D103 - Unit 3

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. What were net sales last year for Lang Company?

$12,175,000 Gross Billings - Returns & Allowances - Discounts = Net Sales ($12,720,000 - $370,000 - $175,000 = $12,175,000). Freight out is a selling expense and not included in the calculation of Net Sales.

Which balance sheet format lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side?

Account form Account form balance sheets list assets on the left side and liabilities and stockholder's equity on the right side.

What is an example of a selling expense?

Advertising expense Advertising expense is an expense related to the sale of product.

What is the correct order to present current assets?

Cash, accounts receivable, inventories, prepaid itemCash, accounts receivable, inventories, prepaid item The order of liquidity is the proper presentation of current assets. Liquidity is the measure of how quickly an asset can be converted to cash. Accounts receivable will be collected and inventories sold before a company can receive a refund for prepaid items.

What can the income statement be used to assess?

Creditworthiness The business and investment community uses the income statement to determine profitability, investment value, and creditworthiness. Creditworthiness is the measure that a company has sufficient income to cover its expenses. Both revenue and expenses are found on the income statement.

What is an appropriate major asset classification?

Current assets Current Assets, Noncurrent Assets, and Other Assets are the major asset classification on a balance sheet.

What is an intangible asset?

Customer lists Customer lists lack physical substance and are not financial instruments.

What can investors and creditors predict with the help of the information provided by the income statement?

The amount of future cash flows An income statement can be used to predict (1) the amount of future cash flows, (2) the timing of future cash flows and (3) the uncertainty of future cash flows. However, Accounts Receivable, a balance sheet item, can be used to evaluate which customers may provide future cash flows.

What will result if a company fails to properly record an adjusting entry to accrue a revenue item?

Understatement of revenues and an understatement of assets To accrue a revenue item, the adjusting entry must credit the revenue account (ie: Rental Income) and debit the asset account (ie: Accrued Rent). If this entry is missing, an understatement of revenues and an understatement assets will be present.

What type of revenue is normally accounted for when it is collected and recorded in advance?

Unearned Revenues that have been paid for, but not earned are classified as unearned revenue.

James, Inc. incurred the following infrequent losses during 2020: A $280,000 write-down of equipment leased to others A $160,000 adjustment of accruals on long-term contracts A $240,000 write-off of obsolete inventory In its 2020 income statement, what amount should James report as total unusual losses?

Each of these items are considered unusual and infrequent. Therefore the amount James will report as total unusual losses is $680,000 ($280,000 + $160,000 + $240,000)

What is working capital?

Excess of total current assets over total current liabilities Total current assets less total current liabilities measures working capital - the ability for a company to meet the financial demands of the operating cycle.

Payment of dividends would come under which activity on the statement of cash flows?

Financing Financing activities involve owners' equity items including obtaining resources from owners and providing them with a return on their investment (dividends)

In which section of a statement of cash flows should you report proceeds from issuing equity instruments?

Financing activities Financing activities involve liability and owners' equity items.

The accountant for the Lintz Sales Company is preparing the multiple-step income statement for 2020. Where will the January 1, 2020 merchandise inventory balance appear?

In the Cost of Goods sold section of the income statement The merchandise inventory balance is used to calculate the Cost of Goods. Cost of Goods is not a selling expense.

What limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation?

Income numbers are affected by the accounting methods employed. Depreciation is an accounting method. If one company uses accelerated depreciation while another uses straight-line, comparing the income of the statements for the two would be affected.

What is a feature of a multiple-step income statement?

It highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. Multi-step income statements highlight certain intermediate components of income, such as operating versus non-operating transaction by matching costs and expenses with related revenues.

Jackson, Inc. has the following information available: Cost of goods sold$148,500 Dividend revenue$ 3,750 Income tax expense$ 3,000 Operating expenses$ 79,500 Sales$255,000 In Jackson's multiple-step income statement, what will gross profit be reported as?

It will be reported at $106,500. Sales - Cost of Goods = Gross Profit ($255,000 - $148,500 = $106,500

What is true about the presentation of a single-step income?

Just two groupings exist - revenues and expenses.

According to the accounting formula, total assets of a business are equal to what?

Liabilities plus total stockholder's equity The accounting formula and the presentation of the balance sheet is Assets = Liabilities + Stockholders' Equity (A = L + E)

What is the current cash debt coverage often used to assess?

