Master Financial Accounting Concepts: Midterm Study Guide
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Concordia University**We aren't endorsed by this school
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COMM 217
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Communications
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Dec 12, 2024
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97
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COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.7 Introduction to Financial Accounting (COMM 217) Crash CourseMidterm Exam –Winter 2023 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.8 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.9 CHAPTER 1INTRODUCTION TO FINANCIAL ACCOUNTING1.1 What is Financial Accounting? Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. The Four Basic Financial Statements Statement of Financial Position (Balance Sheet) •Reports assets, liabilities and shareholders’ equity (financial position). •Information pertains to a specific point in time (snapshot) Statement of Earnings (Income Statement) •Reports revenues, expenses and net income (profit) •Information pertains to a time period (month, quarter, year) Statement of Changes in Equity •Reports all changes to shareholders’ equity accounts.•Information pertains to a time period (month, quarter, year) Cash Flow Statement •Reports the inflows and outflows of cash that are related to operating, investing, and financing activities. oOperating activities: Directly related to generating earnings oInvesting activities: Acquisitions or sales of the company’s fixed assets or investmentsoFinancing activities: Directly related to the financing of the company, includes payments and collections from investors or creditors (banks) arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.10 1.2 Characteristics and Assumptions of Accounting Information Accounting Information Characteristics For accounting information to meet its objective of providing useful information, certain characteristics or rules must be respected: •Relevance oInformation is considered relevant if it can influence a decision. oMaterial Amounts ▪If a transaction involves an amount that is significantly low such that it cannot affect a decision, these amounts are considered immaterial and not relevant. ▪Only material amounts can affect a decision. •Faithful Representation oThe information provided in the financial statements must reflect the actual condition of the business, not merely was is legally visible. oInformation must be complete, neutral (unbiased), and free from material error. •Comparability oThe financial statements of a company must be comparable to previous years’ statements, as well as the statements of other companies, this is achieved by using similar and consistent accounting methods. •Verifiability oInformation presented in the financial statements is verifiable if independent accountants can agree on the nature and amount of the accounts and transactions. •Timeliness oInformation should be made available to decision makers in time to be considered, otherwise it is irrelevant. •Understandability oThe quality of the information that enables users to comprehend its meaning. Clear and concise classification and presentation of information enhances this characteristic. •The Cost Constraint oThe cost of producing the financial information should be less than the benefit it will contribute to the organization. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.11 Accounting Assumptions In addition to the characteristics used in creating the financial statements, there are 4 assumptions when reading a company’s financial records:•The Separate-Entity Assumption oThis assumption states that the activities of the business must be accounted for separately from the activities of its owners. ▪Mark should not use the company credit card to rent a car on his family vacation. •The Unit of Measure Assumption oThis assumption states that accounting information is reported in the national currency. •The Continuity Assumption (Going Concern) oThis assumption states that a business is assumed to continue to operate for the foreseeable future. •The Historical Cost Principle oAssets are required to be reported in the books at the historical (original) cost that was paid for the asset, ignore market value. ▪A building was purchased in 1989 for $50,000; although this building can be sold today for $450,000, in the company’s books it will remain reported at $50,000.arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.12 CHAPTER 2FINANCIAL STATEMENTS2.1 The Statement of Financial Position The balance sheet, also known as the statement of financial position, is the third of the four major financial statements. It is an important tool used by investors and other stakeholders to get a good look at the company's operations. •It is a snapshot at a single point in timeof the company's assets, liabilities, and shareholders' equity. •Gives interested parties an idea of the company's financial position. arko42003@gmail.comAssetsanything!Companynameelementthatcompany->lessIam3.Dateacurrency.owns↑year-morethanyear.Companyas-worth(Note
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.13 Assets •Economic resource controlled by the company. •Can be used to provide future economic benefit. •Assets are classified based on their liquidity 1.Assets that will be liquidated (used) within 12 months are called current-assets2.Assets that will be liquidated (used) in a period longer than 12 months are called non-current assets•There are five categories of assets: 1.Cash and cash equivalents 2.Receivables 3.Inventories 4.Prepaid expenses 5.Property, plant, and equipment. Liabilities •Obligations that a company must honor oCan be debt that needs to be repaid in cash or in other forms like with goods and services. •Liabilities are classified based on their maturity. oLiabilities that are due within 12 months are called current-liabilities.oLiabilities that are due in more than 12 months are called non-current liabilities.arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.14 Shareholders’ Equity•The value of the company’s retained earnings (reinvested profits) and all of the investments made by the company’s owners (shareholders).•Can be seen as the net worth of the company Contributed Capital •The value of the assets invested inthe company by its ownersor shareholders in exchange for ownership (shares). •Also called Share Capitalor Common Shares•Account balance = # of issued shares x Average issue price per share •Increases when shares issued •Decreases when shares are repurchased •Typically use the account titled Common shareswhen recording transactions. Retained Earnings •Profits reinvested in the company increase retained earnings.•Profits taken out of the company and given to shareholders are called dividends, this decreases retained earnings. arko42003@gmail.com⊥Investokinbusiness.
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.15 The Accounting Equation •Describes who has rights to the company's assets 1.Assetscan be divided between credits (liabilities) and owners (equity) •Describes how assets are purchased 1.Can be purchased using debt (liabilities) or purchased by owners (equity). ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITYDouble-Entry Accounting System •Based on the accounting equation •Every transaction must affect at least two accounts.•Accounting equation should always remain balanced. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.16 2.2 The Statement of Earnings (Income Statement) The income statement is the first of the four major financial statements and its primary purpose is to show how much money the business earned (or lost) during the given accounting period.Key Elements of an Income Statement •Report the net income or loss over a specific period •List the revenues and expenses that occurred over the period •Separates operating activitiesfrom non-operating activities•Measures income in steps: 1.Gross Profit: Income from sales after deduction only the direct costs (COGS)of producing or purchasing the goods sold. 2.Operating income: Income earned from the primary operationsof the business. 3.Earnings before Tax: Income earned from both operating and non-operating activities, before income taxes. 4.Net Income: Total income earned after income taxes. 5.Earnings per Share: Net income expressed on a per share basis. arko42003@gmail.comHowprofitable-companyis.->Netincomeor10se-daytoday·nessbus
