Efefred - CORe - FA (117)
IRR in excel
=IRR(Range starting at first to last value)
Real and which are nominal accounts
REAL ACCOUNTS NOMINAL ACCOUNTS Accounts Receivable Advertising Expense Unearned Revenue Cost of Goods Sold Prepaid Rent Cash and Cash Equivalents
Generally, a liability must satisfy the following:
It must impose a probable economic obligation on economic resources in the future The obligation has to be to another entity The event that created the obligation must have occurred in the past
NPV in excel
=NPV(rate, range of cash flows without initial investment)+ initial investment
companies 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, which of the following options are correct in describing 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.
Liabilities (14)
Accounts payable, interest payable, notes payable, current portion of notes payable, wages payable, taxes payable, accrued interest, accrued wages, accrued taxes, deferred revenue, short term debt, long term debt, deferred tax liability, other liabilities
EBIAT
Earnings before interest after taxes, or EBIAT, is a measure of how much income the business has generated while ignoring the effect of financing and capital structure, or the proportion of debt that the business has. As the name implies, interest expense, which is included on the income statement, is added back, and income tax expense is calculated and subtracted based on earnings before interest.
In a multi-national company or a large company with several subsidiaries, the company's financial management must know the legal structure of the company so that the financial records can be kept at the correct levels and financial reporting can be done properly. This relates to which of the following accounting principles?
Entity Concept
Cash dividends paid to shareholders is under which section in statement of cash flows
Fiancing
A packaged foods distribution company owns several warehouses in Indiana. Because of a new highway being built that will improve transportation throughout the Midwest, real estate in the area has increased significantly. The CEO approaches the CFO to ask if the company can update the books to reflect the higher value of the land and buildings. In explaining why the company cannot do that, the CFO's answer should refer to which accounting principle?
Historical Cost
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)?
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.
Revenues (6)
Sales, sales revenue, interest revenue, rent revenue, miscellaneous revenue, other revene
A Deferred Tax Asset arises when:
Taxable Income exceeds Income Before Taxes due to a temporary timing difference.
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?
Interest Coverage Ratio = EBIT / Interest Expense = (Net Income + Income Tax + Interest Expense) (140,000 +50,000 + 10,000) / 10,000) = 20.0
The catch-phrase for Carl's Consulting Company (CCC) is "Our employees are our biggest asset." However, if you look at the Balance Sheet of CCC, there is no such asset. What accounting principle does this represent?
Money Measurement
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?
NPV is the only one of the answer choices that is impacted by the discount rate.
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?
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.
When projecting financial statements, which of the following accounts is difficult to forecast using the percent of sales method?
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.
The company has positive cash flows from operations, negative cash flows from investing, and positive cash flows from financing.
Profitable/Growing Stage
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?
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.
A manufacturing company rented a new piece of equipment on January 1st and agreed to pay an annual rental of $9,000 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: $60,391 It is calculated by multiplying the annual payment by the present value of an annuity factor. $9,000 * 6.71008 = $60,391
Gordon Growth Model
Terminal value is the present value of infinite cash flows expected in the future. A higher discount rate results in a lower terminal value. The Gordon Growth Model assumes that the growth rate will remain fixed. A higher growth rate results in a higher terminal value.
Suppose Initech lent $110,000 to Initrode. On December 31, 2015, Initrode paid back the $110,000 and also paid $15,000 interest to Initech. Under U.S.GAAP, what would be the impact of the repayment on Initech's statement of cash flows of 2015 using the direct method?
The $110,000 received should be an increase in the Investing Section and, under U.S.GAAP, the $15,000 interest received should be included in the Operating Section.
Calculation of gross profit margin
The Gross Profit Margin is calculated by dividing Gross Profit by Revenue. Gross Profit / Revenue = Gross Profit Margin
Calculation of profit margin
The Profit Margin is calculated by dividing the Net Income by the Revenue. Net Income / Revenue = Profit Margin
Which of the following cash flows should be used in an NPV calculation to determine which project to pursue? (Select all that apply.)
The cash inflows expected as a result of the project nvestment needed to be made by the company to undertake the project
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 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.
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 June 30, 2018 for $60,000. The accumulated depreciation is $216,000.
The correct answer is to debit Cash for $60,000, credit Property, Plant & Equipment for $300,000, debit Accumulated Depreciation for $216,000, and debit Gain/Loss on Disposal of Assets for $24,000.
The company has negative cash flows from operations, positive cash flows from investing, and negative cash flows from financing.
