period that the asset is expected to generate resources for the company and a reasonable amount for which the asset can be sold at the end of its estimated life.
T/F: A sale of a plant asset at less than cost requires that a company recognize a loss in the income statement.
False: Gains and losses are determined based on the selling price compared to the book value, not the cost.
T/F: Goodwill is considered to be impaired if the market value of the acquired business is greater than the carrying amount on the balance sheet.
False: Goodwill is impaired if the market value of the acquired business is less than its carrying amount on the balance sheet.
T/F: If accounts receivable increase during an accounting period, then the cash received from customers is more than the sales revenue for the period for payment on credit sales
False: If accounts receivable is increasing, this means that the amount of sales on credit is greater than the cash received.
T/F: Retained earnings are present on both the income statement and the statement of stockholders' equity.
False: Retained earnings are present in the statement of stockholders' equity and the balance sheet. It reflects the total earnings of the company since the company began operations, less any payouts. The income statement represents current period earnings.
T/F: A bond selling for an amount above face value is said to be selling at a discount.
False: This bond would sell at a premium, not a discount.
T/F: A deferred tax asset arises when tax reporting income is less than financial reporting income.
False: This statement describes a deferred tax liability. A deferred tax asset arises when tax reporting income is greater than financial reporting income.
T/F: Under the matching principle, the cost of inventory should be reported as an expense in the income statement when it is purchased, even if it is purchased on credit and will not be paid until the next reporting period.
False: Under the matching principle, the cost of inventory should only be reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets. Unpaid amounts to suppliers are reported as liabilities.
Explain why Gain on sales of property and dealers is listed as an adjustment when reconciling Net Income to Cash from Operations. In fiscal year 2016, this amount is ($5.8) million. Why is this number different from the $10.7 million of 'Proceeds from sales of property and dealers' listed under cash flows from investing activities?
Gain on sale is a book gain and is defined as proceeds from sale minus net book value of asset. As this is a book amount and is not a cash flow, the gain is subtracted from net income in order to reconcile to cash flow from operating activities. The actual cash flow from the sale of the asset is listed under cash from investing activities.
Which of the following items are in the balance sheet: 1) Inventory, 2) Operating expenses, 3) Account receivable, 4) Equipment, 5) Cash payments, 6) Provision for income taxes
Inventory, accounts receivable, and equipment are found on the B/S under assets. Cash payments are found on the statement of cash flows.
Classify the following as operating, investing, or financing cash flow: Received from sale of used equipment
Investing
Did accounts receivable for AMAT increase, decrease, or not change in fiscal year 2017 relative to fiscal year 2016?
See notes on AMAT. Increase — From the statement of cash flows: an increase in current assets is subtracted from net income to arrive at CFO, in this case (37).
Did income taxes payable for AMAT increase, decrease, or not change in fiscal year 2017 relative to fiscal year 2016?
See notes on AMAT. Increase — From the statement of cash flows: an increase in current liabilities is added to net income to arrive at CFO, in this case 121.
Would Herman Miller's provision for income taxes have been higher or lower than recognized in its 2017 financial statements had they not received a manufacturing subsidy under the American Jobs Creation Act of 2004?
See notes on Herman Miller Higher by $3.4 million.
As of June 3, 2017 what was Herman Miller's best estimate of the amount (in dollars) that would be claimed as part of warranty expense in future periods?
See notes on Herman Miller financial statement. $ 47.7 million (From balance sheet or note 12)
What is the amount of outstanding accounts and notes receivable at fiscal year-end 2017 that the company expects to collect?
See notes on Herman Miller financial statement. $186.6 million, from balance sheet.
Herman Miller took a write-off of $1.1 million to the allowance account in fiscal year 2017. 1) What impact did this write-off have on net income in fiscal year 2017? 2) What was the impact of the write-off on total assets as of June 3, 2017? 3) The following questions relate to a scenario where the company recovers the entire amount of write-off in fiscal year 2018. 3A) Write the journal entries that the company would make because of the recovery. 3B) What is the impact of the recovery on total assets as of the end of fiscal year 2018? 3C) What is the impact of the recovery on net income for fiscal year 2018? 3D) What is the impact of the recovery on cash flow from operating activities for the fiscal year 2018?
