Financial Accounting Extra Credit 1. A. Why would a company offer to sell to their customers on account (Accounts Receivable) since bad Debts are inevitable? One reason why a company may offer to sell to their customers on account is because of the speedy inflow of cash. B. Also, Discuss ALL alternatives available to owners, to increase their cash flow from Sales to customers. 2. For each of the following situations, indicate which internal control procedure ABC company has violated: a. Comparisons and compliance monitoring. b. Smart hiring practices c. Limited access. d. Adequate records. e. Proper approvals. f. Segregation of duties. __B___ 1. Since they are costly, background checks are not done for the employees. __F__ 2. Purchases of items on credit do not need the approval of the purchasing department. __D__ 3. All hard copies of documents are shredded after one month and electronic records are deleted after two months. __A__ 4. The company does not prepare operating or cash budgets. __F__ 5. The accountant receives the cash and records the cash receipts. __C__ 6. There are no locks in the area where inventory is stored. __E__ 7. The hiring, firing and pay adjustments are made by the department foremen. 3. New Street Corporation had accounts receivable of $110,000 at the beginning of the year and $125,000 at the end of the year. Sales on account for the year amounted to $575,000. SHOW your calculations and give the amount to be reported on the statement of cash flows for collections from customers under the operating activities. 4. Zimbalist Corporation reports a decrease in Salaries Payable of $5,000. If Salaries Expense totaled $187,000 for the year, what amount of cash was paid to employees? Show all your calculations. 5. During the year, Lady Liberty Corporation's treasury stock increased $50,000 from a cash purchase of stock, cash dividends were paid totaling $44,000 and the company reported net income of $200,000. Show your calculations and give the amount of Net Cash USED by Financing Activities on the statement of cash flows (indirect method). 6. A company reports the following balances: 12/31/2015 12/31/2016 Common Stock $150,000 $160,000 Paid-in Capital in Excess of Par 100,000 110,000 Retained Earnings 70,000 80,000 During 2016, dividends of $15,000 were declared and paid. What is net income for 2016? Show all calculations. 7. Kate Johnson, President of BQ Industries, executed a note payable on behalf of the company on October 1, 2014 in the amount of $300,000 with an interest rate of 8% for 9 months. Calculate the following items and show your calculations: The total interest to be paid over the term of the note The interest that should be accrued at December 31, 2014 (the Fiscal Year End) The maturity value of the note when the note is due The date that the note is due (maturity date) 8. Various transactions of Plymouth Corporation are shown below. Required: Categorize each transaction as either an operating activity (O), investing activity (I), financing activity (F), or a noncash activity (N). _____ 1. Bonds payable are issued for cash at a premium. __I__ 2. Equipment is sold for cash at book value. __I__ 3. Land is purchased by signing a 5-year, 8% note payable. __F__ 4. 1,000 shares of ABC Corporation's common stock are purchased for cash. _____ 5. The conversion option is utilized and bonds payable are converted into common stock. __F__ 6. Common stock, with a $1 par value, is sold for $10 per share. _____ 7. Interest receivable on a short-term note receivable is received. _____ 8. Cash is paid on accounts payable. __F__ 9. Cash dividends are declared and paid. __O__ 10. Merchandise is sold for cash to customers. 9. Virginia Whittaker is reviewing her financial statements for May. Her dry cleaning business had a $10,000 profit for May, but her business checking account shows a decrease of $2,500. Explain to Virginia why the net income for the business and the ending balance in cash are not the same amounts. 10. In 2014, Martin Motors has a gross profit of $400,000, operating expenses of $180,000 (not including depreciation), and a tax rate of 40%. On January 10, 2014, Martin Motors purchased a machine that will help diagnose problems with engines. The machine cost $210,000, residual value of $20,000, and useful life of 5 years. Explain to the board of directors the depreciation method that would be best for financial statement purposes and the depreciation method that would be best suited for tax purposes. Include any explanation of the impact on cash flows and tax savings realized in the first year and also over the entire life of the asset. Show calculations to support your explanations. (Hint: Set up a schedule for straight-line and one for double-declining.) 