Financial Accounting M2, Financial Accounting M3, Financial Accounting M4, Financial Accounting M5, Financial Accounting M6, Financial Accounting M7
What are the following examples of? Cash dividends paid to shareholders Repurchases of common stock Proceeds from issuing bonds Repayment of a bank loan (principal)
Cash flows from financing activities
Suppose Green Mountain Coffee Roasters presents the following information in its 2012 financial statements: Net Sales $4.5B Cost of Sales $3B Income Tax Expense $0.2B General & Admin Expenses $0.4B Selling & Marketing Expenses $0.3B Interest Expense $0.2B What would the Net Income be in this fiscal year?
$0.4B To get Net Income, we need to subtract from Net Sales the Cost of Sales, all Operating and Admin Expenses as well as Interest and Tax Expense. The calculation would be: $4.5B - 3B - 0.4B - 0.3B - 0.2B - 0.2B = $0.4B
Suppose Green Mountain Coffee Roasters presents the following information in its 2013 financial statements: Net Sales $4.4 B Cost of Sales $2.8B Income Tax Expense $0.3B General and Admin Expenses $0.3B Selling and Operating Expenses $0.5B Interest Expense $0.1B What would be the Operating Income in this fiscal year?
$0.8B Operating Income is the profit before taxes and interest. In this example it is the Gross Profit (Net Sales - Cost of Goods Sold) minus Selling, Operating, General and Admin Expenses.
For the year 2013, Darkeye Corp.'s Gross Profit was $600,000. Their income statement shows that Cost of Goods Sold (COGS) was $450,000, and Operating Expense was $180,000. What was Darkeye Corp.'s Sales Revenue for 2013?
$1,050,000 The general formula is Revenue - COGS = Gross Profit Since we know COGS was $450,000 and Gross Profit was $600,000, Revenue must be $1,050,000. Operating expense is not needed in this calculation. In addition, since this question asks you to find Revenue, you can rearrange the formula to be: Revenue = Gross Profit + COGS, so 600,000 + 450,000 = 1,050,000
Suppose Hipzone had Net Income of $1,600,000 for the year 2011. They also had the following income and expenses: COGS $7,000,000 SG&A Expense $2,100,000 Other Non-Operating Income $100,000 Interest Income $20,000 Depreciation Expense $350,000 Income Tax Expense $150,000 What would the Operating Income be for the year 2011?
$1,630,000 To get from Net Income to Operating Income, we need to add back the Tax Expense ($150,000) and eliminate the impact of any non-operating income or expenses ($20,000 Interest Income and $100,000 Other Income). $1,600,000 +150,000 - 20,000 - 100,000 = $1,630,000
For the year 2013, suppose Green Mountain Coffee Roasters had Net Revenue of $4.4 billion, $2.8 billion of Cost of Goods Sold (COGS) and $0.5 billion of selling and operating costs. What is GMCR's Gross Profit in the year?
$1.6 billion The correct answer is $1.6 billion Net Revenue - COGS = Gross Profit Net Revenue of $4.4 billion minus COGS of $2.8 billion equals $1.6 billion Gross Profit. Selling and operating costs are not needed in this calculation.
For the year 2013, West Corp. had Revenue of $500,000. Their income statement shows that Cost of Goods Sold (COGS) was $320,000, and Net Income was $80,000. What was West Corp.'s Gross Profit?
$180,000 Revenue - COGS = Gross Profit Revenue of $500,000 minus COGS of $320,000 equals Gross Profit of $180,000. Net Income is not needed in this calculation.
For 2012, suppose Cardullo's had Gross Profit of $500,000 and the following expenses: Salaries and Wages Expense $200,000 Building and Utilities Expense $80,000 Other Operating Expenses $30,000 Interest Expense $15,000 Income Tax Expense $25,000 Cost of Goods Sold (COGS) $500,000 What would be Cardullo's Operating Income for 2012?
$190,000 Operating Income is the income before taxes and interest. In this example it is the Gross Profit minus the Salaries and Wages and the Building and Utilities Expenses and the Other Operating Expenses.
Suppose Hipzone's Operating Income for 2014 was $2,042,000. Their income and expenses during the year include the following: Sales, General, & Admin Expense $2,397,000 Interest Income $3,000 Income Taxes $155,000 Depreciation Expense $374,000 What was Hipzone's Income Before Taxes for 2014?