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.17 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.18 RevenuesRevenues are fees or income earnedin exchange for goods, services, and other activities the business participates in. Operating Revenues Operating revenue is generated by a company's primary businessactivities. Examples •Sales revenue •Service revenue Non-Operating Revenues Non-operating revenue is revenue generated by activities outside of a company's primary operations.•Interest revenue •Rent revenue •Dividend revenue •Gains from disposition of assets •Gains from settlement of liabilities Contra-Revenues Accounts that decreasethe amount of revenue actually collected by the company. •Sales discounts •Sales returns and allowances arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.19 ExpensesExpenses are fees and costs incurred by the business for the goods and services used to generate revenues. Cost of Goods Sold Cost of goods sold (Cost of sales) represents all the expenses directlyincurred in order to bring a product or service to market. •Cost of purchasing merchandise from suppliers. •Cost of manufacturing merchandise (materials, labour and overhead). Operating ExpensesOperating expenses are the indirect costs incurred by a business to bring its products and services to market. •Salaries and wages expense •Supplies expense •Rent expense •Depreciation expense •Marketing expense Non-Operating Expenses Non-operating expenses are the costs incurred that are not related to normal business operations. Also called Other expenses. •Interest expense •Income tax expense •Losses from disposition of assets •Losses from settlements of liabilities arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.20 Net Income •The net amount earned or lost by a company during an accounting period. •It is one of most important figures since the primary purpose of a business it to increase the wealth of it owners, which is typically done by turning a profit. •Also called Profit (Loss), Net EarningsIncome Tax ExpenseThe portion of the company's earnings before tax that must be paid to tax agencies. Earnings Per Share •Profit or Loss earned on a per share basis •Investors care most about this number arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.21 2.3 Accounts Accounts are the building blocks of financial reporting. They are used to sort and store transactions affecting a particular part of the company's ledger. Example: The cashaccount is used to record every transaction that increases or decreases the company's cash. There are 5 broad categories of accounts: •Assets •Liabilities •Shareholders' Equity •Revenues •Expenses LIST OF COMMON ACCOUNT NAMES Assets Liabilities Shareholders' Equity CashAccounts/Trades Payable Contributed Capital Short-term InvestmentAccrued Liabilities Common shares Accounts/Trades ReceivableSalaries and wages payable Preferred shares Notes ReceivablesInterest payable Retained earnings InventoryUnearned revenue Supplies Notes payable PrepaymentsBonds payable Long-term InvestmentsEquipmentBuildingLandIntangiblesarko42003@gmail.comnote-Stosales⊥certainsneme)I(YouOLos
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.22 CHAPTER 3TRANSACTION ANALYSISFinancial Accounting Basics –Summary What is an account? A record in the general ledger and financial statements of a business that is used to collect and store debit and credit amounts. For example, the Cash account is where every transaction involving cash is recorded. A business has many accounts and account classifications. What are Debits and Credits? Debits and credits are accounting entries that either increase or decrease an accounting. •Debits are positioned to the left in an accounting entry •Credits are positioned to the right in an accounting entry What is a T-Account? A T-account is a graphic representation of an account. Debit entries are entered on the left and credit entries are entered on the right. Example: T-Accounts A company begins the year with $2,000 in cash. Throughout the year, the company spends $35,000 in cash and at the end of the year there is $5,000 in the cash account. How much cash was received? Show your work using a t-account. arko42003@gmail.com5000=X-(35000-(4)Soasha5000=X-33050I3800038000Cash2008-Dreceived32K.$35000350005000
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.23 Types of Accounts There are 5 main categories of accounts, and can either be natural debits or natural credits. •Natural Debit: Account that is increased with a debit and decreased with a credit. •Natural Credit: Account that is increased with a credit and decreased with a debit. Natural Debits Natural Credits Dividend declaredGainsExpensesIncomeAssets Losses Revenue Liabilities Shareholders’ EquityAssets = Liabilities + Shareholders' Equity + Debit –Credit –Debit + Credit –Debit + Credit Expenses Revenues + Debit –Credit –Debit + Credit What is a transaction? •A business event having a monetary impact on the financial statements of a business. •Must involve at least two accounts, but can involve more. For example: On March 15, ABC Inc sells $5,000 of merchandise to a customer in exchange for cash. WATCH OUT! Some events are not transactions. If the event does not affect the balance of at least two account, it is not a transaction. arko42003@gmail.comMostimportpage
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.24 What is a Journal Entry? •A journal entry is used to record a business transaction in the accounting records of a business. •In a journal entry, debit accounts are written first and to the left, followed by credit accounts to the right. •There can be many debits and credits but there must be at least one of each. •The total of the debits should always equal the total of the credits Some Examples 1.On March 15, ABC Inc sells $5,000 of merchandise to a customer in exchange for cash. Mar 15 Cash (Asset +) 5,000 Sales Revenue (Revenue +) 5,000 2.On September 17, ABC Inc repays a $2,000 bank loan plus $200 of interest. Sep 17 Loan Payable (Liability −) 2,000 Interest Expense (Expense +) 200 Cash (Asset −) 2,200 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.25 Example: Journal Entries You were hired as an accountant for SOS Electronics in December 2021. SOS sells high-end consumer electronics to retail stores across Canada and provides IT services to those retailers as well which it classifies as Sales to simplify its accounting. SOS is a public corporation listed on the Toronto Stock Exchange (TSX) and on January 1st2021 had 80,000 outstanding shares. SOS’s fiscal year ends December 31. You are hired to replace the company’s old accountant who was fired last week whenmanagement realized that he had not recorded any transactions after the end of October. SOS’s unadjusted trial balance on October 31, 2021 is shown below: Account Name Debit Credit Cash 45,000 - Accounts Receivable 115,000 - Allowance for Doubtful Accounts - 12,000 Short-term Investments 5,000 - Supplies 51,000 - Merchandise Inventory 165,000 - Furniture and Equipment 320,000 - Accumulated Depreciation –Furniture and Equipment - 25,000 Buildings 1,600,000 - Accumulated Depreciation –Buildings - 90,000 Land 385,000 - Accounts Payable - 50,000 Salaries Payable - 5,000 Contributed Capital (80,000 shares) - 600,000 Interest Expense 2,500 - Interest Payable - 5,000 Salaries Expense 160,000 Sales Revenue - 1,273,500 Cost of Goods Sold 350,000 - Depreciation Expense 20,000 - Marketing Expense 13,000 - Rent Expense 20,000 - Unearned Revenue - 6,000 Sales Discounts 12,000 - Sales Returns and Allowances 13,000 - Retained Earnings - 1,210,000 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.26 A review of SOS’s documents reveals the following items:▪November 1st, sold merchandise costing $5,000 to a customer for $20,000. The sale was on account. ▪November 1st, borrowed $200,000 from TD Bank and signed a 5-year note for that borrowing. The note carries a 9% interest rate. Principal and interest are due at maturity. ▪November 2nd, issued 4,000 new shares for $50 per share. ▪November 6th, paid $6,000 in advance in rent for the months of November, December and January. ▪November 18th, purchased on account $25,000 of merchandise from one of its suppliers. ▪November 22nd, collected $10,000 from customers’ accounts.▪December 1st, paid employees $30,000 for November salaries. ▪December 1st, the company rents out a portion of its warehouse to an unrelated business for $1,000 per month starting today. ▪December 1st, lent an employee $60,000 to be repaid in 6 months, the loan carries an interest rate of 10%. ▪December 2nd, received and paid bill of $2,000 from a marketing agency. ▪December 5th, delivered half the services to the customers that had prepaid in August. ▪December 7th, a $1.30 per share dividend was declared. ▪December 9th, collected $17,000 from customers for services to be rendered in 2018. ▪December 12th, purchased $20,000 of supplies, paid in cash. ▪December 13th, hired a new office manager who will earn $50,000 per year. ▪December 17th, purchased new office equipment for $150,000. Paid half in cash and signed a note to repay the rest before the end of the year. ▪December 20th, paid the dividends. ▪December 21st, paid the remaining balance for the office equipment. arko42003@gmail.com2022
