ACC 3010 Chapter 3

Listed below are several terms and phrases associated with the balance sheet and financial disclosures. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. Balance Sheet

An organized array of assets, liabilities, and equity.

Times interest earned ratio

Calculated by dividing income (before interest and income taxes) by the interest expense

Is Prepaid rent (next six months) a current or long-term account?

Current

Is a Note Payable (due in 90 days) a current or long-term account?

Current

Is accounts receivable a current or long-term account?

Current

The trial balance for K and J Nursery, Inc., listed the following account balances at December 31, 2018, the end of its fiscal year: cash, $32,000; accounts receivable, $27,000; inventories, $41,000; equipment (net), $96,000; accounts payable, $30,000; wages payable, $13,000; interest payable, $9,000; note payable (due in 18 months), $46,000; common stock, $82,000. Calculate total CURRENT assets and total current liabilities that would appear in the company's year-end balance sheet.

Current Assets : $100,000 ($32,000 cash, $27,000 AR, and $41,000 inventory) Current Liabilities: $52,000 ($30,000 AP, $13,000 wages, $9,000 interest)

Find Current Assets backwards via ratios Inventories: $840,000 Total assets: $2,800,000 Current Ratio: 2.25 Quick Ratio: 1.20 Debt to Equity ratio: 1.8

Current Ratio = Current assets / Current liabilities Quick Ratio = Current assets - Invent. = Current Liabilities Current Ratio 2.25 - Quick Ratio -1.20 = inventory/current liabilities 1.05 If: Inventory / current liabilities = 1.05 Then: Inventory / 1.05 = current liabilities So: $840,000 / 1.05 = $800,000 If: Current assets / current liabilities = 2.25 Then: Current assets = current liabilities * 2.25 So: Current assets = $800,000 * 2.25 Current assets = $1,800,000

The following is a December 31, 2018, post-closing trial balance for Culver City Lighting, Inc. Account Title Debits Credits Cash $ 62,000 Accts Receivable 46,000 Inventories 52,000 Prepaid insurance 22,000 Equipment 100,000 Accumulated dep. $41,000 Patent, net 47,000 Accounts payable 15,500 Interest payable 5,500 Note payable (due in 10, annual instlmt) 130,000 Common stock 77,000 Retained earnings 60,000 Totals 329,000 329,000 a. Calculate the current ratio. b. Calculate the acid-test ratio. c. Calculate the debt to equity ratio.

Current Ratio: 5.35 - Current Assets / Current Liabilities (Current Assets of 62,000 + 46000 + 52000 + 22000) (Current Liabilities of 15500 + 5500 + 13000) Acid-Test Ratio: 3.18 - Quick Assets / Current Liabilities (Current Assets w/o inventory, so 62000 + 46000) (Current Liabilities of 15500 + 5500 + 13000) Debt to Equity Ratio: 1.10 - Total Liabilities / Shareholders' Equity (liabilities 15500 + 5500 + 130000) (Shareholders of 77000 + 60000)

Working capital

Current assets minus current liabilities.

Find Shareholder's Equity backwards via ratios Inventories: $840,000 Total assets: $2,800,000 Current Ratio: 2.25 Quick Ratio: 1.20 Debt to Equity ratio: 1.8

Debt to equity ratio = Total Liability / Shareholder's Equity = 1.8 So: TL = 1.8(SE) Accounting Equation: TA = TL + SE Then: TL = TA - SE And: TA = $2,800,000 So: TL = $2,800,000 - SE If: TL = 1.8(SE) And: TL= $2,800,000 - SE Then: 1.8(SE) = $2,800,000 - SE +SE +SE So: 2.8(SE) = $2,800,000 /2.8 /2.8 SE = $1,000,000

For example, a business has net income of $100,000, income taxes of $20,000, and interest expense of $40,000. Based on this information, its times interest earned ratio is 4:1, which is calculated as: ($100,000 Net income + $20,000 Income taxes + $40,000 Interest expense) ÷ $40,000 Interest expense

Example of times interest earned ratio

Find Long Term Liabilities backwards via ratios Inventories: $840,000 Total assets: $2,800,000 Current Ratio: 2.25 Quick Ratio: 1.20 Debt to Equity ratio: 1.8

If: Total assets = Total liabilities + Shareholder's Equity And: Total liabilities = Current liabilities + Long-term liabilities Then: total assets = Current Liabilities + Long-term Liabilities + SE So: Long-term liabilities = Total assets - current liabilities - shareholder's equity or $2,800,000 - $800,000 - $1,000,000 = $1,000,000

Current liabilities

Important to a user in comparing financial information across companies.

Summary of significant accounting policies

Important to a user in comparing financial information across companies.

You have been asked to review the December 31, 2018, balance sheet for Champion Cleaning. After completing your review, you list the following three items for discussion with your superior: An investment of $32,000 is included in current assets. Management has indicated that it has no intention of liquidating the investment in 2019. A $120,000 note payable is listed as a long-term liability, but you have determined that the note is due in 10, equal annual installments with the first installment due on March 31, 2019. Deferred revenue of $66,000 is included as a current liability even though only two-thirds will be recognized as revenue in 2019, and the other one-third in 2020.

Investment: $32,000 Long-term Installment Note: $12,00 Current liabilities $108,000 Long-term liabilities Deferred Revenue: $44,000 Current liabilities $22,000 Long-term liabilities

Current assets

Items expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer.

Intangible asset

Lacks physical substance.

Is Note Receivable (due in 2 years) a current or long-term account?

Long-term

Is a Note Payable (due in 5 years) a current or long-term account?

Long-term

Subsequent events

Occurs after the fiscal year-end but before the statements are issued.

Cash equivalent

One-month U.S. Treasury bill.

Is a Patent a current on long-term account?

Patent

Operating cycle

Period of time from payment of cash to collection of cash.

Accrued liabilities

Recorded when an expense is incurred but not yet paid.

Liquidity

Refers to the ability of a company to convert its assets to cash to pay its current obligations.

The trial balance for K and J Nursery, Inc., listed the following account balances at December 31, 2018, the end of its fiscal year: cash, $22,000; accounts receivable, $17,000; inventories, $31,000; equipment (net), $86,000; accounts payable, $20,000; wages payable, $8,000; interest payable, $4,000; note payable (due in 18 months), $36,000; common stock, $62,000. Determine the year-end balance in retained earnings for K and J Nursery, Inc.

Retained Earnings: $26,000 (All assets - All liabilities - Common Stock)

Qualified opinion

Scope limitation or a departure from GAAP.

Unqualified opinion

The statements are presented fairly in conformity with GAAP.

Find Long Term Assets backwards via ratios Inventories: $840,000 Total assets: $2,800,000 Current Ratio: 2.25 Quick Ratio: 1.20 Debt to Equity ratio: 1.8

Total assets - Current assets = Long Term Assets $2,800,000 - $1,800,000 = $1,000,000

Composition of investments.

in a separate disclosure note

Composition of long-term debt.

in a separate disclosure note

Employee benefit plans.

in a separate disclosure note

Indicate whether the above items should be disclosed (A) in the summary of significant accounting policies note, (B) in a separate disclosure note, or (C) on the face of the balance sheet. A related-party transaction.

in a separate disclosure note

Depreciation method.

in the summary of significant accounting policies note

Inventory costing method.

in the summary of significant accounting policies note

Allowance for uncollectible accounts.

on the face of the balance sheet

Number of shares of common stock authorized, issued, and outstanding.

on the face of the balance sheet