$2,045,000 In this example, S,G,& A and Depreciation Expenses are operating expenses that have already been deducted to arrive at Operating Income. Income Taxes will be deducted after Income Before Taxes. To get to Income Before Taxes, simply add Interest Income to Operating Income: $2,042,000 + $3,000 = $2,045,000
Suppose PepsiCo purchased a piece of plant equipment in December, 2013 and, after installing and testing the equipment, it was put into service on January 1, 2014. The total cost to put the equipment into service was $300,000; it is expected to have a useful life of 5 years and a salvage value of $60,000. Assuming PepsiCo uses straight-line depreciation, what would the accumulated depreciation related to this asset be on July 1, 2014?
$24,000 By July 1, 2014, the equipment would have been in use for 6 months. The amount to be depreciated is the total cost to put the asset in service ($300,000) minus the assumed salvage value after 5 years ($60,000). This leaves $240,000 to be depreciated over 5 years (60 months) or $4,000 per month. Therefore, the accumulated depreciation at that point would be $24,000 ($4,000 per month times 6 months).
Suppose Zenon Co. issued a long-term bond and received $250,000 cash from the issuance during 2015. The company also issued 12,000 shares of common stock for $260,000. At the end of the year, Zenon paid $165,000 for the dividend declared last year. What would be the net impact of these transactions on Zenon's 2015 statement of cash flows under US GAAP?
$345,000 would be shown as an increase in the Financing Section. The correct answer is: the $345,000 would be shown as an increase in the Financing section. $250,000 + $260,000 - $165,000 = $345,000 Cash inflows from issuing long-term bonds and stocks, and cash outflows for paying dividends should be included in the Financing Section.
Suppose PepsiCo purchased a piece of plant equipment in December, 2013 and, after installing and testing the equipment, it was put into service on January 1, 2014. The total cost to put the equipment into service was $300,000; it is expected to have a useful life of 5 years and a salvage value of $60,000. Assuming PepsiCo uses straight-line depreciation, what would the depreciation expense be for the month of July, 2014?
$4,000 The amount to be depreciated is the total cost to put the asset in service ($300,000) minus the assumed salvage value after 5 years ($60,000). This leaves $240,000 to be depreciated over 5 years (60 months) or $4,000 per month.
A company has retained earnings of $94,000 as of December 31, 2014. The Pro-forma income statement projects net income of $22,000 for 2015. The company expects to declare their annual dividend on March 15, 2015 of $0.70 per share and has a total of 100,000 shares outstanding. What will the projected retained earnings account be as of December 31, 2015?
$46,000 To calculate the projected retained earnings, you add the projected 2015 net income of $22,000 to the beginning balance of $94,000 carried over from 2014. Then you must subtract $70,000 for the dividend of $0.70 per share times the 100,000 shares outstanding. $94,000 + $22,000 - $70,000 = $46,000
For the year 2012, suppose Cardullo's Gourmet Shoppe had revenues of $1,100,000. Their income statement shows that Gross Profit was $500,000 and Other Expenses were $350,000. What was Cardullo's Cost of Goods Sold (COGS)?
$600,000 Revenue - COGS = Gross Profit Since we know Revenues were $1,100,000 and Gross Profit was $500,000, COGS must be $600,000. Other expenses is not needed in this calculation.
On July 1, 2013, Bikram Yoga Natick sells 5 annual memberships for $1,200 each. What would the entry look like to record the receipt of cash as deferred revenue?
Cash debited 6000 Deferred rev credited 6000
Company X reported the following information on its 2015 income statement: Interest Expense $10,000 Income Tax $50,000 Net Income $140,000 What is Company X's Interest Coverage Ratio for 2015?
20.0 Interest Coverage Ratio = EBIT / Interest Expense = (Net Income + Income Tax + Interest Expense) (140,000 +50,000 + 10,000) / 10,000) = 20.0
The Peach Pit, a restaurant, has Net Income of $25,000, Sales of $55,000, Assets of $115,000, and no debt. What is their ROE?
