Problems-Series B

PROBLEM 1–26B Applying GAAP to Financial Reporting

Kim Verhaeghe is a business consultant. She analyzed the business processes of one of her clients, Rector Companies, in November 2005. She prepared a report containing her recommendation for changes in some of the company’s business practices. She presented Rector with the report in December 2005. Kim guarantees that her clients will save money by following her advice. She does not collect for the services she provides until the client is satisfied with the results of her work. In this case she received cash payment from Rector in February 2006.

Required

Define the acronym GAAP.
Assume that Kim’s accountant tells her that GAAP permits Kim to recognize the revenue from Rector in either 2005 or 2006. What GAAP rule would justify reporting the same event in two different ways? Write a brief memo explaining the logic behind this rule.
If Kim were keeping records for managerial reporting purposes, would she be bound by GAAP rules? Write a brief memo to explain how GAAP applies to financial versus managerial reporting.

PROBLEM 1–27B Accounting Entities

L.O. 2

The following business scenarios are independent from one another.

Mary Poort purchased an automobile from Hayney Bros. Auto Sales for $9,000.
John Rodman loaned $15,000 to the business in which he is a stockholder.
First State Bank paid interest to Caleb Co. on a certificate of deposit that Caleb Co. has invested at First State Bank.
Parkside Restaurant paid the current utility bill of $128 to Gulf Utilities.
Gatemore, Inc. borrowed $50,000 from City National Bank and used the funds to purchase land from Morgan Realty.
Steven Wong purchased $10,000 of common stock of International Sales Corporation from the corporation.
Dan Dow loaned $4,000 cash to his daughter.
Mega Service Co. earned $5,000 in cash revenue.
McCloud Co. paid $1,500 for salaries to each of its four employees.
Shim Inc. paid a cash dividend of $3,000 to its sole shareholder, Marcus Shim.

Required

For each scenario, create a list of all of the entities that are mentioned in the description.
Describe what happens to the cash account of each entity that you identified in Requirement a.

PROBLEM 1–28B Relating Titles and Accounts to Financial Statements

L.O. 3

A random list of various financial statements components follows: (1) Retained Earnings account ending balance, (2) revenues, (3) Common Stock account beginning balance, (4) Common Stock account ending balance, (5) assets, (6) expenses, (7) operating activities, (8) dividends, (9) Retained Earnings beginning balance, (10) investing activities, (11) common stock issued during the period, (12) liabilities, and (13) financing activities.

Required

Set up a table with the following headings. Identify the financial statements on which each of the preceding components appears by placing the reference number for the component in the appropriate column. If an item appears on more than one statement, place the reference number in every applicable column. The first component is shown as an example.

PROBLEM 1–29B Preparing Financial Statements for Two Complete Accounting Cycles

L.O. 3, 4, 5, 5, 6, 8

Jim’s Janitorial Services experienced the following transactions for 2007, the first year of operations, and 2008. Assume that all transactions involve the receipt or payment of cash.

Transactions for 2007

Acquired $60,000 by issuing common stock.
Received $100,000 for providing services to customers.
Borrowed $25,000 cash from creditors.
Paid expenses amounting to $70,000.
Purchased land for $40,000 cash.

Transactions for 2008

Beginning account balances for 2008 are:

Acquired an additional $20,000 from the issue of common stock.
Received $120,000 for providing services in 2008.
Paid $10,000 to reduce notes payable.
Paid expenses amounting to $80,000.
Paid a $15,000 dividend to the stockholders.
Determined that the market value of the land is $45,000.

Required

Write an accounting equation, and record the effects of each accounting event under the appropriate headings for each year. Record the amounts of revenue, expense, and dividends in the Retained Earnings column. Provide appropriate titles for these accounts in the last column of the table.
Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for each year.
Determine the amount of cash that is in the retained earnings account at the end of 2007 and 2008.
Compare the information provided by the income statement with the information provided by the statement of cash flows. Point out similarities and differences.
Determine the percentage growth in earnings from 2007 to 2008. Based on the data shown in Exhibit 1-7, is this a high-, medium-, or low-growth company?

PROBLEM 1–30B Interrelationships among Financial Statements

L.O. 3, 5, 5, 8

Best Electronics started the accounting period with $10,000 of assets, $2,200 of liabilities, and $4,550 of retained earnings. During the period, the Retained Earnings account increased by $3,565. The bookkeeper reported that Best paid cash expenses of $5,010 and paid a $625 cash dividend to stockholders, but she could not find a record of the amount of cash that Best received for performing services. Best also paid $1,000 cash to reduce the liability owed to a bank, and the business acquired $2,000 of additional cash from the issue of common stock.

Required

Prepare an income statement, statement of changes in stockholders’ equity, year-end balance sheet, and statement of cash flows for the accounting period. (Hint: Determine the beginning balance in the common stock account before considering the effects of the current period events. It also might help to record all events under an accounting equation before preparing the statements.)
Determine the percentage of total assets that were provided by creditors, investors, and earnings.

