Financial Accounting - Module 3
For the year 2015, Dark Horse Corp.'s sales revenue was $1,600,000. Cost of goods sold (COGS) was 40% of sales revenue. Their income statement shows that operating expense was $150,000. What was Dark Horse Corp.'s gross profit for 2015? $640,000 $960,000 $1,600,000 $720,000
Gross Profit is equal to Sales Revenue minus Cost of Goods Sold, in this case $1,600,000 - $640,000 = $960,000. The Cost of Goods Sold of $640,000 is found by multiplying $1,600,000 by 40%.
Identify which of the following items belong on a balance sheet and which belong on an income statement, and drag them to the correct section provided.
BALANCE SHEET Prepaid Expense Salaries Payable Deferred Revenue INCOME STATEMENT Income Tax Expense Salaries Expense Sales Revenue Prepaid Expense: Prepaid Expense belongs on the balance sheet. Remember: Prepaid Expense is not an expense account, but rather an asset account. Salaries Payable: Salaries Payable is a liability account and therefore, it belongs on the balance sheet. Deferred Revenue: Deferred Revenue belongs on the balance sheet. Remember: Deferred Revenue is not a revenue account, but rather a liability account. Sales Revenue: Sales Revenue is a revenue account and therefore, it belongs on the income statement. Income Tax Expense: Income Tax Expense is an expense account and therefore, it belongs on an Income Statement. Salaries Expense: Salaries Expense is an expense account and therefore, it belongs on the income statement.
Which statement about US GAAP and IFRS accounting standards is true? US GAAP requires that assets be divided up into current and non-current assets while IFRS does not require such division. Both US GAAP and IFRS require that owners' equity be listed after liabilities. US GAAP will generally list assets and liabilities in order from most liquid to least liquid while IFRS will generally do the opposite. Both US GAAP and IFRS require that non-current liabilities be listed before current liabilities.
Both US GAAP and IFRS require that assets be divided into current and non-current assets. Only US GAAP requires that owner's equity be listed after liabilities. IFRS on the other hand, often lists owners' equity before liabilities. US GAAP lists assets and liabilities in order of liquidity - the most liquid being first. IFRS is generally the opposite. Only IFRS requires that non-current liabilities be listed first. US GAAP requires that current liabilities be listed first.
Organize the accounts and amounts shown on the right into the current assets and non-current assets sections of the balance sheet for Cardullo's. Start building the sections according to US GAAP and then do it according to IFRS standards. Cash Other Non-Current Assets PP&E (net) Prepaid Expenses Inventory Other Current Assets Accounts Receivable
CURRENT ASSETS: Cash Accounts Receivable Prepaid Expenses Inventory Other Current Assets NON-CURRENT ASSETS: PP&E (net) Other Non-Current Assets Notice again how US GAAP presents Current Assets first, followed by Non-Current Assets, while IFRS presents them in the reverse order. In these questions we are not evaluating on the order of accounts within Current Assets or Non-Current Assets, but remember that accounts are generally presented in order of liquidity from most liquid to least liquid under US GAAP, and vice versa under IFRS.
Organize the accounts and amounts shown on the right into the current liabilities and non-current liabilities sections of the balance sheet for Cardullo's. Start building the sections according to US GAAP and then do it according to IFRS standards. You will have a chance to review both side by side before submitting your answer. Accounts Payable Other Current Liabilities Gift Certificates non-current Wages Payable Sales Tax Payable Short Term Loan Payable
CURRENT LIABILITIES Accounts Payable Wages Payable Sales Tax Payable Short Term Loan Payable Other Current Liabilities NON-CURRENT LIABILITIES: Gift Certificates non-current Notice again how US GAAP presents Current Liabilities first, followed by Non-Current Liabilities, while IFRS presents them in the reverse order. In these questions we are not evaluating on the order of accounts within Current Liabilities or Non-Current Liabilities, but remember that accounts are generally presented in order of liquidity from most liquid to least liquid under US GAAP, and vice versa under IFRS.
Suppose for the year 2015, Speedy Chef, a fast food restaurant, had a Gross Profit of $1,281,648. Speedy Chef had the following expenses: Cost of Goods Sold $1,251,167 Selling Expense $70,578 Rent Expense $156,941 Utilities Expense $73,994 Insurance Expense $35,148 Wages $505,245 General & Administrative $24,358 Miscellaneous $32,968 Interest Expense $4,059 Income Tax Expense $60,596 What would Speedy Chef's Income Before Taxes be for 2015? $347,876 $378,357 $317,357 $287,280
Income Before Taxes is calculated by subtracting Operating Expenses and Non-Operating Expenses from Gross Profit (note that Cost of Goods Sold has already been subtracted to get Gross Profit, and Income Tax Expense should not be subtracted to get Income Before Taxes so these two figures can be ignored in this case). $1,281,648 - $70,578 - $156,941 - $73,994 - $35,148 - $505,245 - $24,358 - $32,968 - $4,059 = $378,357
Identify which of the following are permanent and which are temporary accounts and drag them to the correct section provided.