21.7% ROE = (Net Income / Sales) X (Sales / Assets) X (Assets / Equity) If a company has no debt, then their equity multiplier is 1. (25,000/55,000) * (55,000/115,000) * 1 = 21.7%
What are the following examples of? Cash received in sale of equipment Purchase of land Sale proceeds from debt investment Principal received from loans made to others
Cash flow from investing activities
Bob's Burgers has an Inventory Turnover of 6.0, an Accounts Receivable Turnover of 8.5, and an Accounts Payable Turnover of 10.1. What is the length of their Cash Conversion Cycle?
67.6 Days Inventory + Average Collection Period - Days Purchases Outstanding = Cash Conversion Cycle Days Inventory = 365 / Inventory Turnover Average Collection Period = 365 / Accounts Receivable Turnover Days Purchases Outstanding = 365 / Accounts Payable Turnover ( 365 / 6.0 + 365 / 8.5 - 365 / 10.1 ) = 67.6
The founders of a business are interested in investing in a project in the coming year, and they have two different projects to choose from. The estimated cash flows of the two projects are shown below. The company's Weighted Average Cost of Capital (WACC) is 9%. Calculate the IRR of each project. Project 1 t Cash Flows 0 -275,000 1 20,000 2 45,000 3 55,000 4 60,000 5 77,000 6 60,000 7 122,000 Project 2 t Cash Flows 0 -130,000 1 41,000 2 44,000 3 22,000 4 27,000 5 10,000 6 10,000 7 15,000
=IRR(0:7, .09)
IRR IN EXCEL
=IRR(All cash flows : All cash flows, Rate) OR =IRR(All cash flows : All cash flows)
Clean Air Systems buys a diagnostic piece of equipment for $270,000. The machine will be depreciated on a straight-line basis for 10 years with a salvage value of $50,000. The company expects the machine to be able to generate after-tax cash flows of $43,000 in each of the 10 years, and then it will sell the machine for $50,000 at the end of 10 years. The discount rate is 7%. What is the Net Present Value IN EXCEL? t Cash Flows 0 -270,000 1 43,000 2 43,000 3 43,000 4 43,000 5 43,000 6 43,000 7 43,000 8 43,000 9 43,000 10 93,000 Rate 7%
=NPV(rate, 1:10) + 0 Remember, for NPV you have to manually add the negative outflow from time zero related to the initial investment.
A project has the estimated cash flows shown as indicated below. The discount rate is 7%. Calculate the NPV of this project IN EXCEL. t Cash Flows 0 -74,000 1 11,822 2 13,004 3 15,228 4 22,076 5 21,314 Rate: 7%
=NPV(rate, 1:5) + 0 Remember, for NPV you have to manually add the negative outflow from time zero related to the initial investment.
Which type of company is most likely to have a negative Cash Conversion Cycle?
A discount retailer sells most of its inventory quickly and for cash, while delaying payments to suppliers.
Using the Indirect Method to create the Statement of Cash Flows, what must be done to convert net income to operating cash flow?
A gain is subtracted from net income. An increase in operating current assets is subtracted from net income. A decrease in operating current liabilities is subtracted from net income. A gain, an increase in operating current assets, and a decrease in operating current liabilities would all need to be subracted from net income in order to convert net income into operating cash flow when using the indirect method to create the Statement of Cash Flows.
Which of the following statements is NOT true in relation to the Gordon Growth Model? Terminal value is the present value of infinite cash flows expected in the future. A higher discount rate results in a higher terminal value. The Gordon Growth Model assumes that the growth rate will remain fixed. A higher growth rate results in a higher terminal value.
A higher discount rate results in a higher terminal value. This statement is not true. A higher discount rate results in a lower terminal value.
What is a common finding in looking at the statement of cash flows of a declining company?
A positive or negative cash flow from financing activities A declining company usually has negative cash flows from operations, positive cash flows from investing, and positive or negative cash flows from financing.
What is this an example of? A company recorded wages expense for May on May 31, and will pay the wages on June 15. A company recorded its vehicle rental expense on June 30 and will pay this expense on July 31.
Accrued liabilities Expense was recognized before cash was paid.
Wise Guys Consulting issues an invoice for $9,000 to one of their clients for services provided. The terms of the invoice call for payment 30 days after the invoice date. What would be the impact at the date the services are completed and invoiced?