See notes on Herman Miller financial statement. 1) No effect. 2) No effect. 3A) There are two sets of journal entries: i) Reverse the write-off, ii) Record receipt of cash. i) DR Accounts receivable (asset) 1.1, CR Allowance for doubtful accounts (XA) 1.11 ii) DR Cash (asset) 1.1, CR accounts receivable (asset) 1.1 3B) No effect. 3C) No effect 3D) Increased by $1.1 million.
Did accounts payable increase, decrease, or not change in the following fiscal years for 2015, 2016, and 2017?
See notes on Herman Miller financial statement. 2015: Increase 2016: Increase 2017: Decrease Subtract (add) decrease (increase) in current liabilities to reconcile net income to cash from operating activities.
Did accounts receivable increase, decrease, or not change in the following fiscal years for 2015, 2016, and 2017?
See notes on Herman Miller financial statement. 2015: Decrease 2016: Increase 2017: Decrease Add (subtract) decrease (increase) in current assets to reconcile net income to cash from operating activities.
During fiscal year 2017, Herman Miller repurchased and retired some shares. If the company had held these shares in treasury instead of retiring them, how would the following financial statement items be affected? In each case, indicate whether the amount would be higher, lower, or the same as currently reported, and by how much. i) Total shareholders' equity as of June 3, 2017? ii) Paid-in capital as of June 3, 2017? iii) Number of shares issued as of June 3, 2017? iv) Net income for fiscal year 2017?
See notes on Herman Miller for numbers. i) The same ii) Higher by $23.8 million (From statement of shareholders' equity: $0.1 million under "Common stock" and $23.7 million under "Additional Paid-in Capital". iii) Higher by 765,556 (note 8) iv) The same
The following questions are related to Herman Miller's long term debt of $149.9 million (Series B Senior Notes, 6.42%, due January 3, 2018). Assume that there were no repurchases. i. What is the coupon rate on this bond? Was the market rate at issuance higher than, lower than, or equal to the coupon rate? Was the bond issued at premium, discount, or par? ii. Herman Miller classifies the $149.9 million in debt as long term even though the note is due within one year. What might be a reason for this classification? How might you have expected this bond to be classified on the balance sheet? Be specific.
See notes on Herman Miller's financial statement. i. Coupon rate = 6.42% Market rate = coupon rate Bond issued at par (From note 5) ii. Herman Miller expects to refinance the short term debt. Would have expected this to be classified under current liabilities as "current portion of long term debt".
What effect did the purchase of DWR have on the following financial statement items for the fiscal year 2014? If it had an effect, indicate the magnitude of that effect. Ignore any effects due to non-controlling interests. 1) Total assets 2) Net income 3) Shareholder's Equity
See notes on Herman Miller's financial statement. 1) Increased by $81.1 million. Cash decreased by $155.2 million, total assets due to acquisition increased by $236.3 million. 2) No effect. 3) No effect, or increased by 25.7 + 5.8 due to non-controlling interests.
What is the net book value of Herman Miller's intangibles as on June 3, 2017?
See notes on Herman Miller's financial statement. 428 million: From balance sheet: 304.5 (goodwill) + 78.1 (indefinite-lived intangibles) + 45.4 (other amortizable intangibles, net)
What percentage of the total intangible assets acquired from DWR in fiscal year 2014 was amortizable?
See notes on Herman Miller's financial statement. From note 2, end of page: (68.5 - 55.1) / 68.5 = 19.6% (Intangibles with indefinite life are not amortized).
What is the net book value of long-term debt as of June 3, 2017?
See notes on Herman Miller's financial statement. Solution: $199.9 million (From balance sheet or note 5)
In fiscal year 2014, Herman Miller acquired 81% of "Design Within Reach" (DWR) for $155.2 in cash. What percentage of the $155.2 million was allocated to separately identifiable net assets?