DateAccountDebitCreditnov.1AccounReceivab$20,000SaleRevenue$20,000costofgoods$5,000Inventory-5,000Nov.1Cash$200,000Notespayable$200,000Nov.2Cash$200,000ContributedCapital$200,000Nov.6PrepaidRent$6,000Cash$6,000Nov.18Inventory$25,000Accountpayable$)25,08
Nov.Cash$10,00022AccountsReceivable$10,000Dec.SalaryExpense$30,000OfCash$30,000DecNotesReceivable$60,000OICash5)60,000DecMarketingExpense$2,00002Cash$2,000DecUnearnedRevenue$3,00005ServiceRevenue$3,000DecDividendReclared$109,20007Dividendpayables.$)109,200
DecCash$17,00009unearnedRevenue$)17,000Decsupplies$20,00012Cash$20,000DecEquipment$150,00017Cash$)75,000Notespayable$75,000DecDividends$109,20020Cash$109,200DecNotepayable$75,00021Cash$75,000
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.29 CHAPTER 4ADJUSTING-ENTRIES AND THE YEAR-END PROCESS4.1 Accrual Basis vs Cash Basis Accounting Accrual Basis Accounting •Recognizes revenues when they are earned •Recognizes expenses when they incurred or used •This method is the widely used in financial accounting as it is required under IFRS and GAAP Cash Basis Accounting •Recognizes revenues when cash is received •Recognizes expenses when cash is paid •This method is mainly used by small businesses and personal finance The Fiscal Year Unlike the calendar year, a company can choose their year on any day of the year. The fiscal year represents a year for tax and accounting purposes. •Can be any day of the year but companies should be consistent each year •All accounts must be up to date at the end of the fiscal year •Adjusting journal entries and financial statements are prepared on the last day of the fiscal year arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.30 4.2 Adjusting Journal Entries What is an Adjusting Entry? •Prepared at the end of an accounting period •Record revenues and expenses that have occurred but have not yet been recorded. Contra-Assets •Related to, and subtracted from, another asset. •Accounts that are classified as assets but carry a negative balance. oThis means that as the contra-asset increases in value, the related asset decreases in value. •There are 2 contra-assets to get to know: oAccumulated depreciation: decreases the value of a long-term fixed asset. oAllowance for doubtful accounts: decreases the value of accounts receivables. SOS TIP Adjusting journal entries never contain the cash account! arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.31 4.3 Financial Statements Statement of Financial Position (Balance Sheet) The balance sheet, also known as the statement of financial position, is the third of the four major financial statements. It is an important tool used by investors and other stakeholders to get a good look at the company's operations. •It is a snapshotat a single point in timeof the company's assets, liabilities, and shareholders' equity. •Gives interested parties an idea of the company's financial position. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.32 Statement of Earnings (Income Statement) The income statement is the first of the four major financial statements and its primary purpose is to show how much money the business earned (or lost) during the given accounting period. •Reports the net income or loss over a specific period •List the revenues and expenses that occurred over the period Earnings per Share EPS =Net IncomeAverage number of outstanding common sharesarko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.33 4.4 Closing Entries Temporary and Permanent Accounts In financial reporting, certain accounts are labeled as temporary accountswhile other are permanent accounts.Understanding this concept is crucial for completing the accounting cycle. Temporary Accounts •Reset back to a zero balance at the end of the accounting period •Includes all revenues, expenses and dividends declared Permanent Accounts •Accounts balance at the end of an accounting period are carried over into the following period •Includes all assets, liabilities, and shareholders' equity accounts Four Closing Entries 1.Close revenues and contra-revenues to Income Summary 2.Close expenses to Income Summary 3.Close Income Summary to Retained Earnings 4.Close Dividends Declared to Retained Earnings Example: Adjusting Journal Entries arko42003@gmail.com->AncomeStatement+Dividend-Balancesheetaccounts,this!!!warDr
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.34 You were hired as an accountant for SOS Electronics in December 2021. SOS sells high-end consumer electronics to retail stores across Canada and provides IT services to those retailers as well which it classifies as Sales to simplify its accounting. SOS is a public corporation listed on the Toronto Stock Exchange (TSX) and on January 1st2021 had 80,000 outstanding shares. SOS’s fiscal year ends December 31. You are hired to replace the company’s old accountant who was fired last week when management realized that he had not recorded any transactions after the end of October. SOS’s unadjusted trial balance on October 31, 2021 is shown below: Account Name Debit Credit Cash 45,000 - Accounts Receivable 115,000 - Allowance for Doubtful Accounts - 12,000 Short-term Investments 5,000 - Supplies 51,000 - Merchandise Inventory 165,000 - Furniture and Equipment 320,000 - Accumulated Depreciation –Furniture and Equipment - 25,000 Buildings 1,600,000 - Accumulated Depreciation –Buildings - 90,000 Land 385,000 - Accounts Payable - 50,000 Salaries Payable - 5,000 Contributed Capital (80,000 shares) - 600,000 Interest Expense 2,500 - Interest Payable - 5,000 Salaries Expense 160,000 Sales Revenue - 1,273,500 Cost of Goods Sold 350,000 - Depreciation Expense 20,000 - Marketing Expense 13,000 - Rent Expense 20,000 - Unearned Revenue - 6,000 Sales Discounts 12,000 - Sales Returns and Allowances 13,000 - Retained Earnings - 1,210,000 arko42003@gmail.comOO
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.35 A review of SOS’s documents reveals the following items:▪November 1st, borrowed $200,000 from TD Bank and signed a 5-year note for that borrowing. The note carries a 9% interest rate. Principal and interest are due at maturity. ▪November 6th, paid $6,000 in advance in rent for the months of November, December and January. ▪December 1st, the company rents out a portion of its warehouse to an unrelated business for $1,000 per month starting today. ▪December 1st, lent an employee $60,000 to be repaid in 6 months, the loan carries an interest rate of 10%. ▪December 12th, purchased $20,000 of supplies, paid in cash. Below is additional information available on December 31st2021. ▪December salaries totalled $35,000 and will be paid on January 1st2021. ▪A physical count of supplies reveals that there are $10,000 of supplies on hand. ▪The company determines that $15,000 of its trade receivables are likely to not be collected. ▪Depreciation expense for the last two months of 2021 are $12,000 for Furniture and Equipment; and $10,000 for Buildings. ▪The company has provided a customer with $20,000 of tech support services that has not been recorded or paid. ▪The tenant in the warehouse has not yet paid the rent for December. ▪The company is subject to a 30% tax rate arko42003@gmail.com
DateAccountDebitCreditDecInterestExpense$3,00031Interestpayable$3,000DecRentExpense$4,00031PrepaidRent$4,000DecRentreceivable$1,00031Rentrevenue$1,000DecInterestReceivable$50031InterestRevenue$500Decsupplieexpense$61,00031supplie$)61,000Suppliesbegbalance$51,000I#Dec12$20,000Dec3$10,000
DecWageExpense$35,000wagepayable$35,000DecBadDebExpense$3,00031AllowanceforDoubtfulAcc$3,000EDM512,000$3,000$15,000DecDepreciationexpense$12,00AccumulatedDep-Furnitane$12,000Depreciationexpense$10,000AccumulatedRep-Building$10,000DecAccountreceivable$20,00031Servicerevenue$24,000DecAncometaxExpense$166,65031Incometaxpayable$166,650
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.37 Example: Financial StatementsYou were hired as an accountant for SOS Electronics in December 2021. SOS sells high-end consumer electronics to retail stores across Canada and provides IT services to those retailers as well which it classifies as Sales to simplify its accounting. SOS is a public corporation listed on the Toronto Stock Exchange (TSX) and on January 1st2021 had 80,000 outstanding shares. SOS’s fiscal year ends December 31. You are hired to replace the company’s old accountant who was fired last week when management realized that he had not recorded any transactions after the end of October. SOS ELECTRONICS Unadjusted Trial Balance December 31, 2021 Account Name Debit Credit Cash 94,800 - Accounts Receivable 125,000 - Allowance for Doubtful Accounts - 12,000 Short-term Investments 5,000 - Supplies 71,000 - Merchandise Inventory 185,000 - Furniture and Equipment 470,000 - Accumulated Depreciation –Furniture and Equipment - 25,000 Buildings 1,600,000 - Accumulated Depreciation –Buildings - 90,000 Land 385,000 - Accounts Payable - 75,000 Salaries Payable - 5,000 Contributed Capital (84,000 shares) - 800,000 Interest Expense 5,500 - Interest Payable - 8,000 Salaries Expense 190,000 Sales Revenue - 1,296,500 Cost of Goods Sold 355,000 - Depreciation Expense 20,000 - Marketing Expense 15,000 - Rent Expense 24,000 - Unearned Revenue - 20,000 Sales Discounts 12,000 - Sales Returns and Allowances 13,000 - Retained Earnings (January 1, 2019) - 1,210,000 Prepaid rent 2,000 Long-term notes payable 200,000 Short-term Notes Receivable 60,000 arko42003@gmail.comOO⑤792-OOOOg-GC6