Accts receivable debited 9k revenue credited 9k
Based on this income statement for Company ZYX for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for Gain or Loss in calculating cash flow from Operating Activities using the indirect method? gain/(loss) on sale of equipment (30,000) gain/(loss) on sale of debt investment 46,000
Adjustment of (16,000) in the Operating Section The correct answer is: Adjustment of (16,000) in the Operating Section The total cash flows received from both the sale of equipment and the sale of debt investment are investing activities and not operating activities. The net of the gain and loss is a gain of $16,000. To eliminate this gain, the $16,000 amount should be subtracted from net income. Since the gain would have increased net income, this subtraction ensures that the net effect on cash flow from operations is zero.
Once they have identified their two performance obligations (provide a phone and provide one year of software updates) and have identified the price as $1000, what should they do next?
Allocate the transaction price of $1000 to the phone and the software updates
Accounts including the words "asset," "receivable," or "prepaid" in their name are usually what type of account?
Assets
Which of the following is an expense account? COGS Prepaid Expense Wages Payable Rent Expense Wages Expense
COGS, Rent expense, Wages expense
Cakery Bakery receives $1,000 from a customer on August 5, 2016 for a wedding cake to be delivered on September 19, 2016. What would Cakery Bakery record on their books when they receive this payment?
Cash debited $1k, Deferred revenue credited $1k
Keep You in the Know (KYK) magazine received $120,000 cash in annual subscriptions in December 2013. KYK is a monthly publication and all of these subscriptions commence in January 2014. What entry should KYK make on December 31, 2013 to record the payments received for these subscriptions?
Cash debited 120k deferred rev credited 120k
Like A Wrecking Ball is a demolition company. At the end of a project, they presented their client with an invoice for $18,000 and immediately received a check for the full amount. What is the journal entry to record this receipt?
Cash debited 18k Revenue credited 18k
Company A borrowed $100,000 from a commercial bank at an annual interest rate of 8% for 3 years on January 1, 2013. Interests on the loan would be paid with principal after three years. On December 31, 2013, the accountant of Company A recorded a journal entry as follows: Interest expense debited 8000 Interest payable credited 8000 Which of the following best describes the transaction that would lead to this journal entry?
Company A didn't pay $8,000 to bank but recognized $8,000 of interest expense. The interest expense incurred in 2013 was $8,000, which would be paid on December 31, 2015.
Company A has a shorter Average Collection Period than Company B using the formula 365 / (Credit Sales / Average AR Balance). Which of the following statements is true regarding these two companies?
Company A is more efficient in collecting receivables from customers than Company B. Average Collection Period = 365 / AR Turnover = 365 / (Credit Sales / Average AR Balance) Accounts Receivable Turnover is an indicator of a business' ability and efficiency in collecting receivables from customers.
Company A has a higher Inventory Turnover Ratio than Company B. Which of the following statements is true regarding these two companies?
Company A is more efficient in using its inventory to generate revenue. Inventory Turnover = Cost of goods sold / Average inventory Inventory Turnover measures the number of times inventory is sold or used in a time period. It is an indicator of operating efficiency.
Company A has a higher Accounts Payable Turnover Ratio than Company B. Which of the following statements is true regarding these two companies?
Company A is paying suppliers at a faster rate than Company B. Accounts Payable Turnover = Credit Purchases / Average Accounts Payable Balance Accounts Payable Turnover measures the number of times a company can pay off its average account payable balance during a time period.
Company B, a cable services company, performed services to a client on November 30, 2013. The client promised to pay Company B $1,200 on January 5, 2014 for the services provided on November 30, 2013. On November 30, 2013 the accountant of Company B recorded a journal entry as follows: Accts receivable debited 1200 revenue credited 1200 Which of the following best describes the transaction that would lead to this journal entry?
Company B didn't collect $1,200 from client but recognized revenue. Revenue earned from providing service was $1,200, which would later be collected on January 5, 2014.
A customer of Company C, a gym studio, paid $800 for a yearly membership on July 1, 2013. On July 1, 2013, the accountant of Company C recorded a journal entry as follows: Cash debited 800 deferred rev credited 800 Which of the following best describes the transaction that occurred on July 1, 2013 that would lead to this journal entry?
Company C collected $800 from customer but didn't recognize revenue. $800 was collected for services which had not yet been provided.
A customer of Company C, a gym studio, paid $800 for a yearly membership on July 1, 2013. On December 31, 2013 the accountant of Company C recorded a journal entry as follows: Deferred revenue debited 400 revenue credited 400 Which of the following best describes the transaction that occurred on December 31, 2013 that would lead to this journal entry?