PERMANENT ACCOUNTS Rent Payable Inventory Cash & Cash Equivalents TEMPORARY ACCOUNTS Cost of Goods Sold Sales Revenue Rent Expense Cash and Cash Equivalents: Permanent account because it is an Asset account used to show the balance of cash and cash equivalents available at a point in time. Rent Payable: Permanent account because it is a liability account used to show the obligation to pay for rent at a point in time. Inventory: Permanent account because it is an asset account used to show the balance of inventory at a point in time. Cost of Goods Sold: Temporary account because it shows the total of an expense (costs associated with providing goods or services to a customer) over a period of time. Sales Revenue: Temporary account because it shows the total money that a business earns and realizes from its customers for providing goods or services related to its normal operations net of any allowances or provisions over a period of time. Rent Expense: Temporary account because it shows the total of an expense (costs associated with paying rent) over a period of time.
Identify which of the following are real and which are nominal accounts and drag them to the correct section provided.
REAL ACCOUNTS Accounts Receivable Unearned Revenue Prepaid Rent Cash and Cash Equivalents NOMINAL ACCOUNTS Advertising Expense Cost of Goods Sold Cash and Cash Equivalents: Real account because it is an Asset account used to show the balance of cash available at a point in time. Accounts Receivable: Real account because it is an asset account used to show the monies owed to a company at a point in time. Unearned Revenue: Real account because it is a liability account used to show the obligation to provide goods or services. Prepaid Rent: Real account because it is an asset account used to show the prepayment of rent at a point in time. Advertising Expense: Nominal account because it shows the total of an expense (costs associated with providing goods or services to a customer) over a period of time. Cost of Goods Sold: Nominal account because it shows the total of an expense (costs associated with providing goods or services to a customer) over a period of time.
Company A's accounting period goes from January 1 through December 31. Which of the following describes the difference between the trial balance on December 31, 2013 and the trial balance on January 1, 2014? The trial balance on January 1, 2014 does not balance because all nominal accounts were reset in the closing process. The trial balance on January 1, 2014 does not balance because the company has not yet earned any income for the period. The trial balance on January 1, 2014 shows no balance in all nominal accounts because they were closed to retained earnings in the closing process. The trial balance on January 1, 2014 shows no balance in all accounts because the accounting books were reset in the closing process.
Remember that the trial balance must always balance. Remember that the trial balance must always balance. This is the correct answer! During the closing process, the balance of all nominal accounts are closed to retained earnings and reset to zero. The trial balance maintains the cumulative balance of all real accounts over time.
The Mayflower, a seafood restaurant, had the following liabilities by the end of 2015: Accounts Payable $60,000 Wages Payable $100,000 Unearned Revenue $125,000 (60% will be earned in 2016) Notes Payable $140,000 ($45,000 payable in 2016) What is the amount that The Mayflower should report as Total Current Liability on its balance sheet as of December 31, 2015? $425,000 $300,000 $280,000 $160,000 Your information has been submitted. Result:
The Total Current Liability reported would be the sum of Accounts Payable, Wages Payable, $75,000 of Unearned Revenue, and $45,000 of Notes Payable. 60,000 + 100,000 + 75,000 + 45,000 = $280,000
At the end of the fiscal year, December 31, 2015, ProHealth Gym had the following revenue and expense accounts: Rent Expense$4,025 Cost of Goods Sold$2,175 Salary Expense$2,625 Sales$11,025 Depreciation$1,525 What is the total value of all the expense accounts on January 1, 2016? 0 675 10,350 8,825
The correct answer is 0. ProHealth Gym closed their books on December, 31, 2015, which means that all nominal accounts (expense and revenue accounts) were set to 0 for the beginning of the new fiscal year, beginning January 1, 2016.
The trial balance for a business at a given point in time typically has much more detailed information than what is depicted on the financial statements. What is the accounting concept that allows for the information from the trial balance to be condensed to what is displayed on the financial statements? Historical Cost Materiality Entity Concept Closing Process
The historical cost principle essentially states that the value of an asset purchased by a business is equal to the amount the business paid for it. While this is useful in determining the value of a company's assets, it is not useful in determining the level of detail on a financial statement. This is the correct answer! The concept of materiality states that a business is not required to report information on financial statements that would not impact the decision-making of the users of the financial statements. The entity concept states that a business is a distinct, separately identifiable entity and that only the transactions of the business entity are recorded. This is helpful in preventing financial data from other entities from affecting the trial balance and financial reports, but it does not help in discerning the appropriate level of detail for a financial report. At the end of the financial year, the closing process transfers the net income to retained earnings and zeroes out the revenue and expense accounts. This explains the link between the income statement and balance sheet, but it does not help in discerning the appropriate level of detail for a financial report.
A summarized trial balance for Cardullo's as of September 28, 2013 is provided. Use the information to create an income statement in the space provided.