weneedtoupdateallaccountsInterestExpenseInterestpayable$5,500I$9,000$5,000$3,000$8,500$11,000RentExpensePrepaidRent$24,000$6,0005)4,000$4,000I$28,000$2,000RentReceivableRentrevenue#itto$1,000$1,000$100
InterestReceivableInterestRevenue500I·500-500SupplyExpensesupplies$61,000$71,000$61,20rote$10,000WageExpensewagepayable$190,000$5,000$35,000$35,000$225,00$40,000BadDebtExpenseAFDA$3,000$$12,000So
DepreciationExpenseAcc.Dep.F.$20,000$25,vo0$12,000$12,000~$37,000Acc.Dep.B$90,000$,00Acc.Receivable$100,osoIncometaxpayable166,650serviceRevenue166,650$20,wo$20,000
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.38 Requirements 1.Prepare the income statement 2.Prepare the statement of financial position 3.Prepare the closing entries 4.Calculate the following ratios assuming the company’s total assets were $2,500,000 at December 31, 2020. a.Current ratio b.Debt-to-equity ratio c.Total asset turnover ratio d.Return on assets e.Return on equity arko42003@gmail.com
*ymportantSoSElectronics.⑦IncomeStatementFortheYearendedDec312021in($)ServiceRevenue$20,000SalesRevenue1,296,oroLess:SalesDiscount-12,000Less:SalesReturns-13,000Netsales1.291,500CostofGoodssold3555,000GrossProfits936,500operatingExpensesMarketingexpenses$15,000RentExpense28,000SupplyExpense61,ourSalaryExpense225,000BaddebtExpense3,000Depreciation·42,000
TotaloperatingExpense$374,000Totaloperatingincome562,SeootherRevenue&ExpenseInterestExpense$-8,500PentRevenue1,000InterestRevenue500TotalotheRevenues&Expense-7,000IncomebeforetaxPutin555,500journalIncometaxExpenseentrie166,650Notincome388,850Earningspershare4.74Netincome355,850=#-Aug#shares8084,theevery2Sharegenerates4.74metincome
②soselectronics.StatementofFinancialPositionAsatDec31,2021in(9)AssetsCurrentAssets1.Cash$94,8002.Shortterminv5,0003.Acc.receivable$145,000lessAFDA15,000130,000PrepaidRent7,000MerchandiseInv.185,000Short-termNotesReceivable60,000PrentReceivable1,000InterestReceivable500supplies10,000TotalCurrentAssels488,300Non-CurrentAssetsland385,000Funtuequiena470,00037,0001133,000Building1,600000AccDepBuilding-100,0001;500,000TotalNon-CurrentAsset2,315.oTotalAsset2,806,300S
Liabilities&ShareholdersEquityLiabilitiesCurrentliabilitiesAccpayable$79,000UnearnedRevenue20,000Salariespayable40,000Interestpayable11,000Incometaxpayable166,650TotalCurrentliabilities316,650Non-currentliabilitiesLongtermNotespayable200,000Totalnon-currentliabilities200,000Totalliabilities516,650ShareholdersEquity~preginingtowenicencContributedCapitalwout800,000RetainedEarnings-1,489,650⊥1,210,000+385,850-109,200TotalshareHoldersEquity272,289,650TotelliabilitiesIShareholdersEquity2,506,300
③ClosingEntriesDateAccountDebitCreditDraServiceRevenue20,00031SalesRevenue1,296,000Rent1I1,000Interest"11500Salesdise.12,000SalesRahmAll13,000IncomeSummary①1293,000DecIncomeSummary2904,15031Mark.Expense15,000Rent25,000supplies.1161,000Salaries"225,06EBaddebt"3,000Repreciation"I42,000Interes--11S,500Incometax 1166,650costofGoods355,00↑netincome.DecIncomeSummary355,550331ReturnedEming389,550109,200DeaReturnedBalmgDeclare109,200IncomeSummaryaiRetainedEarnings1,210,000984,150389,500388,550109,200385,5501,489,650balantstret
⑪a)CurrentRationCurrentAsset48350Currenthiabilities⊥=1.54Balancesheet⊥Payshort-termliabilities.High-strongliquidity.b)DebttoequityratioLiabilities=516,000=0.24Equity2,289,650InCompanyreliesmoneonI$Equitytofinanceits-②totalHowmanySalveyatoset.assetsIncome4-Netsales-1,291,500=0.49statementAugtotalAssets2,653,150#Balance(Beg+Endingly
D)Returnonassets.388,850+8,500(1-0.30)=0.152,653,150x)HowmuchprofitforgenenyHighermonaHowmuchprofit3)ReturnofEquityearnedfor$2Netincome=388,850=0.1897Avg.Equity2,049,285⊥Beginning(FirsttrialBalance)⊥(Balancesheet)2
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.43 CHAPTER 6REVENUE RECOGNITION, RECEIVABLES AND BAD DEBT6.1 Revenue Recognition Revenue is recognized when the following conditions are met: •The seller has transferred to the buyer the significant risks and rewards of owning the goods •The seller retains no control over the goods sold •The amount of revenue earned can be measured reliably •It is probable that the economic benefit (payment) will be received by the seller •The cost incurred or to be incurred can be measured reliably Revenue Recognition with Shipping Terms FOB Destination FOB Shipping Point When is the transaction recorded? When goods reach the buyer When goods leave the seller Who pays for the shipping costs? Seller Buyer How are shipping costs recorded? Shipping Expense or Freight-outInventory or Freight-in arko42003@gmail.com⊥/ymportant
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.44 6.2 Contra-Revenues and Net Sales Contra-RevenuesAccounts that decrease the amount of revenue collected from customers. •Credit card discounts •Sales discounts •Sales returns and allowances Credit Card Discounts•Fees incurred by merchant (seller) when a customer pays with a credit card like MasterCard, VISA, American Express, etc. •Percentage deducted from the sale amount and kept by the credit card provider. •Recorded as a cash sale by the seller because the cash is received from the credit card provider. Example: Provided a service to a customer for $1,000, the customer paid with their credit card. The credit card company takes a 3% fee on all credit card transactions. Date Account Debit Credit Jun 18 Cash 970 Credit card discount 30 Sales revenue 1,000 arko42003@gmail.comInaturaldebit
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.45 Sales Discounts•Discount given to a customer for paying their account within the discount period. •Discount only recorded if a customer receives the discount, not at the time of the original sale. Example: Customer purchased merchandising for $5,000 with the terms 2/10, net/30. The cost of the merchandise was $1,000 and the customer returned after 3 days to pay their account. Date Account Debit Credit Apr 12 Accounts receivable 5,000 Sales revenue 5,000 Cost of goods sold 1,000 Inventory 1,000 Apr 15 Cash 4,900 Sales discount 100 Accounts receivable 5,000 Sales Returns and Allowances•Used to record returns from customers.•Returns always recorded at the original sale priceoRefund is given if the customer has already paidoCredit is given (reduction of account) if the customer has not paid yet.•Merchandise returned to inventory and COGS cancelled only if the merchandise is not defective and can be resold.Example: Customer returns $2,000 worth of merchandise for a refund. The merchandise had originally cost the company $500. Date Account Debit Credit Aug 23 Sales returns and allowances 2,000 Cash 2,000 Inventory 500 Cost of goods sold 500 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.46 Net Sales•Actual sales amount after deducting contra-revenue accounts. •Represents the real amount of revenue earned by the company. Gross Profit Margin•Measures how effective management is at selling goods and services for more than it cost to purchase of produce them.•Measures how much gross profit is generated from every sales dollar.•The higher the ratio is the better.Gross Profit Margin ࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?arko42003@gmail.comReco,a
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.47 6.3 Bad Debt When customers can purchase goods and services on an open account (account receivable), the company creates the risk of some customers not paying their balances, this is called bad debt. Allowance for Doubtful Accounts (AFDA) •Contra-asset to accounts receivableoReduces the net realizable value of accounts receivable.•Represents the portion of receivables that the company estimates it will not collect.Bad Debt Expense Estimate The expense that represents additions to the company’s doubtful accounts (AFDA). Date Account Debit Credit Dec 31 Bad debt expense 5,000 Allowance for doubtful accounts 5,000 Writing-off Uncollectible Accounts •Closing an account that is deemed to be definitely uncollectible (100% probability of not collecting). •Reduces AFDA and accounts receivable Date Account Debit Credit Aug 23 Allowance for doubtful accounts 2,300 Accounts receivable 2,300 arko42003@gmail.com-wentBankrupt