This is a declining company.
The company has positive cash flows from operations, neutral cash flows from investing, and negative cash flows from financing.
This is a mature company.
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?
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
US GAAP vs IFRS Statement of cash flows
US GAAP IFRS Interest Paid Operating Section Operating OR Financing Section Dividends Paid Financing Section Operating OR Financing Section Interest Received Operating Section Operating/Investing Section Dividends Received Operating Section Operating/Investing Section
Which of the following accounts is decreased by a debit? Select all that apply. Sales Revenue Rent Expense Deferred revenue interest expense prepaid rent
sales revenue deferred revenue
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. Should they buy equipment?
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.
Which of the following companies would likely have the LEAST difficulty making the interest payments on its debts? Company A with Net Income of $100,000, Interest Expense of $25,000, and Tax Expense of $15,000 Company B with Net Income of $100,000, Interest Expense of $30,000, and Tax Expense of $10,000 Company C with Net Income of $100,000, Interest Expense of $25,000, and Tax Expense of $20,000
Company C will likely have the least difficulty making interest payments on its debt, because it has the highest Interest Coverage Ratio. The Interest Coverage Ratio can be calculated as ( EBIT / Interest Expense ) Company A has an EBIT of $140,000 ( $100,000 + $25,000 + $15,000 ) Company A's Interest Coverage Ratio is 5.6 ( $140,000 / $25,000 ) Company B has an EBIT of $140,000 ( $100,000 + $30,000 + $10,000 ) Company B's Interest Coverage Ratio is 4.7 ( $140,000 / $30,000 ) Company C has an EBIT of $145,000 ( $100,000 + $25,000 + $20,000 ) Company C's Interest Coverage Ratio is 5.8 ( $145,000 / $25,000 )
What is free cash flow?
Free cash flow is the amount of cash that a business could be expected to generate from its normal operations.
In the statement of Cash Flows , under US GAAP cash paid for interest go into what category?
Operating
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: is there an inflow or outflow and how much?
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.
Equity is....
"the residual interest in the assets of an entity that remains after deducting its liabilities."1 In other words: Owners' Equity = Assets - Liabilities
Suppose Green Mountain Coffee Roasters (GMCR) sold a piece of land during the year for $30 million. GMCR also bought a long term investment in a small competitor for $10 million, and, at the end of the year, GMCR purchased computers for $1 million to replace its current equipment. What would be the net impact of these transactions in the Investing Section of the statement of cash flows?
All the transactions are part of the GMCR Investing Section. As a result, the section will show a positive cash flow effect of 19 million (sum of $30M inflow, $10M outflow, and $1M outflow).
Suppose that before 2012 Apple recognized revenue on domestic sales when the goods were shipped and recognized revenue on international sales when the goods were delivered to the customer. Let's also suppose that in 2012 Apple began recognizing revenue on all sales, domestic and international, when they were shipped. Which of the following is true A. Apple's accounting prior to 2012 violated the consistency principle. B. Apple's accounting in 2012 violated the consistency principle. C. Neither Apple's accounting before or during 2012 violated the consistency principle. D. Both Apple's accounting before and during 2012 violate the consistency principle.
Apple's accounting in 2012 violated the consistency principle. Apple's accounting in 2012 violated the consistency principle because it started using different revenue recognition policies than it had used in the previous year.
Examples of what goes on balance sheet vs income statement
BALANCE SHEET INCOME STATEMENT Prepaid Expense Income Tax Expense Salaries Payable Salaries Expense Deferred Revenue Sales Revenue
These standards state that to be considered an asset, an item must:
Be purchased at a cost that is measurable Produce probable economic benefit in the future Result from a past event Be owned or controlled by the entity
Which statement about US GAAP and IFRS accounting standards is true?
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.
Which of the following is an expense account? Select all that apply. COGS Prepaid Expense Deferred tax asset rent expense accrued expense
COGS Rent expense
Which of the following accounts decreases with a credit? Select all that apply. Accrued Wages COGS SALES preferred stock accounts receivable cash
COGS accounts receivable cash
Assets (list 12)
Cash, Accounts receivable, notes receivable, interest receivable, inventory, investments, fixed assets, PP&E, Other prepaid expenses, goodwill, other intangible assets, deferred assets
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: Graphic of a journal entry dated July 1st, 2013. There are two entry lines, one is for the "Cash" account, which has a debit of $800. The second entry line is listed below the first one, and is for the "Deferred Revenue" account, which has a credit of $800.
Company C collected $800 from customer but didn't recognize revenue.