11. Listed below are several account titles. List the type of account listed by the account title. The first item is listed as an example. Account Title Account Type Normal Balance Machinery Asset Debit Bonds Payable Liability Merchandise Inventory Asset Debit Prepaid Rent Asset Debit Preferred Stock Cost of Goods Sold Debit Accounts Receivable Asset Debit Notes Payable Liability Credit Retained Earnings Stockholders Equity Credit Salary Expense Liability Debit Sales Stockholders Equity Short-term Investments Allowance for Bad Debts 12. Prepare a bank reconciliation using Bobby Barnacles Restaurant Supply Incs information for August 31, 2012. A NSF check from Johnny Jones for $3,164. Two deposits made on August 31 were not on the bank statement, totaling $2,897. The bank collected an EFT payment for Rent for $2,600. August 31 balance in Cash was $1,905. The owner had written check # 1598 for $500 and recorded this check as $5,000. The balance on the bank statement as of August 31 was $5,216. Bank service charge of $28 was shown on the bank statement. Checks #1572, 1606, 1116, and 1242 for $419, $126, $650, and $1,105, respectively, were not shown on the bank statement, even though the company had sent the checks. 13. The inventory costing method a company chooses can affect the financial statements and thus the decisions of the people who are using those statements. Company A uses the LIFO inventory method and discloses its use of the LIFO method in the Notes to the Financial Statements. Company B uses the FIFO method to account for its inventory. Company B does NOT disclose which inventory method it uses. Company B reports a higher net income than Company A. In which company would you prefer to invest? Give your reasons. (For example, how do these methods affect the financial statements and what are the tax implications.) 14. An auto dealer uses a perpetual inventory system. The dealer incurred the following transactions during the month of May 1. On May 1, a dealer purchased 10 vehicles on account at $20,000 each, with credit terms of 2/10, net 30. 2. On May 2, the dealer returned one vehicle due to a product defect. 3. On May 3, the dealer sold 5 vehicles for $25,000 each on account to a local town. The credit terms were 3/10, net 30. 4. On May 9, the dealer paid for the vehicles purchased less the return on May 2. 5. On May 31, the dealer collected one-half of the amount due from the May 3 sale. 6. On May 31, the dealer paid the rent for the next month of $2,500. Required: Prepare the journal entries for the dealer during the month of May. Explanations are not required. Date Account Dr Cr May 1 Accounts Receivables 200000 Sales Revenue 200000 May 2 Sales Returns and Allowance 20000 Accounts Receivables 20000 May 3 Accounts Receivables 125000 Sales Revenue 125000 May 9 May 31 May 31 15. Anchor House Realtors, Inc. prepared the following random list of assets, liabilities, revenues, and expenses from its December 31, 2014, accounting records. Prepare the Income Statement, Statement of Retained Earnings and the CLASSIFIED Balance Sheet for Anchor House Realtors, Inc., as of December 31, 2014. Each of your statements should have the 3-line heading, and your Balance Sheet should be a classified Balance Sheet. Account Debit Credit Cash $800 Accounts Receivable 1,000 Inventory 2,000 Supplies 1,900 Prepaid Rent 500 Goodwill 6,000 Building 40,000 Accumulated Depreciation $8,500 Accounts Payable 7,500 Unearned Revenue 4,100 Notes Payable, due 2020 2,300 Common Stock 3,600 Paid in Excess of Par 3,000 Retained Earnings 3,100 Service Revenue 33,000 Rent Expense 2,300 Supplies Expense 1,200 Salaries Expense 6,400 Depreciation Expense 1,400 Cost of Goods Sold 1,600 Totals $65,100 $65,100 16. Based on the following Statement of Cash Flows for Matthauson Company, evaluate how effectively management is using cash flows. Provide a thorough summary including a discussion of each activity, operating, investing, and financing, as well as overall changes to the cash balance and how the cash flow affects this companys business decisions. Matthauson Company Statement of Cash Flows Year Ended December 31, 2015 Cash Flows From Operating Activities: Cash Collected from Customers $940,000 Cash Paid to Employees (200,000) Cash Paid to Suppliers* (670,000) Cash Paid for Interest (3,000) Cash Paid for Taxes (30,000) Net Cash Provided by Operating Activities $37,000 Cash Flows From Investing Activities: Proceeds from sale of equipment $3,000 Purchase of equipment (220,000) Net Cash Used by Investing Activities ($217,000) Cash Flows From Financing Activities: Dividends paid ($70,000) Bonds payable paid (50,000) Sale of common stock 250,000 Net Cash Provided by Financing Activities $130,000 Decrease in Cash ($50,000) 17. For the year ended, December 31, 2015, the Aldrich Chemical Company omitted the following adjusting journal entries in error. For each entry, indicate if net income will be overstated or understated by placing an "X" in the appropriate box. JOURNAL ENTRY OMITTED NET INCOME NET INCOME OVERSTATED UNDERSTATED 1. Revenue previously recorded as unearned has now been earned. X 2. Revenue has been earned but not yet billed. X 3. Wages have been earned by the employees but have not yet been paid. X 4. Supplies have now been used. X 5. Prepaid Insurance has expired 6. Depreciation expense for the year. 7. Interest earned on a note receivable has not been recorded since it has not yet been received 18. Revenue is recorded when it is: Earned. 19. SHOW the Accounting Equation. Assets = Liabilities + Owners Equity