Company C didn't collect $400 from customer but recognized revenue. By December 31, 2013, half of the obligation to provide service was satisfied, and $400 of revenue was earned. The cash was collected previously.
On January 1, 2013, Company D rented a warehouse for two years. On December 31, 2013, the accountant of Company D recorded a journal entry as follows: Rent expense debited 15000 Prepaid expense credited 15000 Which of the following best describes the transaction that occurred on December 31, 2013, that would lead to this journal entry?
Company D didn't pay $15,000 for warehouse rental but recognized $15,000 of rent expense. By December 31, 2013, half of the prepaid rent expense was amortized, and $15,000 of rent expense was incurred. The cash was paid previously.
On January 1, 2013, Company D rented a warehouse for two years. The accountant of Company D recorded a journal entry as follows: Prepaid expense debited 30k cash credited 30k Which of the following best describes the transaction that occurred on January 1, 2013 that would lead to this journal entry?
Company D paid $30,000 for warehouse rental but didn't recognize $30,000 of rent expense. $30,000 was paid for rent expenses which had not yet been incurred.
Suppose your company issued a 20 year bond to raise additional capital. As you are preparing the balance sheet at the end of 2013, you see that the bond will come due in June of 2014. In which section of the balance sheet does the bond belong?
Current liabilities Because the bond will come due in less than a year, the amount owed is considered a current liability.
Suppose a piece of plant equipment that PepsiCo put into service on January 1, 2014 at a total cost of $300,000 with an expected useful life of 5 years and a salvage value of $60,000 is sold on January 1, 2019 for $50,000. What would the journal entry look like to record this sale?
Debit accumulated depreciation 240k Credit PPE 300k Debit cash 50 k Debit gain/loss on disposal of assets 10,000
In which stage would you typically expect to see large positive Investment Cash Flows?
Decline Companies in decline tend to have negative Operating Cash Flows, positive Investment Cash Flows, and positive or negative Financing Cash Flows.
What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Receivable and Inventory account balances for Google? 12/31/12 12/31/13 Accts Rcvb (7,885) Accts Rcvb (8,882) Inventory (505) Inventory (426)
Decrease of $997 for Accounts Receivable and increase of $79 for Inventory Since Accounts Receivable increased during the year, it means that the cash collected was less than the revenue recognized, so the adjustment is to record a decrease related to Accounts Receivable. Since Inventory decreased it means that COGS expense was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventory.
Cakery Bakery received $1,000 from a customer on August 5, 2016 for a wedding cake to be delivered on September 19, 2016. What would Cakery Bakery record on their books when the cake is successfully delivered?
Deferred revenue debited 1k Revenue credited 1k
On April 1, 2014, Apex Insurance Company receives payment of $6,000 for an annual property insurance policy from one of their corporate customers. How would Apex record the revenue related to this policy for the month of September, 2014?
Deferred revenue debited 500 revenue credited 500
Suppose PepsiCo purchased a piece of plant equipment in December, 2013 and, after installing and testing the equipment, it was put into service on January 1, 2014. The total cost to put the equipment into service was $300,000; it is expected to have a useful life of 5 years and a salvage value of $60,000. Suppose PepsiCo records an adjusting entry at the end of each quarter to record depreciation. What would the entry to record depreciation be for the quarter ending March 31, 2014?
Depreciation expense debited 12k Accumulated depreciation credited 12k
T/F regarding accrual accounting: Transactions are only recorded when there is an exchange of cash
False
You have just reviewed the financial statements of Penelope's Candy Store (PCS). You have determined that PCS has a Profit Margin of 19%. How do you explain this to owner Penelope Hassey?
For every $100 in sales, $19 ended up in Net Income. Profit Margin (Net Income/Sales) measures the ability of a company to make a profit relative to revenue generated during a period. A Profit Margin of 19% tells us that for every $100 in sales, $19 ended up in Net Income.
Apple sells an iPhone X for $1000. They identify this sale as a contract with the customer. What is the very next thing they should do?
Identify the performance obligations they must provide as part of that sale
As part of the 2013 year end close, your company evaluates any potential liabilities related to 2013 activities that will be paid in 2014. The company ran an advertising campaign in December for which you agreed to pay $100,000, but you have not yet received the invoice. What would the journal entry look like to record this obligation?