Liquidity Liquidity refers to the "nearness to cash" of assets and liabilities - how quickly can they get and use their cash

Which error will cause an imbalance in the trial balance?

Listing the balance of an account with a debit balance in the credit column of the trial balance. Listing a debit balance in the credit column will cause an out of balance trial balance.

What does the income statement reveal about an organization?

Net earnings (net income) of the organization for a period of time The income statement reports net earnings (net income) for a period of time, such as month or a year.

What is included in an owners' equity section reported in the balance sheet?

Noncontrolling interest Capital Stock, Additional Paid-in Capital, Retained Earnings, Accumulated Other Comprehensive Income, Treasury Stock, and Noncontrolling interests are reported in the Stockholders' Equity section of the balance sheet.

Receipt of interest from a Note Receivable for trade activity would be reported as a cash inflow in which section?

Operating activities Operating activities involve the cash effects of transactions that enter into the determination of net income, including interest earned on trade activities.

Interest payments to lenders and other creditors should be classified in which secton on the statement of cash outflows?

Operating activities Operating activities involve the cash effects of transactions that enter into the determination of net income.

What does the single-step income statement emphasize?

Total revenues and total expenses A single-step income statement consists of only two sections - revenues & expenses.

Which investments should always be reported as current assets?

Trading securities Current assets are those assets that the company expects to convert to cash within the operating cycle or one year, whichever is longer. Trading securities are bought and held primarily for sale in the near term to generate income on short term price differences.

What approach focuses on the income-related activities that have occurred during the period?

Transaction The transaction approach focuses on the income-related activities that have occurred during the period.

current cash debt coverage

net cash provided by operating activities/average current liabilities shows financial liquidity

Cash debt coverage

net cash provided by operating activities/average total liabilities this shows financials flexibility

As a term of a loan covenant, Bullzai, Inc. is required to evaluate its financial liquidity. To calculate its current cash debt coverage, Bullzai must divide its net cash provided by operating activities by which type of liability?

Average current liabilities Cash dept coverage indicates a company's ability to repay its current liabilities from net cash provided by current operating activities. Net cash from operating activities/average current liabilities = current cash debt coverage.

A corporation would like to evaluate its financial flexibility. In order to calculate its overall cash debt coverage, the corporation must divide its net cash provided by operating activities by which type of liability?

Average total liabilities The cash debt coverage provides indicates a company's ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations. It is calculated by dividing net cash provided by operating activities by average total liabilities.

The following information relates to the Wallstrom Company at the end of 2020: The accounting period is the calendar year. Employees are paid every Friday for the five-day week ending on that day. Salaries amount to $4,000 per week. The accounting period ends on a Tuesday. Using the information given above, what is the necessary adjusting entry at December 31, 2020?

Debit Salaries & Wages Expense, Credit Salaries & Wages Payable; $1,600 ($4,000 ÷ 5 = $800); ($800 × 2 = $1,600 accrued salaries).

Morganstern, Inc has the following inventory information: The supplies inventory on January 1, 2020 was $5,000. Supplies costing $16,000 were purchased during 2020 and debited to the asset account. A count on December 31, 2020 revealed supplies on hand of $3,000. Which adjusted journal entry is made by Morganstern prior to preparing the December 31 financial statement?

Debit Supplies Expense $18,000; Credit Supply Inventory $18,000 The supplies purchased were posted to the inventory account. Therefore an adjusting entry for both the purchases and the difference in inventory must be made. $5,000 (beginning inventory) plus $16,000 (purchases) minus $3,000 (ending inventory) = $18,000; The correct adjusting journal entry: Debit Supplies Expense $18,000; Credit Supply Inventory $18,000

Reed Co. wishes to enter receipts and payments in such a manner that adjustments at the end of the period will not require reversing entries at the beginning of the next period. Reed received $15,000 for six months for a portion of the building on November 1, 2020. The original entry was: Debit Cash $15,000, Credit Unearned Rent Revenue $15,000. What is the correct adjusting entries on December 31, 2020?

Debit Unearned Rent Revenue $5,000, Credit Rent Revenue $5,000 The original entry was made when the cash was received for the rent, but it was not posted to Rent Revenue. For 2020, Reed must post two months (November & December) into 2020 revenue. The rent receipt was for 6 months of rent or $2,500 per month. The correct year-end adjusting entry is: Debit Unearned Rent Revenue $5,000, Credit Rent Revenue $5,000.