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.48 Recoveries •Collection from customers that were previously written-off•Recovery recorded in 2 entries:oFirst entry: reverses the write-offoSecond entry: records the collection in cashDate Account Debit Credit Sep 15 Accounts receivable 1,000 Allowance for doubtful accounts 1,000 Cash 1,000 Accounts receivable 1,000 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.49 Example: Journal Entries Prepare the following journal entries for ABC Corporation: Jan 4: Sold 50 units of merchandise to Smith LLC for $100 each. The terms were FOB shipping point and 2/30 n/30. The items were shipped on January 7th by UPS at a cost of $100. The customer received the goods on January 10th. Jan 15: Smith LCC returned 5 units and paid the remaining balance in full. Feb 11: Smith LLC returned another 8 units. Feb 12: Sold 100 units of merchandise to Brown Corp for $120 each. The terms were FOB destination and 2/10 n/30. The goods were shipped the same day at a cost of $80 and the customer received them on February 18th. Feb 18: Purchased 1,000 units of merchandise for $10 each from Gomez Inc The purchase was paid by e-transfer and the good were shipped under the terms FOB shipping point and the cost of shipping was $150. Mar 6: Sold 40 units of merchandise to Orange Corp for $30 each who elected to pay with his MasterCard. ABC Corporation’s payment processing charges the company a 3% fee forall credit card transactions. Apr 7: Accepted Cheng Corp’s Inc.’s 3-month note for a sale made last year. The customer had experienced cash flow issues due to the pandemic and has asked ABC Corporation to grant a payment extention. Under the new terms, the customer is required to pay back their entire balance of $20,000 on July 7th, the interest rate on the note is 8% starting today. May 11: Received a letter from Armco Inc. stating that the company had declared bankruptcy. Immediately wrote off their $6,000 account receivable. Apr 12: Received a payment of $5,000 from Bluefin Inc. This customer’s account had been previously written off. arko42003@gmail.comunitCost=$201unit4500·0.2
DateAccountDebitCreditJanAccountReceivable5,00007SalesRevenue5,000CostofGoods1,000Inventory1oJanSalesReturns50015AccountReceivable500Inventory100costofGoods100Cash4,410Salesdiscount90AccountReceivable4,500FebSalesReturn80011Cash199%So)784salesdiscount(2%800)16Inventory160CostofGoods160FebAccountReceivable12,00018SalesRevenue12,000SShippingExpenseSoFebCash8012CostofGoods2,000-Inventory2,000
FebInventory10,00018Cash10,000Inventory150Cash150MarCash1,16406CreditCarddiscount36SalesRevenue1,200CostofGoodsforInventory800AprNotesReceivable20,00007AccountReceivable20,000MayAllowancefordoubtfull6,000IlAccountReceivable·6,000AprAccountReceivable5,00012Allowancefordoubtfullaccount5,000Cash5,000AccountReceivable5,000
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.52 6.4 Percentage of Receivables MethodThis method is used to estimate the company’s doubtful accounts by taking a percentage of the accounts receivables. Aging of Receivables •Older accounts receivables have a higher probability of not paying. •Probabilities of not collecting are determined by the company and are different for every company. Estimating Bad Debt Expense •Amount needed to reach the desired ending balance from the unadjusted balance. •Unadjusted balance is found using the previous AFDA, write-offs and recoveries in the current period. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.53 6.5 Percentage of Sales MethodThis method estimates the bad debt expense for the year as a percentage of net credit sales. Net Credit Sales •Sales made on account •Amount after deducting discounts and returns •If credit sales aren’t given, use sales.Determining Ending AFDA Bad debt expense is added to unadjusted balance arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.54 6.6 Receivables Turnover Ratio and Average Collection Period Receivables Turnover Ratio•Liquidity ratio •Measures a company’s ability to collect from customers •Higher is better oHigh ratio means the company collects often oCollecting often is a sign of strong liquidity Receivables Turnover Ratio Formula Net Credit SalesAverage Net Accounts ReceivableAverage Collection Period •Average number of days it takes to collect from a customer.•Lower is better•Ideal collection period is longer than the discount period but lower than the credit term.Average Collection Period Formula 365Receivables Turnover Ratioarko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.55 Example: Revenue recognition and bad debt On December 31, 2020 Mazza Inc had the following accounts receivable: Age Amount Uncollectible % Not due $500,000 2% 1 –30 days past due 320,000 8% 31 –60 days past due 160,000 15% 61 –90 days past due 90,000 30% 91 –120 days past due 25,000 60% 121 + days past due 10,000 100% Additional Information •During the year, the company wrote off old customer accounts totalling $50,000 and recovered written off accounts totalling $10,000. •Net credit sales in 2020: $10,000,000 •Accounts receivable, January 1: $1,200,000 •Allowance for doubtful accounts, January 1: $50,000 •All sales are on account and given the terms 3/15, n/45 Requirements a)Record all necessary transactions at the end of the year. b)Compute the receivables turnover ratio and the average age of receivables Date Account Title Debit Credit arko42003@gmail.com-Dwrite116,000
AgeAmountUncollectible%DoubtfulNotedue2%10,0001-30I8%25,60031-60$500Ace5%2,40061-9030%27,00091-12060%15,000121+188%balance-AFDAEndingX-101,600DecAllowancefordoubtfullAccount10,000*3)AccountReceivable10,000DecBadClebtExpense105,6003)AllowancefordoubfullAccount105,600~owanceforploubfullAccountwrite50,00046,000Beg.Balance10,000Recovery10,000-debitballance4,000-5,600Baddebt101,600EndingBalance.
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.57 6.5 Bank Reconciliation The process of comparing the ending balances of the bank statement and the company’s books to determine the actual amount of cash the company has, because these two balances typically do not match. Adjusting the Bank Statement Adjusting the Book Balance Bank statement balance + Deposits in transit –Outstanding checks +/–Bank errors Correct cash balance Book balance + Deposits by bank –Service charges –NSF cheques +/–Book errors Correct cash balance Example: Bank Reconciliation The cash account for SOS Corp shows a ledger balance of $2,946.90. on June 30, 2021. The bank statement as at that date indicates a balance of $3,412.50. When the statement was compared with the cash records, the following was found: ▪The company was charged $50 in service fees in April. ▪Outstanding cheques totalled $895.60. ▪The bank incorrectly charges the company’s account the monthly service charge twice. ▪Upon reviewing the bank statement, the company noticed it had received a $1,000 e-transfer from a customer. The money was automatically deposited into the company’s account.▪The company earned $70 of interest during the month on its bank balance. ▪The bank statement included a memo from the bank stating that a $300 cheque received from a customer had been returned as NSF. ▪In reviewing the company’s general ledger, the manager noticed that the bookkeeper had incorrectly recorded a cash sale as $100, when it was in fact $1,000. ▪On June 30thin the afternoon, a sale was made to a customer for $2,000. The customer paid by cheque, but the manager did not have time to deposit it before the end of the day, the cheque will be deposited on July 1st. arko42003@gmail.com
SOSCOMDBankReconciliationJune30th2021BankStatement3,412.50Add:Depositintransit2,000.00bankerror50.002,050.00895.60Les:Outstandinge4,566.90BookBalance2,946.90Add:Depositsbybank1,000.00Interest70.00Backerror900.001,970.00less:Servicecharges-50.00NSFcheques-300.004,566.98
onlydoJournalEntry.JuneCash1,00038Accountreceivable1,000JuneCash7030InterestRevenue70JuneServiceExpense5030Cash50JuneAccountReceivable30030Cash300JuneCasalesRevenue90030900