In this case, your company has not received a bill but based on their evaluation concludes that there are obligations coming from 2013 activities that will have to be settled in 2014. These obligations are recorded as liabilities in 2013 because they relate to 2013 activities. You should debit Advertising Expenses for $100,000 and credit Accrued Expenses (a liability account) for $100,000.
A company has total depreciation/amortization costs of $86,000 hat adjustment would need to be made to Net Income to account for Depreciation and Amortization in calculating cash flow from Operating Activities using the indirect method?
Increase by $86,000 This is the correct answer! The adjustment to Net Income is an increase of $86,000, because $86,000 of Depreciation and Amortization expense was recognized during the year. By adding this amount back to Net Income, we eliminate the impact of this non-cash transaction.
What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Payable and Accrued Expenses account balances for Google? 12/31/12 12/31/13 Accts Pyble (2,012) Accts Pyble (2,453) Accrd Expns (9,776) Accrd Expns (10,446)
Increase of $441 for Accounts Payable and increase of $670 for Accrued Expenses Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.
When projecting financial statements, which of the following accounts is difficult to forecast using the percent of sales method? Accounts receivable Accounts payable Interest expense Cost of sales
Interest expense Normally, Accounts Receivable, Accounts Payable, and Cost of Sales will trend in a direct relationship with sales. However, Interest Expense is more dependent upon the level of borrowings which does not necessarily track with sales.
Apple decides to allocate $950 of the purchase price toward the phone itself, and $50 toward the software updates they will provide over the next year. Before the sale, the phone was in Apple's inventory valued at $500. Create a journal entry for the date of the sale, October 1, 2018.
Inventory credited 500 COGS debited 500 Cash debited 1000 Revenue credited 950 Deferred revenue credited 50
An automotive parts company that sells to automotive manufacturers is forecasting revenue as part of its internal budgeting and planning process. Which of the following is LEAST likely to be important in its forecasting assumptions? Expected number of customers Customer acquisition and retention rates Profitability of customer orders Level of long-term debt
Level of long-term debt The level of long-term debt would not likely impact the revenue forecast.
Accounts with the words "liability," "debt," "payable," or "accrued" in their name are usually what type of account
Liability
In the U.S. accounts are listed on the balance sheet in order of ____
Liquidity
On which financial statements would you be most likely to find information about capital expenditures related to the purchase of equipment during the past year?
Look at the investing section in the statement of cash flows. The correct answer is to look at the investing section in the statement of cash flows. The other alternatives would only give partial, and possibly misleading, information about capital expenditures. The investing section of the statement of cash flows would directly show the cash spent on capital purchases.
COGS Rent expense Sales Selling, General Admin expenses
NOMINAL ACCOUNTS
A CFO of a start-up company is evaluating the timing of a significant capital expenditure. He was previously at a mature company that used a discount rate of 8% so he used the same rate at the start-up company. Which of the following would be impacted if the discount rate were raised to reflect the risk of the start-up company? Internal rate of return payback period return on investment net present value
Net Present Value NPV is the only one of the answer choices that is impacted by the discount rate.
Suppose there is a start-up service company that is growing fast. It has a positive Gross Profit, positive Operating Income, and negative Income Before Taxes. Is the negative Net Income sustainable in the long term? Suppose the company also has more Long Term Debt than Equity. What do you think the company should do to finance its growth opportunities?
No The company should probably raise more money through equity.
Suppose your company receives a large order from your best customer. Should this be treated as revenue and recorded on your company's books? (yes/no, why?)
No, because revenue is not considered earned until a product or service is delivered. To recognize revenue, collection of payment should be reasonably certain, but the company must also have delivered the product or performed the service. Since this is just an order, it is not yet a transaction to be recorded. No service or product has been delivered yet, so no revenue is recognized. Remember that in accrual accounting, the recognition of revenue does not necessarily occur at the same time as the receipt of cash.
The following are examples of ________. Salaries and wages Depreciation Selling, General and Admin expenses Marketing expense R&D Utilities expense Rent expense
Operating expense
As part of the 2013 year end close, your company evaluates the total pension obligation and determines that it needs to be increased to properly reflect the obligation at the end of the year. The shortfall is estimated to be $100,000. What would the journal entry look like to record this obligation?