Pappy Corporation received cash of $36,000 on September 1, 2020, for one year's rent in advance and recorded the transaction with credit to Unearned Rent Revenue. What is the correct representation of the December 31, 2020 adjusting entry made by Pappy?

Debit Unearned Rent Revenue and credit Rent Revenue, $12,000 The rent was originally posted as a debit to Cash, an asset and a credit to Unearned Rent Revenue, a liability. In order to record the current year's income, Pappy's must journalize 4 months (September, October, November, and December) of rental income in the current year. $36,000 x 4/12 = $12,000. The correct journal entry is Debit Unearned Rent Revenue $12,000, Credit Rent Revenue $12,000.

What are included in long term liabilities?

Deferred income taxes and most lease obligations Deferred income taxes is categorized as an "other asset" on the balance sheet and is considered a long-term liability.

Which component occurs from peripheral or incidental transactions?

Gain on the sale of equipment

What should be included in the current assets section of the balance sheet?

Inventory Inventory is expected to be converted to cash during a company's operating cycle. It is reported in the Current Assets section of the balance sheet.

In which section of the statement of cash flows would you report making and collecting loans and disposing of property, plant, and equipment?

Investing activities Investing activities include acquiring and disposing of and property, plant, and equipment

Receipts from sales of property, plant, and equipment and other productive assets should generally be classified in which section on the statement of cash inflows?

Investing activities Investing activities include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipmen

How are activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment classified?

Investing activities Investing activities include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment. Financing activities

What is an advantage of the single-step income statement over the multiple-step income statement?

It does not imply that one type of revenue or expense has priority over another. The primary advantage of the single-step format lies in its simple presentation and the absence of any implication that one type of revenue or expense item has priority over another.

What is true about the information provided in the income statement?

It helps in evaluating the past performance of the enterprise. Examining revenues and expenses indicates how the company performed and allows comparison of its performance to its competitors.

What is classified as an unusual and infrequent gain or loss?

Losses on inventory related to a plant fire

Which approach does income reporting follow?

Modified all-inclusive The accounting profession has adopted the modified all-inclusive concept where companies record most items, including unusual or infrequent ones, as part of net income. In addition, companies are required to highlight these items in the financial statements so that users can better determine the long-run earning power of the company.

How is an expense best described?

Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Expenses are defined as outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.

What is an example of an accrued expense?

Property taxes incurred during the year, to be paid in the first quarter of the subsequent year Because the taxes are for the current year, but will not be paid until the subsequent year, it is necessary to create an accrual entry for the current year.

What is the proper classification of Treasury stock on the balance sheet?

Reduction of stockholders' equity Treasury Stock is the cost of shares repurchased by the company. It is reported in the Stockholders' Equity section of the balance sheet as a reduction in stockholders' equity.

What are acceptable balance sheet formats?

Report form and account form Both report form and account form are Balance Sheet presentations.

What are the major elements of the income statement?

Revenues, expenses, gains, and losses The four major elements of an income statement are revenues, expenses, and non-operating gains and losses.

What is a trait of usefulness of the balance sheet?

Solvency is measured The balance sheet is useful to investors because it can help calculate the solvency of the company. Solvency refers to the ability of the company to pay its debts.

Which financial statement summarizes operating, investing, and financing activities of an entity for a period of time?

Statement of cash flows The statement of cash flow summarizes the operating, investing, and financing activities of an entity for a period of time.

Which financial statement summarizes the operating, investing, and financing activities of an entity for a period of time?

Statement of cash flows The statement of cash flow summarizes the operating, investing, and financing activities of an entity for a period of time.

Which statement accurately describes financial flexibility?

The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities Financial flexibility is a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities

One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. How can you best describe financial flexibility?

The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities Financial flexibility is a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Solvency

the ability of a company to pay its debts as they mature. For example, when a company carries a high level of long-term debt relative to assets, it has lower solvency than a similar company with a low level of long-term debt.

Liquidity

the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid."2 Creditors are interested in short-term liquidity ratios, such as the ratio of cash (or near cash) to short-term liabilities. These ratios indicate whether a company, like Amazon.com, will have the resources to pay its current and maturing obligations.