PROBLEM 1–31B Classifying Events as Asset Source, Use, or Exchange

L.O. 4, 7

The following unrelated events are typical of those experienced by business entities:

Acquire cash by issuing common stock.
Borrow cash from the local bank.
Pay office supplies expense.
Make plans to purchase office equipment.
Trade a used car for a computer with the same value.
Pay other operating supplies expense.
Agree to represent a client in an IRS audit and to receive payment when the audit is complete.
Receive cash from customers for services rendered.
Pay employee salaries with cash.
Pay back a bank loan with cash.
Pay interest to a bank with cash.
Transfer cash from a checking account to a money market account.
Sell land for cash at its original cost.
Pay a cash dividend to stockholders.
Learn that a financial analyst determined the company’s price-earnings ratio to be 26.

Required

Identify each of the events as an asset source, asset use, or asset exchange transaction. If an event wouldnot be recorded under generally accepted accounting principles, identify it as not applicable (NA). Also indicate for each event whether total assets would increase, decrease, or remain unchanged. Organize your answer according to the following table. The first event is shown in the table as an example.

PROBLEM 1–32B Recording the Effect of Events in a Horizontal Statements Model

L.O. 6, 9

Belzio Company experienced the following transactions during 2006.

Paid a cash dividend to the stockholders.
Acquired cash by issuing additional common stock.
Signed a contract to perform services in the future.
Performed services for cash.
Paid cash expenses.
Sold land for cash at an amount equal to its cost.
Borrowed cash from a bank.
Determined that the market value of the land is higher than its historical cost.

Required

Use a horizontal statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. Indicate whether the event increases (I), decreases (D), or does not affect (NA) each element of the financial statements. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first transaction is shown as an example.

PROBLEM 1–33B Recording Events in a Horizontal Statements Model

L.O. 4, 6, 9

Foreman Company was started January 1, 2003, and experienced the following events during its first year of operation.

Acquired $32,000 cash from the issue of common stock.
Borrowed $20,000 cash from National Bank.
Earned cash revenues of $42,000 for performing services.
Paid cash expenses of $28,000.
Paid a $6,000 cash dividend to the stockholders.
Acquired $10,000 cash from the issue of additional common stock.
Paid $15,000 cash to reduce the principal balance of the bank note.
Paid $45,000 cash to purchase land.
Determined that the market value of the land is $50,000.

Required

Record the preceding transactions in the horizontal statements model. Also, in the Cash Flows column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The first event is shown as an example.
Determine the amount of total assets that Foreman would report on the December 31, 2003, balance sheet.
Identify the asset source transactions and related amounts for 2003.
Determine the net income that Foreman would report on the 2003 income statement. Explain why dividends do not appear on the income statement.
Determine the net cash flows from operating activities, investing activities, and financing activities that Foreman would report on the 2003 statement of cash flows.
Determine the percentage of assets that were provided by investors, creditors, and earnings.

PROBLEM 1–34B Price-Earnings Relationships

L.O. 10

Beta One, Inc., is a pharmaceutical company heavily involved in research leading to the development of genealogy-based medicines. While the company has several promising research studies in progress, it has brought only two viable products to market during the last decade. Earnings per share and market price per share data for the latest three years of operation follow.

Required

Calculate the company’s annual growth rate in earnings per share from 2003 to 2004 and from 2004 to 2005.
Based on the data shown in Exhibit 1-7, identify the company as a high-, medium-, or low-growth company.
Calculate the company’s price-earnings ratio for all three years.
Based on the data shown in Exhibit 1-7, classify the price-earnings ratio as high, medium, or low.
Explain the size of the price-earnings ratio.

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Home > Chapter 1 > Problems-Series B

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		Learning Objectives The Curious Accountant Chapter Opening Role of Accounting in ... Measurement Rules Reporting Entities Elements of Financial ... Accounting Equation Recording Business Eve... Historical Cost and Re... Recap: Types of Transa... Summary of Transactions Preparing Financial St... The Horizontal Financi... Real-World Financial R... a look back a look forward Self-Study Review Prob... Key Terms Questions Exercises-Series A Problems-Series A Exercises-Series B Problems-Series B Analyze, Think, Commun...

	More Resources
		PowerPoint Presentations
	eBook
		Learning Objectives The Curious Accountant Chapter Opening Role of Accounting in ... Measurement Rules Reporting Entities Elements of Financial ... Accounting Equation Recording Business Eve... Historical Cost and Re... Recap: Types of Transa... Summary of Transactions Preparing Financial St... The Horizontal Financi... Real-World Financial R... a look back a look forward Self-Study Review Prob... Key Terms Questions Exercises-Series A Problems-Series A Exercises-Series B Problems-Series B Analyze, Think, Commun...