Pension obligation credited 100000 Pension benefit expense debited 100000
Friends International is an NGO that fosters greater cultural awareness and understanding by arranging for people of different backgrounds to spend time in other countries and cultures. On January 1, 2014 they purchased $80,000 of open airline tickets in advance that can be used for a variety of destinations. Using the accrual method, build the entry to record the use of $40,000 of these tickets on March 15, 2014 for multiple passengers on a flight from New York to Kigali, Rwanda.
Prepaid expense credited 40k Travel expense debited 40k
Friends International is an NGO that fosters greater cultural awareness and understanding by arranging for people of different backgrounds to spend time in other countries and cultures. On January 1, 2014 they purchase $80,000 of open airline tickets in advance that can be used for a variety of destinations because they need the flexibility and savings provided by such tickets. What entry should Friends International make to record this purchase?
Prepaid expense debited 80k cash credited 80k
Which ratio measures the ability of a company to make a profit relative to revenue generated during a period?
Profit Margin Profit Margin (Net Income/Sales) measures the ability of a company to make a profit relative to revenue generated during a period.
What does the DuPont framework measure?
Profitability using profit margin, efficiency using asset turnover and leverage using the leverage ration (or equity multiplier).
Land and Buildings Deferred revenue Goodwill Intangible Assets Office Furniture and equipment Prepaid expenses
REAL ACCOUNTS
PPE Common Stock Inventory Other Liabilities Accounts receivable Additional paid-In capital
REAL ACCOUNTS
Suppose your business purchased an asset that is expected to last for 10 years. At the end of its expected life, however, there will be no salvage value and you will have to pay a substantial amount to safely dispose of the asset. How should you treat these expected disposal costs?
Recognize the expense over the life of the asset Because the matching principle requires matching revenues and corresponding expenses over the life of the asset
Which of the following items would NOT be shown on a statement of cash flows created using the indirect method? Net income Retained earnings Cash, beginning of year Cash, end of year
Retained earnings is never shown on the statement of cash flows.
At the end of the third quarter, a department store is showing lower cash flows and lower sales on its financial statements compared to the average of the previous four quarters. It also shows an increase in inventory compared to the second quarter. Which of the following options is MOST likely to be the cause?
Seasonality Seasonality is causing the department store to build up its inventory for the holiday season and would anticipate a lower inventory and increased sales and cash flows for the 4th quarter financial statement.
In which stages would you typically expect to see large negative Investment Cash Flows?
Startup Profitable/Growing Startups tend to have negative Operating Cash Flows, negative Investment Cash Flows, and Positive Financing Cash Flows. Profitable/Growing companies tend to have positive Operating Cash Flows, negative Investment Cash Flows, and positive or negative Financing Cash Flows.
Suppose Waterman Cable Company lent $125,000 to Comcast. On December 31, 2015, Comcast paid back the $125,000 and also paid $3,000 interest to Waterman Cable Company. Under U.S.GAAP, what would be the impact of the repayment on Waterman Cable Company's statement of cash flows using the direct method?
The $125,000 would be shown as an increase in the funds in the Investing Section but the $3,000 would be shown as an increase in the Operating Section. The $125,000 received should be an increase in the Investing Section and, under U.S.GAAP, the $3,000 interest received should be included in the Operating Section.
A company is considering buying a diagnostic piece of equipment for $250,000. The machine will be depreciated on a straight-line basis for 10 years with a salvage value of $40,000. The company expects the machine to be able to generate after-tax revenues of $33,000 in each of the 10 years, and then it will sell the machine for $40,000 at the end of 10 years. The sum of the undiscounted cash flows is $370,000. The discount rate is 7%. The net present value is calculated to be $2,112. Which of the following statements is true? The company should not buy the equipment because the NPV is less than the annual revenues expected. The company should not buy the equipment because the NPV is less than the initial cost of the equipment. The company should buy the equipment because the sum of the undiscounted cash flows is greater than the initial cost of the equipment. The company should buy the equipment because the NPV is positive.
The company should buy the equipment because the NPV is positive. As long as the NPV is positive, even if it is a very small positive number, it means the company will earn a return greater than its discount rate, so it is a good investment.
