Accounting Exam - Assignment Example

Week Five Exam BE 1; Page 32 Match the following forms of business organization with a set of characteristics: Sole Proprietorship(SP), Partnership(P), Corporation (C) (a) Partnership(P) - Shared control, tax advantages, increased skills and resources. (b) Sole Proprietorship (SP) - Simple to set up and maintains control with founder. (c) Corporation (C) - Easier to transfer ownership and raise funds, no personal liability. BE-1-3; Page 32 Indicate in which part of the statement of cash flows each item would appear: Operating activities(O), Investing activities (I), or Financing activities (F). (a) Operating activities(O) - cash received from customers. (b) Financing activities (F) - cash paid to stockholders (dividends). (c) Financing activities (F) - cash received from issuing new common stock. (d) Operating activities(O) - cash paid to suppliers. (e) Investing activities (I) - cash paid to purchase a new office building. BE-2-2; Page 78 A list of financial statement items for Schweitz Company includes the following: accounts receivable $14,000; prepaid insurance $3,300; cash $12,400; supplies $3,800, and short-term investments $8,200. Prepare the current assets section of the balance sheet listing the items in the proper sequence. Schweitz Company – Balance Sheet Extract as at XXX Current Assets $ Cash 12,400 Short Term Investments 8,200 Prepaid Insurance 3,300 Accounts Receivable 14,000 Supplies 3,800 41,700 (In order of decreasing liquidity) BE-2-4; Page 78 For each of the following events affecting the stockholders’ equity of Haulmarke, indicate whether the event would: increase retained earnings(IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS). (a) Issued new shares of common stock - increase common stock (ICS) (b) Paid a cash dividend - decrease retained earnings (DRE) (c) Reported net income of $ 75,000 - increase retained earnings(IRE) (d) Reported a net loss of $20,000 - decrease retained earnings (DRE) BE 4-6; Page 193 On July 1, 2007 Lumas Co. pays $14,800 to Patel Insurance Co. for a 2-year insurance contract. Both companies have fiscal years ending December 31. For Lumas Co. journalize and post the entry on July 1 and the adjusting entry on December 31. Lumas Co. - Journal Entries $ $ July 1 Patel Insurance Debit 14,800 Cash/Bank Account Credit 14,800 (Accounting for the insurance expense paid) Dec 31 Income Statement Debit 3,700 Patel Insurance Credit 3,700 (Charging the insurance expense for the year to the Income Statement) (Workings: Insurance expense for the year is 6/24 x 14800=3,700) Cash / Bank Account [extract] 1 July Patel Insurance 14,800 Patel Insurance Account 1 July Cash/ Bank 1 Jan Bal b/d (i.e prepaid insurance) 14,800 _____ 14,800 11,100 31 Dec Income Statement 31 Dec Balance c/d 3,700 11,100 14,800 BE 4-8; Page 193 The bookkeeper for Ahlet Company asks you to prepare the following accrual adjusting entries at December 31. (a) Interest on notes payable of $400 is accrued. (b) Service revenue earned but unbilled total $1,400 (c) Salaries of $780 earned by employees have not been recorded. Use the account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable, Salaries Expense, and Salaries Payable Ahlet Co. - Journal Entries $ $ 31 Dec Interest Expense Debit 400 Interest Payable Credit 400 (Adjusting for accrued interest on notes payable) Accounts Receivable Debit 1400 Service Revenue Credit 1400 (Adjusting for unbilled service revenue) Salaries Expense Debit 780 Salaries Payable Credit 780 (Adjusting for unrecorded salaries) BE 7-1; Page 348 Jo Duma is the new owner of JoJo Co. She has heard about internal control but is not clear about the importance for her business. Explain to Jo the two purposes of internal control, and give her one application of each purpose for JoJo Co. Internal control is important for a number of reasons which can be broadly distilled into two main purposes. The first is “external” or outward looking in that internal controls ensure the quality (accuracy, reliability etc.) of the reporting procedures of the Company. The presence of internal controls give outsiders confidence in the reported state of the company’s affairs, be it published accounts used by the shareholders of public companies or even management accounts of smaller companied used by, for example, banks and tax authorities. The