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.60 CHAPTER 7INVENTORY AND COST OF SALES 7.1 Types of Inventory Depending on the nature of the business, we can find several inventory accounts in a company’s books. •Merchandising Company: Buys and sells finished goods oInventory Account: Merchandise Inventory •Manufacturing Company: Produces and sells finished goods oInventory Accounts: Raw Materials, Work in Process, and Finished Goods Inventory 7.2 Inventory Systems Perpetual Inventory Inventory and cost of goods sold are recorded whenever an event affects inventory or cost of inventory. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.61 Recording a Sale Date Account Title Debit Credit 12-Apr Cash or Accounts receivable 1,000 Sales revenue 1,000 Cost of goods sold 200 Inventory 200 Recording a Purchase of Inventory Date Account Title Debit Credit 12-Apr Inventory 2,000 Cash or Accounts payable 2,000 Recording a Purchase Return Date Account Title Debit Credit 12-Apr Cash or Accounts payable 500 Inventory 500 Recording a Purchase Discount Date Account Title Debit Credit 12-Apr Accounts payable 500 Inventory 500 Recording Cost of Shipping Purchased Inventory Date Account Title Debit Credit 12-Apr Inventory 50 Cash 50 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.62 Periodic Inventory Inventory and cost of goods sold is adjusted only at the end of the period. Recording a Sale Date Account Title Debit Credit 12-Apr Cash or Accounts receivable 1,000 Sales revenue 1,000 Recording a Purchase of Inventory Date Account Title Debit Credit 12-Apr Purchases 2,000 Cash or Accounts payable 2,000 Recording a Purchase Return Date Account Title Debit Credit 12-Apr Cash or Accounts payable 500 Purchase Returns and Allowances 500 Recording a Purchase Discount Date Account Title Debit Credit 12-Apr Accounts payable 500 Purchase Discounts 500 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.63 Recording Cost of Shipping Purchased Inventory Date Account Title Debit Credit 12-Apr Freight-in 50 Cash 50 Adjusting Journal Entry to Record COGS Date Account Title Debit Credit Dec 31 Cost of Goods Sold 16,550 Inventory (ending) 60,000 Purchase returns and allowances 2,000 Purchase discounts 3,000 Freight-in 50 Purchases 31,500 Inventory (beginning) 50,000 Computing Cost of Goods Sold arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.64 7.3 Inventory Costing Methods First In, First Out (FIFO) •Inventory sold in the order it is purchased, in other words the oldest units are sold first. •COGS is the sum of the cost of the individual units given to the customer. •Perpetual and Periodic have same results. Weighted Average Method •Inventory is not sold in a particular meaningful order. •COGS is based on the weighted-average cost of all the inventory on hand. •Perpetual and Periodic do not have the same results: oPeriodic: A single weighted-average cost is computed at the end of the period and used for all calculations. oPerpetual: Weighted-average cost changes as more inventory is purchased at different prices. Weighted-Average Cost Formula Cost of goods available for saleUnits Available for SaleSpecific Identification Method In this method, the cost of each item sold is individually identified and recorded as the cost of sale. Typically, this method is used for very expensive products like aircrafts, yachts, buildings, fine art, etc. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.65 7.4 Inventory Impairment Companies must always report their inventory at the lower of cost or net realizable value (LCNRV). This means that if inventory can realistically be sold for more than its cost, then it would be recorded at cost, but if the net realizable value falls below cost, an adjustment must be made to write down the inventory’s value.Journal Entry to record a $2,000 loss in inventory value Date Account Title Debit Credit 12-Apr Cost of goods sold 2,000 Inventory 2,000 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.66 7.5 Inventory Turnover Ratio and Average Days to Sell Inventory Turnover Ratio •Liquidity ratio •Measures how often the company sells its inventory •Higher means better oA high ratio means the company is selling its inventory often oSign of strong liquidity Inventory Turnover Ratio Formula Cost of goods soldAverage inventoryAverage Days to Sell •Measures how many days it takes to sell inventory on average •Lower is better oLow ratio means inventory remains on hand for less time Average Days to Sell Formula 365Inventory Turnover Ratioarko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.67 Example: Inventory Costing –FIFO Perpetual ABC Inc. has the following transactions effecting its inventory during 2021. All transactions were on account and all sales were made at a selling price of $12.00 per unit. Date Units Unit Cost Total Cost Jan 1 –Beginning Inventory 2,500 $5.60 $14,000 Jan 11 –Purchase 3,000 $5.90 $17,700 Feb 12 –Sale 4,000 Apr 9 –Purchase 3,500 $6.10 $21,350 May 11 –Purchase 4,000 $6.40 $25,600 May 18 –Sale 2,500 Compute COGS and Ending Inventory using FIFOand the perpetual inventorysystem and journalize the transactions on February 12 and April 9. Date Account Title Debit Credit arko42003@gmail.com
FiFoperpetualDateAccountFebAccountReceivable$48,00012SalesRevenue$48,000Costofgoods$22,850,$22,850InventeonyApr.Inventory$21,35009Accountpayable$)21,350
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.68 Example: Inventory Costing –Weighted-Average Perpetual ABC Inc. has the following transactions effecting its inventory during 2021. All transactions were on account and all sales were made at a selling price of $12.00 per unit. Date Units Unit Cost Total Cost Jan 1 –Beginning Inventory 2,500 $5.60 $14,000 Jan 11 –Purchase 3,000 $5.90 $17,700 Feb 12 –Sale 4,000 Apr 9 –Purchase 3,500 $6.10 $21,350 May 11 –Purchase 4,000 $6.40 $25,600 May 18 –Sale 2,500 Compute COGS and Ending Inventory using the weighted-average methodand the perpetual inventorysystem, and use these results to compute the Inventory Turnover Ratio and Average Days to Sell. arko42003@gmail.com
UnilsUnitcostTotalcostJanOI2,5005.6014,000.002,70055.500Jan3,0005.9017,700.00115,5005.7631,700.00Feb12-4,0005.76-23,040(COGS)Ap3,5006.1021,350May40006.4025,600May7890006.1855,610I-2,5006.18-15,450(Cogs)6,50040,160(Ending/ynventingCOGS:15,450+23,040=38,490Ending/inventory=40,160
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.69 Example: Inventory Costing –Weighted-Average Periodic ABC Inc. has the following transactions effecting its inventory during 2021. All transactions were on account and all sales were made at a selling price of $12.00 per unit. Date Units Unit Cost Total Cost Jan 1 –Beginning Inventory 2,500 $5.60 $14,000 Jan 11 –Purchase 3,000 $5.90 $17,700 Feb 12 –Sale 4,000 Apr 9 –Purchase 3,500 $6.10 $21,350 May 11 –Purchase 4,000 $6.40 $25,600 May 18 –Sale 2,500 Compute COGS and Ending Inventory using the weighted-average methodand the periodic inventorysystem. Prepare the journal entry to record the sale transactions on Jan 11 and Feb 12; and to adjust inventory at the end of the year. arko42003@gmail.com
WAC=Begynv.+Purchased($)Begynr+Purchased(units)14,000+17,700+21,350+25,6002.500+3,000+3,500+4,000=6.05/unitCogs:UnitSoldXWAC(4,000+2,5007.6.05=39,325EndingInventoryUnitsLeftxWAC6,500·6.0539,325JanPurchases11Accountspayable17,700,7,700FebAccountreceivable45,00012SalesRevenue48,000DecEndingInventory39,32531Cons39,325Purchases64,650Inventory14,000
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.70 Example: Inventory Costing –Specific Identification ABC Inc. has the following transactions effecting its inventory during 2021. All transactions were on account and all sales were made at a selling price of $12.00 per unit. Date Units Unit Cost Total Cost Jan 1 –Beginning Inventory 2,500 $5.60 $14,000 Jan 11 –Purchase 3,000 $5.90 $17,700 Feb 12 –Sale 4,000 Apr 9 –Purchase 3,500 $6.10 $21,350 May 11 –Purchase 4,000 $6.40 $25,600 May 18 –Sale 2,500 Compute COGS and Ending Inventory using the specific identification methodassuming 25% of the units sold on February 12 were taken the beginning inventory and the rest from the purchase on January 11thand that a quarter of the units sold on May 18thwere from the units purchased on April 9thand the rest from May 11th. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.71 Example: Inventory Impairment ABC Inc. has the following transactions effecting its inventory during 2021. All transactions were on account and all sales were made at a selling price of $12.00 per unit. Date Units Unit Cost Total Cost Jan 1 –Beginning Inventory 2,500 $5.60 $14,000 Jan 11 –Purchase 3,000 $5.90 $17,700 Feb 12 –Sale 4,000 Apr 9 –Purchase 3,500 $6.10 $21,350 May 11 –Purchase 4,000 $6.40 $25,600 May 18 –Sale 2,500 Upon reviewing its inventory on December 31, 2021 ABC concludes that the net realizable value of its remaining inventory is $4.75 per unit. Assume the company uses the FIFO costing system Date Account Title Debit Credit arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.74 RATIO CHEAT SHEETNAMEFORMULAEXPLANATIONNET PROFIT MARGIN (PROFIT MARGIN)Net IncomeNet SalesHow much profit is earned for every $1 of sales. If it’s high it means that there is efficient management of sales and expenses GROSS PROFIT MARGINGross ProfitNet SalesHow much gross profit is earned for every $1 of sales. If it’s high it means there is efficient management of cost of goods sold. CURRENT RATIOCurrent AssetsCurrent LiabilitiesMeasures how many times the company can pay its short-term liabilities using its short-term assets. If it’s high it means the company has strong liquidity. DEBT-TO-EQUITYTotal LiabilitiesTotal Shareholders' EquityMeasures how the company is financing its assets. A ratio higher than 1 means the company relies more on debt, a ratio lower than 1 number means the company relies more on equity. TOTAL ASSET TURNOVERSales RevenueAverage Total AssetsHow many sales dollars are made for every $1 of total assets. If it’s high it means that there is efficient management of assets. RETURN ON EQUITY (ROE)Net IncomeAverage Shareholders' EquityHow much profit is earned for every $1 of shareholders’ equity. The higher the ratio the more profit the company is earning for its shareholders and is likely to lead to a higher stock price. RETURN ON ASSETS (ROA)Net Income + Interest Expense(1-T)Average Total AssetsHow much profit is earned for every $1 of total assets. The higher the ratio the more efficiently the company’s is using its assets to earn income. T = Income Tax Rate INVENTORY TURNOVER RATIO ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?How many times per year the company sells its average inventory. A higher ratio indicates stronger liquidity. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.75 AVERAGE DAYS TO SELL INVENTORY 365࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?How many days, on average, it takes to sell inventory. A lower number indicates stronger liquidity. RECEIVABLES TURNOVER RATIO ࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?How many times per year the company collects its average accounts receivables. A higher ratio indicates stronger liquidity. AVERAGE COLLECTION PERIOD 365࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?࠵?࠵?࠵? ࠵?࠵?࠵?࠵?࠵?How many days, on average, it takes to collect from customers. Ideally this number is higher than the discount period but lower than the credit period. Important information about ratios:Most ratios have “average” something in them. The average means that you are supposed to average the beginning and ending amounts. •For example: Average Total Assets = Total Assets (Jan 1) + Total Assets (Dec 31)2arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.78 Question 1 ACCO Ltd. is a placement agency for companies in need of temporary accountants for their business. The company has been established for the past 15 years and has presented the following trial balance for its most recent year end being December 31, 2009. Account Debit Credit Trade receivable 186,000 Trade Payable 109,100 Accumulated Depreciation –Equipment 38,000 Cash 154,500 Common Shares (45,000 shares) 792,650 Dividend Revenue 7,350 Cost of goods sold 643,100 Equipment 604,000 Interest expense 800 Land 169,500 Long-term investments 149,500 Meals & Entertainment expense 147,700 Merchandise inventory 226,700 Note payable, 9%, due June 1, 2010 24,500 Note receivable, 5%, due April 30, 2010 37,500 Prepaid Insurance 5,300 Retained earnings - January 1, 2009 266,000 Salaries expense 263,000 Sales 1,426,000 Software expense 2,500 Warehousing expenses 73,500 Total 2,663,600 2,663,600 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.79 Additional information: •Depreciation on the equipment for 2008 is $25,000 and for 2009 is $20,000. •The note receivable was issued on November 1, 2009 by COMM Ltd. •The note payable was issued on September 1, 2009 to Concordia Credit Union. The principal and interest of 9 percent are payable on June 1st, 2010. •Sales Revenues has been derived from a major consulting agreement between ACCO Ltd and Maggil Inc. The value of the entire contract is for $4,800. As at December 31, 2009, 80% of the work required under the contract has been performed. The accountant has already recorded the entire $4,800 as revenue since the majority of the work has been performed. Cash has been collected from customer. •On January 7, 2010, ACCO Ltd will pay its biweekly salaries of $12,000. Time sheets have indicated that 40% of this amount relates to work that was performed during 2009. •ACCO Ltd. has one annual insurance policy that was purchased on March 31, 2009; the entire purchase price was debited to Prepaid Insurance. •ACCO Ltd. is subject to a combined federal and provincial income tax rate of 25%. Required: a.Prepare the adjusting journal entries based on the additional information b.Prepare, in good form and proper style, a multi-step statement of earnings (income statement) c.Prepare, in good form and proper style, a classified statement of financial position (balance sheet) arko42003@gmail.com
Question1.DecDepreciationExpense20,000.O31AccumulatedDepreciation20,000.voMustmentDecNotesReceivable312.5031LintesRevenue312.50ExpenseDecNotespayable735.0031hAntiestpayable735.00DecSalesRevenue960.003)unearnedRevenue960.00DecWageExpense4,500.0031wagepayable4,500.00DecInsuranceExpense3975.0031PrepaidInsurance3975.00DecIncometaxexpense31Cash
DepreciationExpenseAccumulatedRpI38,00024,00020,000-20,00055,000AnterestInterestNotesReceivableSalesRevenue37,500312.50---312.5837,812.50312.50InterestExpenseInterestpayable800II7351535SalesRevenueUnearnedrevenue960/1,426,0001960.01,425,040960WageExpensesWagespayable26I4,8004,500267,800InsuranceExpensePrepaid/nsmane39755,30039751325
AccoltalIncomestatementFortheyearendofDecil2009SalesRevenue1,425,040CostofGoods643,100Grossprofit781,946OperatingExpenseWarehouseExpense73,500WagesExpense267,800InscuanceExpense3,975SoftwareExpense2,ScoMeals&EnterExpense147,700DepreciationExpense20,000TotaloperatingExpense2661465otherRev.&ExpenseInterestexpense
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.80 Question 2 The following events occurred during the first month of operations for ABC Corp. a company specialized in providing energy products to automobile manufacturers. Jan.1stThe shareholders invested $300,000 in cash, a land worth $100,000 and a building worth $250,000 in exchange for common shares. Jan 2ndIn order to develop a research facility, ABC acquired computer equipment for $175,000. The purchase price was paid 20% in cash and the remaining on a note. Jan 15th ABC issued an advertisement in the newspaper in order to recruit a research lab specialist. The ad will run throughout the month and will cost $1,500. The invoice was received on the 15thof the month. Jan 31stThe research specialist worked for the last two weeks of the month. His salary of $5,500 was paid on the last day of the month. Jan 31st The company started shipping products during the last week of the month. During that period, sales amounted to $265,000, all received in cash except for $15,000 which was sold on account. Jan 31stAt the end of the month, ABC received a bill from Lleb Canada for its telephone, internet and cell phone charges. The total of the invoice amount to $750 to be paid by the end of the following month. In addition, the company paid the newspaper company for the advertisement services provided. Jan 31st To ensure the survival of the company in case of an incident, the company prepaid $5,000 for an annual insurance policy with coverage starting at the beginning of the following month. Jan 31stGiven the success of the company, the board of directors declared and paid a dividend of $15,000 arko42003@gmail.com
DateAccount5)Debit$CreditJanCash300,000OlLand100,000Building250,000Commonshares650,000JanComputerExpense175,00002Cash35,000Notespayable140,000JanMarketingExpense1,50015Accountpayable1,500JanSalaryExpense5,50031Salarypayable5,500JanCash250,0003)-Accountreceivable4-15,000SalesRevenue265,000JanAccountpayable1,5003)Cash1,500InvoiceExpense750Invoicepayable750JanuranceExpense5,00031*PrepaidExpenseCash5,500JanDividenddared15,0003)Cash15,IEE
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.82 Question 3 (Closing entries, financial statements and financial ratios) Jon Horton Ltd, with a June 30, 2009 year end, is a lead merchant in coffee, pastries, and sandwiches. Jon Horton chains exist throughout Canada with a minor presence in the United States. At the end of 2009 fiscal year of the company, Jon Horton Ltd. presented the following trial balance. All adjusting entries have been processed and audited by the company’s auditors. Debit Credit Trade Payable $1,400 Trade receivable $41,500 Accumulated Depreciation, machinery 3,800 Depreciation expense 2,400 Cash 11,100 Cost of goods sold 65,600 Credit Sales revenue 147,500 Dividends payable 3,700 Entertainment expenses 1,500 Income tax expense 9,265 Income taxes payable 7,500 Insurance expense 500 Interest expense 435 Interest payable 1,800 Interest revenue 300 Machinery, at cost 13,900 Merchandise inventory 35,500 Note payable, due 2011 10,200 Note receivable, due 2012 6,700 Prepaid Insurance 1,500 Rent revenue 800 Retained earnings, Jan. 1, 2004 25,500 Salaries expense 26,300 Salaries payable 3,900 Sales Discount 2,250 Share capital (20,000 shares in 2008 & 2009) 14,750 Telephone expense 4,400 Unearned Rent revenue 1,700 Total $222,850 $222,850 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.83 You, consultant, have been hired by Jon Horton Ltd to help with the preparation of the financial statements of the company. The company’s CFO has informed you that no additional entries are required except for the closing entries of the year. Given the success of the company in the last year, the value of the company’s share is now at $20/share. Select Information from June 30, 2008 trial balance: •Trade Receivable: $30,000 •Total Liabilities: $35,000 •Total Shareholders’ Equity:$80,000 Required: 1.As indicated by the CFO, prepare the closing entries required as at June 30, 2009 for the company 2.Prepare in good form and proper style a multi-step statement of earnings (income statement) for the year ended June 30, 2009 3.Prepare in good form and proper style a classified statement of financial position (balance sheet) as at June 30, 2009 4.Prepare the following ratios and explain the meaning of each a.Current Ratio b.Debt to Equity Ratio c.Return on Asset (ROA) Ratio d.Return on Equity (ROE) Ratio e.Trade Receivable Average Collection Period f.Earnings per Share g.Price Earnings Ratio arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.90 Question 4 Prepare journal entries & adjusting entries to record the following transactions. Show your computations. 