See notes on Herman Miller's financial statement. Solution: 51.3% From note 2: Separately identifiable net assets = net assets acquired - Goodwill = 155.2 - 75.6 = 79.6. Percentage allocated to separately identifiable net assets = 79.6/155.2 = 51.3%
The following questions relate to the effect of warranty expense on Herman Miller's income taxes. Assume a statuatory tax rate of 35%. i. Was the cumulative warranty expense that Herman Miller reported on its financial statements higher, lower, or the same compared to what they reported on their tax return at the end of the fiscal year 2017? ii. Was the warranty expense that the company reported on its financial statements higher, lower, or the same compared to what they reported on their tax return during fiscal year 2017?
See notes on Herman Miller. i) Higher by $48.57 million. A positive DTA balance implies that cumulatively, the company has paid more to the IRS than owed. Therefore, Cumulative taxes due (IRS) > Cumulative provision for income taxes (F/S) => Cumulative expense on tax return < Cumulative expense in F/S. The amount is greater by 17/35% = $48.57 million. ii) Higher by $3.714 million. DTL increased by 1.3 in 2017 (i.e., the asset account was debited). Journal entries for 2017: DR Provision for income taxes (E, RE) xx DR DTA (warranty related) 1.3 CR Taxes due xx + 1.3 => Taxes due (IRS) > Provision for income taxes (F/S) => Warranty expense (IRS) < Warranty expense (F/S) Higher by 1.3/35% = 3.714 million.
Company A had the following units and costs of widgets available for sale during the year: Beginning inventory - 10 units at $130 First purchase - 15 units at $135 Second purchase - 30 units at $140 Third purchase- 20 units at $145 The company has 30 units on hand at the end of the year. What is the dollar amount of inventory at the end of the year according to the first-in, first-out method?
The ending inventory is made up of 20 units in the third purchase plus 10 units in the second purchase. (20 × $145) + (10 × $140) = $4,300
T/F: Cash dividends reduce both cash and retained earnings by the amount of the dividends paid.
True, by definition.
T/F: The net accounts receivable reported in the current asset section of a company's balance sheet represents all receivable expected to be collected within the next year or operating cycle.
True. A company makes two representations when reporting receivables in the balance sheet. The first is that it expects to collect the amount reported on the balance sheet. The second is that it expects to collect within the next year or operating cycle.
T/F: The balance in Allowance for Uncollectible Accounts represents the amount a company thinks it will not collect from a customer
True. Allowance for uncollectible accounts represents the amount that a company thinks it will not collect from customers. Accounts receivable on the balance sheet is reported net of the allowance for uncollectible accounts.
T/F: A bond will sell for a discount when the market rate is greater than the coupon rate.
True: Bonds sell at a discount when the coupon rate is less than the market rate.
T/F: Underestimating the allowance for uncollectible accounts can shift income from future periods into the present period.
True: By underestimating the allowance for uncollectible accounts, current income increases because the bad debt expense charged is lower. However, due to the underestimation, future year bad debt expense will need to increase to compensate, thus lowering future profitability.
T/F: FIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.
True: FIFO assumes that the most recently purchased goods are remaining in inventory's balance. Hence, the balance sheet reports inventories at more current costs.
T/F: In general, in a period of rising prices, FIFO produces higher gross profits than LIFO.
True: Gross profit is affected by the choice of inventory costing method. Specifically, in periods of rising costs and prices, FIFO produces higher gross profits then LIFO because lower cost inventories (i.e., first inventories bought are first out) are matched against sales revenues at current market prices.
T/F: When a company uses LIFO and prices are declining, profits will be higher than if the company had used FIFO
True: If prices are declining, the cost of the most recently purchased units will be less than the cost of older units. These newer units will flow to the income statement with a smaller cost than under FIFO causing profits to be higher.
T/F: If Company A purchased inventory on credit from Company B, then the transaction recorded by Company A would include an increase in a liability and an increase in asset.