The income statement is built by starting with revenue less cost of goods sold, less operating expenses of selling expense, depreciation expense, rent expense, utilities expense, insurance expense, wages expense, general and administrative expense, and miscellaneous operating expenses. Then subtract interest expense to get to income before taxes. Finally subtract tax expense to get to net income. CONSOLIDATED INCOME STATEMENT As of Sep 28, 2013 (in millions) Revenue$2,481,104 Less: Cost of Goods Sold $1,300,126 Gross Profit$1,180,976 Depreciation Expense$3,150 Selling Expense$85,453 Rent Expense$152,976 Insurance Expense$34,320 Utilities Expense$67,703 Miscellaneous Operating Expense$30,973 General and Administrative Expense$21,334 Wages Expense$494,610 Total Operating Expenses$890,519 Operating Income$290,459 Interest Expense($1,034) Income Before Taxes$289,425 Less: Tax Expense$58,572 Net Income$230,853
The income statement reflects a company's: Financial position over a given period of time. Financial position at a given point in time. Financial performance over a given period of time. Financial performance at a given point in time.
The income statement shows a company's financial performance, because it shows the accumulation of all nominal accounts over a period of time.
How quickly and easily an item can be converted to cash is known as: Money Measurement Leverage Conservatism Liquidity
The money measurement principle refers to the fact that only values that can be measured in monetary terms should be recorded in the financial accounting records. Leverage refers to the use of debt as a funding source. Conservatism recognizes that there are some estimates involved in accounting and says that accounting should reflect the more cautious estimated valuation rather than the more optimistic one. Liquidity refers to how quickly and easily assets and liabilities can be converted to cash.
Which of the following items represents the net income/(loss) for the year? The difference between the revenues/gains and expenses/losses. The difference between the cash receipts and payments. The difference between the funds raised by stock issuance and the dividends paid. The difference between the net increase in assets and in liabilities.
The sum of all revenues/gains and expenses/losses (all nominal accounts) is used to find the net income/(loss) for the year.
Which of the following are steps in the closing process? Select all that apply. Nominal accounts are reset to zero. Real accounts are reset to zero. Net income is transferred to the cash account on the balance sheet. Net income is transferred to the retained earnings account on the balance sheet. The retained earnings account is reset to zero.
This is one of the correct answers. Accounts on the income statement are nominal accounts, which means that they are reset to zero as part of the closing process. Accounts on the balance sheet are real accounts, which means that their balances are carried forward and are not reset to zero as part of the closing process. Net income is transferred to the retained earnings account on the balance sheet. This is one of the correct answers. The net balance of total revenues less total expenses (Net Income) is transferred to the retained earnings account. Retained earnings is a real account on the balance sheet, which means that the balance is carried forward and not reset to zero as part of the closing process.
Which of the following is true regarding the trial balance? Select all that apply. The trial balance includes all of the accounts needed to create the balance sheet and the income statement. The trial balance is much less detailed than the balance sheet and income statement. The accounting principle of materiality says that the information on the trial balance can be combined and simplified into more general reporting items. The accounting principle of money measurement says that the information on the trial balance can be combined and simplified into more general reporting items. The trial balance shows only nominal accounts.
This is one of the correct answers. The trial balance includes all of the accounts needed to create the balance sheet and the income statement. The trial balance is much MORE detailed than the balance sheet and income statement. This is one of the correct answers. The accounting principle of materiality says that the information on the trial balance can be combined and simplified into more general reporting items. The accounting principle of materiality says that the information on the trial balance can be combined and simplified into more general reporting items. The trial balance includes not only the nominal accounts used to build the income statement, but also the real accounts used to build the balance sheet.
For the year 2015, McGuire's Auto had Operating Income of $320,000. It also had the following expenses: Salaries and Wages Expense $75,000 Building and Utilities Expense $86,000 Interest Expense $122,000 Income Tax Expense $84,000 Cost of Goods Sold (COGS) for the year was $440,000 What would McGuire's Auto's gross profit be for 2015? $481,000 $687,000 $440,000 $526,000
To get to Gross Profit from Operating Income, we must add back any Operating Expenses. In this case we start with $320,000 Operating Income and add back Salaries and Wages Expense of $75,000 and Building and Utilities Expense of $86,000, to get Gross Profit of $481,000.
Which of the following would be considered a long term liability account? Wages Payable Accounts Payable Mortgage Payable Sales Tax Payable
Wages payable is an accrued expense recorded at the end of a financial period for amounts of payroll that have been worked but not yet paid. The amount is due in a year or less. Accounts payable is a liability account used to show the obligation to pay suppliers who have provided goods or services on credit terms. The amount is due in a year or less. Mortgage payable is a liability account that represents the unpaid balance related to a mortgage. This balance is the portion of the payable that is not due in a year or less. Therefore, it is a long-term liability account. Sales Tax Payable is a liability account that represents the amount owed to the government for sales tax collected from customers throughout the accounting period. The amount is due in a year or less.