1.SOS Tutoring purchased cooking supplies for $5,000 on September 1st. Prior to the purchase; SOS Tutoring had $1,400 of supplies on hand. By the end of the month, only $700 of supplies was still left. 2.On July 1st, the company purchased office furniture for $25,000. The expected life of the furniture is 5 years with a salvage value of $2,500. The company’s yearend is on December 31st. 3.JMG Inc. issued a note payable on September 1, 2009 to AMC Ltd in exchange for merchandise inventory. The principal of $30,000 along with interest at a rate of 8% was due on January 1st, 2010. JMG’s year end is December 31st. 4.ACCO Ltd. sold inventory costing $50,000 at a price 20% greater than cost. The amount was collected in cash at the moment of sale except for $10,000 which was sold on account. ACCO Ltd.’s year end is December 31st. 5.ABC Inc. purchased a 15-month insurance policy on April 1, 2008 for $22,500. The company’s yearend is on November 30, 2008. 6.Hulk Coffee Shop Inc. paid $7,500 on November 1, 2009 for 3 months of rent. The company’s yearend is on November 30, 2009. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.94 Question 5 Venture Corp. is a group of doctors, dentists, professional sports players and celebrities with excess funds that wish to find small companies with great innovative ideas and invest in them. Several of the small companies present their idea to Venture Corp. under a televised show broadcasted on national TV. The following information has been derived from the past three-year financial statements of Acer Inc., one of the small companies looking for investment from Venture Corp. Statement of financial position (balance sheet), December 31 2009 2008 2007 Current assets Cash 50,000 45,000 94,000 Trade receivable, net 130,000 120,000 110,000 Merchandise Inventories 250,000 230,000 195,000 Other current Assets 45,000 53,000 42,000 Total current assets 475,000 448,000 441,000 Property Plant & Equipment, net 196,000 191,000 175,000 Total assets 671,000 639,000 616,000 Current liabilities Trade Payable 175,000 195,000 185,000 Accrued Liabilities 1,000 6,500 21,000 Total current liabilities 176,000 201,500 206,000 Long term liabilities 230,000 250,000 295,000 Total liabilities 406,000 451,500 501,000 Shareholders’ equity Common shares 110,000 95,000 65,000 Preferred shares, note 5 25,000 25,000 25,000 Retained earnings 130,000 67,500 25,000 Total shareholders’ equity 265,000 187,500 115,000 Total liabilities and shareholders’ equity 671,000 639,000 616,000 arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.95 Statements of Earnings (income statement) 2009 2008 Net sales $723,700 $694,000 Cost of goods sold 347,350 344,500 Gross margin 376,350 349,500 Operating expenses 183,500 179,750 Income from operations 192,850 169,750 Interest expense 37,525 39,450 Income before income tax 155,325 130,300 Income tax expense 38,831 32,575 Net income $116,494 $97,725 Additional Information: 1.The common shares are traded on the stock exchange. At the end of 2009, the value of the share was $15.00 and at the end of 2008, the value per share was $14.00 2.The number of shares outstanding on the market is as follows: a.2009: 25,000 b.2008: 15,000 c.2007: 10,000 3.All sales are made on credit. 4.The company’s income tax rate is 25%.5.The preferred shares are cumulative, no par value, $2.50, 10,000 shares authorized, 2,000 shares issued and outstanding You, consultant, have been hired by Venture Corp. to assist in the analysis of the financial statements and provide a recommendation whether Venture Corp. should invest or not into this company. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.96 Required: Compute the following ratios for the current and past year in order to assess if it has improved or not. Show your computation and provide an overall recommendation on whether Venture Corp. should invest in Acer Inc. or not. •Current Ratio •T/R Average Collection Period •Working Capital •Debt to Equity Ratio •Earnings Per Share •Net Profit Margin Ratio •Return on Equity Ratio (ROE) arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.101 Question 6 AIT Inc. is an importer of European food products from several countries including France, Spain and Italy. The company has been established by Mr. Alfred Ingrid in Montreal, QC back in 2005. Ever since, the company has experienced significant success in its operations and profitability. In an attempt to expand its operations to Ottawa and Toronto, AIT is requesting an important loan from the MBO, the local bank. As part of the application process, MBO has request financial statement for the 2009 fiscal year. The following information is the trial balance of AIT as at May 31, 2009 Trade Payable 61,600 Trade Receivable 64,000 Accumulated Depreciation –Building 7,000 Accumulated Depreciation –Machinery 19,000 Allowance for Doubtful Accounts 700 Building 95,000 Cash 44,600 Cost of Goods Sold 142,000 Insurance Expense 6,350 Interest Expense 800 Inventory 54,900 Land 43,000 Long Term Investments 73,000 Machinery 28,000 Rent Expense 24,350 Retained Earnings 98,000 Salaries Expense 32,500 Sales Revenue 223,200 Share Capital 209,500 Transportation Expense 10,500 619,000 619,000 You, accountant, have been hired by AIT to prepare the financial statements for the year ended June 30, 2009. The CFO has informed you that no one has processed any of the December transactions as the bookkeeper has suddenly resigned. arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.102 You have gathered the following information for the month of June 2009 transactions: June 1 AIT acquired Computer Equipment for a cost of $60,000 from Best Purchase. AIT signed a note payable to Best Purchase for the entire amount. The note is interest bearing at a rate of 10% and is due on December 31, 2010 June 3 Received payment from a customer for a sale that was made on May 27. The sale amount was $20,000 with terms 2/10, n/30 June 10 AIT made sales of $40,000 subject to terms 2/10, n/30. The cost of the inventory sold amounted to $17,500 June 30 AIT received utility bills for $7,000 to be paid in July 2009 While reviewing your emails, you notice a reminder not to forget to record adjusting entries for the following items: •Depreciation on the Machinery for $1,500 •Depreciation on the Building for $7,000 •Depreciation on the Computer Equipment for $6,000 •Unpaid Salaries of $2,000 •Interest on Note Payable from June 1 •Income Taxes at a rate of 25% Required: 1.Prepare the journal entries for the month of June along with all the adjusting entries for the year ended June 30, 2009 2.Prepare, in good form and proper style, a multi-step statement of earnings (income statement) 3.Prepare, in good form and proper style, a classified statement of financial position (balance sheet) arko42003@gmail.com
COMM 217 –Introduction to Financial Accounting –Midterm © Wizedemy Inc. All Rights Reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or sorted in a database or retrieval system, without the prior written permission of Wizedemy Inc.102 You have gathered the following information for the month of June 2009 transactions: June 1 AIT acquired Computer Equipment for a cost of $60,000 from Best Purchase. AIT signed a note payable to Best Purchase for the entire amount. The note is interest bearing at a rate of 10% and is due on December 31, 2010 June 3 Received payment from a customer for a sale that was made on May 27. The sale amount was $20,000 with terms 2/10, n/30 June 10 AIT made sales of $40,000 subject to terms 2/10, n/30. The cost of the inventory sold amounted to $17,500 June 30 AIT received utility bills for $7,000 to be paid in July 2009 While reviewing your emails, you notice a reminder not to forget to record adjusting entries for the following items: •Depreciation on the Machinery for $1,500 •Depreciation on the Building for $7,000 •Depreciation on the Computer Equipment for $6,000 •Unpaid Salaries of $2,000 •Interest on Note Payable from June 1 •Income Taxes at a rate of 25% Required: 1.Prepare the journal entries for the month of June along with all the adjusting entries for the year ended June 30, 2009 2.Prepare, in good form and proper style, a multi-step statement of earnings (income statement) 3.Prepare, in good form and proper style, a classified statement of financial position (balance sheet) arko42003@gmail.com