True: Inventory would increase, and accounts payable would increase.
T/F: Companies using LIFO are required to disclose the amount at which inventory would have been reported had the company used FIFO. The difference between LIFO and FIFO inventories is called the LIFO reserve.
True: The disclosure of the LIFO reserve is required for those companies using LIFO inventory costing. This disclosure allows analysts to adjust the balance sheet and income statement for LIFO effects when comparing LIFO and FIFO companies.
Suppose Company A had issued an additional zero coupon bond, and made the following disclosure related to it (Note that a zero coupon bond has a coupon rate of 0%): Title: (In $ millions) | June 03, 2017 | May 28, 2016 Content: $171 US Dollar zero coupon bonds, due 2020 | $140 | $130 i. What is your best estimate of the interest expense that Company A recognized in fiscal year 2017 for the "U.S. dollar zero coupon notes due 2020"? Assume that Company A has not retired or issued additional notes in this category in 2017. ii. What is your best estimate of the historical interest rate that Company A uses to compute interest expense for the "U.S. dollar zero-coupon notes due 2020"?
i) BB = $130, EB = $140, Coupon = 0 BB + Interest Expense - Coupon payment = EB Interest expense = 140 - 130 = $10 million. ii) Historical interest rate = Interest expense ÷ beginning balance of bonds, net = 10/130 = 7.7%
Suppose Company A issued additional common stock for cash during 2019 and used the cash in two ways: 1) to purchase additional equipment, and 2) to hire and compensate additional workers to run the equipment. Indicate the effect on the Cash Flows from Operations (CFO), Cash Flows from Investing (CFI), and Cash Flows from Financing (CFF). [Ignore tax effects]. i) CFO ii) CFI iii) CFF
i) CFO — Lower ii) CFI — Lower iii) CFF — Higher Issuing common stock increases a company's CFF. Using cash to purchase equipment lowers CFI. Using cash to pay employees lowers CFO.
Suppose Company A was required to pay additional interest (in cash) on its outstanding debt. Indicate the effect on the Cash Flows from Operations (CFO), Cash Flows from Investing (CFI), and Cash Flows from Financing (CFF). [Ignore tax effects]. i) CFO ii) CFI iii) CFF
i) CFO — Lower. ii) CFI — No change. iii) CFF — No change. Interest expense is considered an operating activity, as having debt and paying interest are considered a normal and ordinary cost of doing business.
Suppose that Company A sold (for cash) additional used equipment at a loss at the beginning of fiscal year 2019, thereby avoiding one year's depreciation expense. Indicate the effect on the Cash Flows from Operations (CFO), Cash Flows from Investing (CFI), and Cash Flows from Financing (CFF). [Ignore tax effects]. i) CFO ii) CFI iii) CFF
i) CFO — no change. ii) CFI — higher iii) CFF — No change Buying and selling property is an activity reflected in CFI. Cash flow from investing increases by the amount of cash received. While Net Income will include the loss on the sale of the equipment, the loss is reversed out of the SCF in CFO so that there is no net effect of this transaction on CFO. There is no effect on CFF.
Indicate the effect on the leverage ratio calculated above (0.568, so more assets than liabilities) for 2019 had the event occurred. i) Suppose that on October 26, 2019, AMAT purchased a new piece of equipment, paying for 20% of the fixed asset in cash and the rest through an external bank loan. ii) If AMAT had paid off (with cash) some of its accounts payable in September 2019? iii) If AMAT's brand value increased in fiscal year 2019, compared to the year before. The brand is internally developed.
i) Higher — PPE increases by 100% of the purchase price, cash decreases by 20% of the purchase price. Liabilities increase by 80% of the purchase price. Therefore, the numerator and denominator increase by the same amount, and it therefore goes higher because it's already < 1. ii) Lower — Total liabilities and total assets decrease by the same amount. By the same logic as above, the leverage ratio is lower. iii) No change — Changes in internally developed brand value is not recognized.