On January 1, 2013, Company D rented a warehouse for two years. The accountant of Company D recorded a journal entry as follows: Graphic of a journal entry dated January 1st, 2013. There are two entry lines, one is for the "Prepaid Expense" account, which has a debit of $30,000. The second entry line is listed below the first one, and is for the "Cash" account, which has a credit of $30,000. 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.
ACCOUNTS PAYABLE increases with a Debit or Credit
Credit
CASH decreases with a Debit or Credit
Credit
The income statement reflects a company's...
Financial performance over a given period of time.
In the statement of Cash Flows , under US GAAP cash contributed by owner go into what category?
Financing
Company A has an Inventory Turnover of 3.0, an Accounts Receivable Turnover of 5.5, and an Accounts Payable Turnover of 7.1. What is the length of their Cash Conversion Cycle?
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 / 3.0 + 365 / 5.5 - 365 / 7.1 ) = 136.7
Are debit on left or right?
Debits are on the left and credits are on the right.
We Like to Rock (WLR), a granite countertop manufacturer, delivered 5 countertops at $2,000 each to their client. The cost of producing the countertops was $500 each. The client paid cash for the countertops. First, how would the revenue from this transaction impact the accounting equation for WLR?At the same time, how will the related expense from this transaction impact the accounting equation of WLR?
First, assets increase by $10,000 (5 countertops at $2,000 each) as the company now has a receivable, or right to receive cash, and owners' equity increases by $10,000 to recognize the revenue associated with the sale. At the same time, assets decrease by $2,500 (5 countertops at $500 each) as the company no longer has the inventory, and owners' equity decreases by $2,500 to recognize the expense associated with the sale.
Inventory turnover
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.
In the statement of Cash Flows , under US GAAP payments to reacquire stock go into what category?
Investing
Examples of permanent and temporary accounts
PERMANENT ACCOUNTS TEMPORARY ACCOUNTS Rent Payable Cost of Goods Sold Inventory Sales Revenue Cash & Cash Equivalents Rent Expense
Suppose on January 1, 2014 Cardullo's purchases a new cash register for the shop and pays $800.
Property, Plant, & Equipment (P,P&E) is an asset and increases with a debit of $800. Cash is also an asset and decreases with a credit of $800.
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?
The correct answer is to debit Cash for $120,000 as the company now has the cash, and credit Deferred Revenue for $120,000 as the company now has the obligation to provide services in the future.
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?
The correct answer is to debit Cash for $18,000 as the company now has the cash (remember--checks are considered cash!) and credit Revenue for $18,000 to recognize the revenue associated with the services provided
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?
The correct answer is to debit Prepaid Expense for $80,000 as the company now has the right to receive benefits from the prepaid tickets and credit Cash for $80,000 as the company no longer has the cash.
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.
The correct answer is to debit Travel Expense for $40,000 to recognize the expense associated with the use of the tickets and credit Prepaid Expense for $40,000 as the company no longer has the right to receive benefits from the prepaid tickets.
How does the following transaction impact cash flow? Recognizing depreciation expense on a piece of equipment purchased six years ago.
The correct answer is: No Impact No cash is actually paid when a company recognizes depreciation expense. This is an implicit transaction related to the passage of time, and therefore, there is no impact on cash flows.
Suppose Company X purchased 10,000 common shares at a price of $15 per share on March 1, 2013. On Nov. 30, the company received cash dividend of $10,000 from stock they purchased. Under US GAAP, what would be the impact of this investment and dividend on the statement of cash flows of 2013 using the direct method?
The correct answer is: the $150,000 would be shown as a decrease in the funds in the Investing Section but the $10,000 would be shown as an increase in the Operating Section The $150,000 paid to purchase common shares should be a decrease in the Investing Section and, under US GAAP, the $10,000 cash dividend received should be included in the Operating Section.
Suppose Nebula Co. issued a long-term bond and received $150,000 cash from the issuance during 2014. The company also issued 10,000 shares of common stock for $160,000. At the end of the year, Nebula paid $65,000 for the dividend declared last year. What would be the net impact of these transactions on Nebula's 2014 statement of cash flows under US GAAP?
The correct answer is: the $245,000 would be shown as an increase in the Financing section. $150,000 + $160,000 - $65,000 = $245,000 Cash inflows from issuing long-term bonds and stocks, and cash outflows for paying dividends should be included in the Financing Section.