other purpose is more inward looking. Internal controls ensure that a company attains its organizational goals. As put in the Financial Reporting Council of UK’s guidance on Internal Control, internal controls facilitate the effective and efficient operation of a business by enabling it to respond to significant risks, including the proper management of assets and liabilities (7). An application of the first purpose of ensuring the quality of the Company’s reporting would be the conducting of reconciliations between, for example, the individual debtor’s accounts and the accounts receivable control account to ensure that no mistakes were made during posting. An application of the second purpose would be the physical safeguard of corporate assets to protect them from theft, natural disasters etc. Without such assets the Company may not be able to continue their operations. BE 7-8; Page 349 At July 31 Ballah Company has this bank information: cash balance per bank $7,800; outstanding checks $762; deposits in transit $1,350; and a service charge $40. Determine the adjusted cash balance per bank at July 31. Cash Balance as per Bank – July 31 $7,800 Add: Deposits in Transit $1,350 Less: Outstanding Checks $762 Service Charge $40 ($802) Adjusted Cash Balance per Bank – July 31 $8,348 BE 13-2; Page 684 An inexperienced accountant for Barlay Corporation showed the following in Barlay’s 2007 income statement: Income before taxes $300,000; Income tax expense $48,000; Extraordinary loss from flood (before taxes) $60,000; and Net income $192,000. The extraordinary loss and taxable income are both subject to a 20% tax rate. Prepare a correct income statement beginning with “Income before income taxes.” Barlay Corporation- Extract from Income Statement for the year ended XX 2007 $ $ Income before income taxes 300,000 Income tax expense Tax expense on income (20% x 300,000) 60,000 Tax credit on extraordinary loss (20% x 60,000) (12,000) (48,000) Income before extraordinary loss 252,000 Extraordinary loss from flood (net of 12,000 tax credit) (48,000) Net Income 204,000 BE 13-11; Page 685 The following data are taken from the financial statements of Tall Tail Company. 2007 2006 Accounts Receivable (net), end of year $560,000 $540,000 Net sales on account $4,700,000 $4,000,000 Terms of all sales are 1/10, n/45 Compute for each year (a) the receivables turnover ratio and (b) the average collection period. What conclusions about the management of accounts receivable can be drawn from these data? At the end of 2005, accounts receivable was $500,000. 2007 2006 (a) Accounts receivable turnover ratio: 4,700/560 4,000/540 ( = Sales/year end accounts receivable) =8.4 times =7.4 times (b) Average Collection Period: (=Average accounts receivable/sales x 365) 550/4700x365 520/4000x365 =42.7 days =47.45 days The Accounts Receivable Turnover Ratio (ARTR) refers to the frequency or number of times the accounts receivable balance has been paid and reestablished for the relevant accounting year. The higher it is the better, as it means the Company is able to collect its debts fast and as such has more cash at hand. i.e. it is in a better position in terms of liquidity. The ratio has improved from 2006 to 2007, showing that Tall Tail has become more efficient in collecting debts and converting receivables to cash. The Average Collection Period (ACP) refers to the number of days it takes for a debtor to repay its debt to Tall Tail. The lower it is the better as it means the Company is able to recover its debts more quickly. The ACP has marginally decreased from 2006 to 2007 by about 5 days, which means that the Company debtors are paying back their debts 5 days sooner in 2007 than they did in 2006. Tall Tail uses sales terms of 1/10, n/45 meaning 1% discount is given if the invoice is paid in 10 days and the net invoice total is due in 45 days. In 2006, on average, the Company’s debtors were not adhering to the credit terms and did not seem to take advantage of the discount for early settlement. On the contrary, in 2007, on average the debtors settled their accounts inside the credit limits and this maybe a sign of more debtors taking advantage of the sales discount. Works Cited United Kingdom. Financial Reporting Council. Internal Control – Revised Guidance for Directors on the Combined Code. London, 2005. Read More