A company under IFRS standards decides to include interest paid in the Financing Section of their Statement of Cash Flows. How will this company's Statement of Cash Flows differ from how it would appear if the company were abiding by US GAAP standards?
The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP. The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section because interest paid is a use of cash (so the financing section's cash flow is decreased). The company under US GAAP would be required to include interest paid in the operating section, which lowers cash flows for that section.
Initech finances their business using a combination of equity and liabilities. What is most likely Initech's equity multiplier?
The correct answer is 1.5. A company that finances using only equity will have an equity multiplier of 1. Any amount over 1 shows the proportion financed using liabilities. Since Initech uses a combination of equity and liabilities to finance operations, the only option that would most likely be their equity multiplier is option 4, 1.5.
Accruals
Transactions where cash changes hands after revenue or expense is recognized.
Cybertrex, a manufacturing facility, rented a new piece of equipment on January 1st and agreed to pay an annual rental fee of $18,000 at the end of each of the next 10 years. The weighted average cost of capital of the company is 8%. The present value of $1 for 10 years at 8% is 0.46319 The present value of an ordinary annuity of $1 for 10 years at 8% is 6.71008 What is the Present Value of the rental payments over 10 years?
The correct answer is: $120,781 It is calculated by multiplying the annual payment by the present value of an annuity factor. $18,000 * 6.71008 = $120,781
How does the following transaction impact cash flow? Recording an account receivable for the sale of goods to a customer.
The correct answer is: No Impact When a company records an account receivable for goods sold to a customer, it is because they are allowing the customer to pay for the goods at a later date. Since no cash was received at the time of transaction, there is no impact on cash flows.
What is measured by the DuPont Framework?
The return that a business generates during a period on equity invested in the business by the owners of the business. This is the definition of ROE (Return on Equity), which is measured by the DuPont Framework.
T/F The total amount debited must equal the total amount credited
True
What does the operating income tell us?
Whether the business is earning enough to cover all the necessary expenses to operate.
On April 1, 2014, Apex Insurance Company receives payment of $6,000 for an annual property insurance policy from one of their corporate customers. How should this receipt be recorded in the accounts of Apex?
cash debited 6000 deferred rev credited 6000
Cost of Goods Sold, Accounts Receivable, Cash Decreases with a _____
credit.
On July 1, 2015, two years after the original purchase, Diamond Decals sold a building and the related land to another party. The building and land were originally purchased for $1,500,000, and $100,000 of depreciation had been recognized against the building. Diamond Decals received $1,100,000 from the purchaser of the land and building. How would the sale of the land and building be recorded? The value of the land had remained constant at $300,000 and depreciation on the building had been recorded through June 30.
debit Accumulated depreciation 100k credit land and buildings 1.5 mil debit cash 1.1 mil debit gain/loss on disposal of assets 300k
What is this an example of? A magazine company collected annual subscription fees at the beginning of the year before delivering magazines. A household appliances company received an advance payment from its customer for a product that would be delivered at a later date.
deferred revenue
Accounts containing the word "cost" or "expense" are what type of account
expense
Debit _______ as it balances
increases
The sections of a statement of cash flows:
operating activities, investing activities, financing activities
Company A estimates that it needs 30% of sales in net working capital. In year 1, sales were $1 million and in year 2, sales were $2 million. Associated with the change in net working capital from year 1 to year 2 is a cash:
outflow of $300,000. The correct answer is an outflow of $300,000. The company would need to make a cash investment (outflow) of $300,000 to increase their net working capital from the $300,000 needed to support $1 million of sales to the $600,000 needed to support $2 million of sales.
Accounts containing the word "sales" or "revenue" are what type of account
revenue
Applied Medical Services buys a diagnostic piece of equipment for $326,000. The machine will be depreciated on a straight-line basis for 10 years with a salvage value of $75,000. The company expects the machine to be able to generate after-tax cash flows of $64,000 in each of the 10 years, and then it will sell the machine for $75,000 at the end of 10 years. What are the cash flows related to this purchase for each of the next 10 years? Ignore taxes.
t Cash Flows 0 -326,000 1 64,000 2 64,000 3 64,000 4 64,000 5 64,000 6 64,000 7 64,000 8 64,000 9 64,000 10 139,000 0 is the purchase price 1-9 is the after-tax cash flow generated for each of the ten years, year 10 is the cash flow generated plus the sale of the equipment.