Suppose Company X sold a piece of equipment during the year. The equipment had been purchased five years ago for $10,000. At the time of the sale, $5,000 of Depreciation had been recognized against the equipment. Company X received $6,000 from the sale of the equipment. What would be the impact of the sale on the statement of cash flows prepared using the Indirect Method?
The correct answer is: the $6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as a decrease in the Operating Section The $6,000 received for the equipment should be an increase in the Investing Section and, because the $1,000 gain is a non-cash item which would have been included in net income, it has to be deducted from the Operating Section.
What represents the net income/(loss) for the year?
The sum of all revenues/gains and expenses/losses (all nominal accounts) is used to find the net income/(loss) for the year.
Suppose on September 1, 2013 Cardullo's purchased an order of Spicy Maya Hot Chocolate from the supplier for $100. Cardullo's has 30 days to pay the supplier. What would the journal entry for this purchase look like? 30 days later, Cardullo's paid for the hot chocolate. What would the journal entry for the payment made on September 30, 2013 look like?
To record the purchase on 9/1/13: Debit Inventory for $100 Credit Accounts Payable for $100 To record the payment 30 days later: Debit Accounts Payable for $100 Credit Cash for $100
Expenses (8)
COGS, interest expense, rent expense, office supplies expense, travel expense, R&D expense, depreciation expense, other expense
What are the steps in the closing process?
Accounts on the income statement are nominal accounts, which means that they are reset to zero as part of the closing process. The net balance of total revenues less total expenses (Net Income) is transferred to the retained earnings account.
While it is important that you understand the reason why you are making the adjustments, here are a few simple rules you can keep handy to help you remember how to convert net income to operating cash flow using the indirect method
An increase in operating current assets is subtracted from net income. A decrease in operating current assets is added to net income. An increase in operating current liabilities is added to net income. A decrease in operating current liabilities is subtracted from net income.
Asset turnover calcllation
Asset Turnover is calculated by dividing the annual revenue by the average asset value for the year. In this case, we are using the average of beginning and end of year asset values. Revenue / Average Assets = Asset Turnover
Jarvard University Bookstore paid $67,000 for books purchased on credit in the previous month. How would this payment impact the accounting equation?
Assets decrease by $67,000 as cash is paid, and liabilities decrease by $67,000 as Jarvard no longer has the obligation to pay for the books.
Perfect Printers is able to obtain 30 days credit terms to purchase a heavy duty printing machine for $200,000. How will this purchase impact the accounting equation of Perfect Printers at the time of the purchase? Select all that apply.
Assets increase by $200,000 because the company now has a machine, and liabilities increase by $200,000 because the company now has the obligation to pay for the machine within 30 days.
AQG Industries receives payment of $200,000 from P4U Enterprises for 5 generators that were delivered and invoiced on credit in the previous month. How would this receipt impact the accounting equation of AQG? Select all that apply.
Assets increase by $200,000 because the company receives cash, and assets also decrease by $200,000 because the company no longer has a right to receive the cash (the receivable previously recorded at the time of the sale).
Dongfeng, an automobile manufacturer, purchased raw materials for $600,000 on credit on January 1st. Dongfeng promised to pay for the raw materials in three equal monthly installments beginning from February 1st. How will this purchase impact the accounting equation on the books of Dongfeng? Please enter the amounts in the boxes below.
Assets increase by $600,000 because the company now has raw materials it will use in the manufacturing process, and liabilities increase by $600,000 because the company now has an obligation to pay for these materials.
Suppose on April 1, 2014 Cardullo's purchased 10 boxes of Harbor Sweets Chocolates for $25 per box; the chocolates are to be sold in the store. Later that month, on April 15, 2014, Cardullo's sold one of the Harbor Sweets Chocolates boxes to a customer for $40. Create T-chart
At the time of the purchase, Inventory (an asset) increases with a debit for $250 and Cash (an asset) decreases with a credit for $250. At the time of the sale, Cash (an asset) increases with a debit for $40 and Sales (revenue) increases with a credit for $40. At the same time, Cost of Goods Sold (expense) increases with a debit for $25 and Inventory (an asset) decreases with a credit for $25.
Suppose on June 30, 2013 Cardullo's Gourmet Shoppe received their electricity bill for $900 and paid it immediately. What does the T-account look like?
Cash is an asset account and it is decreased by credits (on the right in T-accounts). Utility Expense is an expense account and it is increased by debits (on the left in T-accounts).
Owners Equity (6)
Common stock, capital stock, additional paid-in capital, preferred stock, treasury stock, retained earnings
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.
COMMON STOCK decreases with a
Debit
NOTES RECEIVABLE increases with a Debit or Credit
Debit
Suppose that on January 1, 2014 PepsiCo obtained a patent on a production process and it expected that this patent would have value for 10 years. The patent was recorded on the books for $3,600,000.
Debit Amortization Expense for $30,000 and credit Accumulated Amortization for $30,000.
On January 1, 2016, Flathound Properties received $22,800 from a tenant as rent for all of 2016. How would this receipt be recorded on Flathound Properties' books on 1/1/2016?
Debit Cash for $22,800 and credit Deferred Revenue for $22,800.
On January 1, 2016, Flathound Properties received $22,800 from a tenant as rent for all of 2016. What journal entry would Flathound Properties make at the end of January 2016 to show that one month of service had been provided?
Debit Deferred Revenue for $1,900 and credit Revenue for $1,900.
You have just reviewed the financial statements of Sullivan's Shoe Store. You have determined that Sullivans' has a Profit Margin of 17%. How do you explain this to owner Clay Sullivan?
For every $100 in sales, $17 ended up in Net Income.
AQG Industries purchases $20,000 of product on credit from RSI Manufacturing. AQG records the purchase as an increase in inventory and an increase in accounts payable. AQG feels that they will be able to realize the value from the inventory and settle the obligation to RSI in the weeks to come. What accounting principle does this relate to?
Going concern. The idea that a company will be able to realize the benefits from its assets and settle any obligations from its liabilities underlies the going concern concept, so this description of AQG recording the transaction with RSI is an example of the going concern concept.
Leverage ratio
In the DuPont Framework, the leverage ratio is calculated by dividing the average total assets by the average equity. Average Total Assets / Average Equity = Leverage Ratio
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.
Wanting to raise more capital for the business, Dave's Designs decided to allow 2 new equity investors into the business. Each new investor paid $20,000. How will their investment impact the accounting equation? Select all that apply.
Increase Assets by 40,000 and owners equity increases by 40,000.
P&P Accountants, an audit firm, bills $35,000 to AQG Industries for audit work performed related to the annual audit. P&P requests payment in 15 days. How would this impact the accounting equation of P&P?
Increase assets by 35,000 and increase owners equity by 35,000.
Party Planners, an event planner and producer, records and tracks every cost in detail and provides an itemized invoice for $150,000 to Ivy University for their services at the commencement ceremony. However, Ivy University simply records the entire amount of the invoice as part of their overall Event Expenses account. The reason for the different levels of detail between the two entities is related to the accounting principle of:
Materiality
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?
Materiality
In the statement of Cash Flows , under US GAAP interest and dividends received go into what category?
Operating
Address You, a fancy dress manufacturer, sold a dress for $8,000 on credit. The cost of producing this dress was $1,000. First, how would the revenue and receivable from this transaction impact the accounting equation of Address You? At the same time, how will the related expense from this transaction impact the accounting equation of Address You?
Part 1: Increase assets by 8,000, and increase owners equity by 8,000. Part 2: Decrease assets by 1,000 and decrease owners equity by 1,000.
Which ratio measures the ability of a company to make a profit relative to revenue generated during a period?
Profit Margin (Net Income/Sales) measures the ability of a company to make a profit relative to revenue generated during a period.
Company A has Net Income of $30,000, Sales of $60,000, Assets of $120,000, and no debt. What is their ROE?
ROE = (Net Income / Sales) X (Sales / Assets) X (Assets / Equity) If a company has no debt, then their equity multiplier is 1. (30,000/60,000) * (60,000/120,000) * 1 = 25%
Victory Inc. sells custom trophies, medallions, and ribbons. For over 20 years, Victory, Inc. has had a special relationship with the city's Parks and Recreation Department and is the exclusive supplier of trophies for all their youth sports leagues. The founder of the company estimates this relationship is worth $100,000 in revenue each year and would like to record that amount as expected revenue for the coming year. The controller argues that such a relationship cannot be valued in dollars. This debate relates to which of the following principles?
Revelance
Principles or Accrual accoutning
Revenues are recorded when earned uses the matching principle expenses are recorded as incurred transactions recorded when good/services delivered NOT only when cash exchanges hands
has negative cash flows from operations, negative cash flows from investing, and very large positive cash flows from financing.
Startup/Fast Growing Stage
Below are some of the accounts that Company J has on their books: Cash and Cash Equivalents $1,000 Insurance Expense $500 Accounts Payable $700 Prepaid Rent $200 Accounts Receivable $500 Deferred Revenue $1,200 Inventory $600 Which of the amounts below is the correct total of liabilities?
The correct answer is $1,900, which includes: Accounts Payable $700 Deferred Revenue $1,200
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?
The correct answer is $2,045,000 Income Before Taxes is equal to Operating Income adjusted for any non-operating activity. 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 Hipzone's Operating Income for 2013 was $2,120,000. Their income and expenses during the year include the following: Sales, General, & Admin Expense $1,910,000 Interest Expense $14,000 Income Taxes $198,000 Depreciation Expense $420,000 Other Non-operating Expenses $35,000 What was Hipzone's Income Before Taxes for 2013?
The correct answer is $2,071,000 Operating Income adjusted for any non-operating activities results in Income Before Taxes. In this example, take Operating Income less Interest Expense less Other Non-Operating Expenses ($2,120,000 - 14,000 - 35,000 = $2,071,000). Selling, General, & Admin and Depreciation Expenses were already deducted to arrive at Operating Income, and Income Taxes will be deducted after Income Before Taxes.
Below are some of the accounts that Company J has on their books: Cash and Cash Equivalents $1,000 Insurance Expense $500 Accounts Payable $700 Prepaid Rent $200 Accounts Receivable $500 Deferred Revenue $1,200 Inventory $600 Which of the amounts below is the correct total of assets?
The correct answer is $2,300, which includes: Cash and Cash Equivalents $1,000 Prepaid Rent $200 Accounts Receivable $500 Inventory $600
Tom's Grocery purchased 5 new cash registers for their new store and they paid $2,400 each for a total of $12,000 on August 1, 2013, the day they were delivered. The cash registers are expected to have useful lives of 5 years and they are not expected to have any salvage value. Tom's Grocery uses straight-line depreciation. The cash registers were recorded as long-lived assets at the time of the purchase and now Tom's needs to make an entry showing the expense related to these cash registers up to December 31, 2013.
The depreciable value of the cash registers is $12,000 and they have an estimated useful life of 5 years (or 60 months), so the monthly depreciation would be $200 per month ($12,000 / 60). To recognize the 5 months' worth of depreciation ($200 per month * 5 months = $1,000) at 12/31/13, the company would record a debit to Depreciation (an expense, part of owners' equity) for $1,000 and a credit to Accumulated Depreciation (a contra-asset, part of assets) for $1,000.
trial balance
The trial balance includes all of the accounts needed to create the balance sheet and the 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.
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 shows no balance in all nominal accounts because they were closed to retained earnings in the closing process. During the closing process, the balance of all nominal accounts are closed to retained earnings and reset to zero.
On January 1, 2015 Outback Subaru Limited, a Subaru dealership in Alice Springs, sold 2 cars to the town for $50,000 total. Outback had paid $37,000 to purchase the cars. The town was granted credit terms and permitted to pay in 30 days. On the same day of the sale, Outback Subaru Limited delivered the cars to the town. Consider both the revenue and cost of this transaction on the books of Outback Subaru Limited. What would be the impact on January 1, 2015, the date of the sale? On January 30, 2015 Outback Subaru Limited received payment in full from the town for the cars. What would be the impact of this transaction on this date?
This transaction involves both the sale and the related cost of the sale. On 1/1/15, the Revenue account (part of owners' equity) should be increased (with a credit) by $50,000, the amount of the sale, and, since the town was given 30 days to pay, Accounts Receivable (an asset) should be increased (with a debit) by the same amount of $50,000. On the cost side, the vehicles came from inventory so the Inventory account (an asset) should be reduced (with a credit) by $37,000, the amount that Outback Subaru Ltd paid for the vehicles. The expense should be increased (with a debit) to Cost of Goods Sold (part of owners' equity) for $37,000. On 1/30/15, receipt of the payment from the town means that the the Cash account (an asset) should be increased (with a debit) by $50,000 and the Accounts Receivable account (also an asset) should be decreased (with a credit) by $50,000.
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?
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 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?
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
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?
To record the cash and the related liability, record a debit to cash for $6,000 and a credit to deferred revenue for $6,000.
Maria makes prepayments for online marketing services for her business through Constant Contact. Suppose she paid $360 on January 1, 2014 for six months of service. What would the journal entry look like to record this transaction?
To record the prepayment, Bikram Yoga Natick would record a debit of $360 to increase Prepaid Expenses (an asset) and a credit of $360 to decrease Cash (an asset).
statement of cash flows contains..
cash at beginning and end of year
