# Financial Accounting Study Guide Fall 2013 CH1 & 2 PART VI RATIOS

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1 Financial Accounting Study Guide Fall 2013 CH1 & 2 PART VI RATIOS Name: Selected information from the financial statements of Miller Company for the year ended December 31, 2012, appears below: 2012 Current assets \$ 525,000 Total assets 1,250,000 Current liabilities 150,000 Long-term liabilities 400,000 Net sales 1,500,000 Gross profit 600,000 Net income 100,000 Average Shares Outstanding 10,000 Instructions: Answer the following questions relating to the year ended December 31, The number of shares outstanding at the end of the year was 10,000. Show computations. \$450, The current ratio for 2012 is 3.0 times. = 3.0 times. \$150, The debt to total assets ratio for 2012 is 44%. \$150,000+\$400,000 = 44% \$1,250, The working capital for 2012 is \$300,000. \$450,000 - \$150,000 = \$300, The earnings per share for 2012 is \$10. \$100,000/10,000 = \$10 CH3 &4 PART III ADJUSTING ENTRIES The trial balance of Shift Company shows the following balances for selected accounts on November 30, 2012: Prepaid Insurance \$ 15,000 Unearned Service Revenue \$ 1,500 Equipment 40,000 Notes Payable 24,000 Accumulated Depreciation 8,800 Interest Payable 400 Instructions: Using the additional information given below, prepare the appropriate monthly adjusting entries at November 30. Show computations. 1. Revenue earned for services rendered to customers, but not yet billed, totaled \$5,000 on November The note payable is a 6%, 1-year note issued October 1, The equipment was purchased on January 2, 2010, for \$40,000. It has an estimated life of 5 years and an estimated salvage value of \$4,000. Shift uses the straight-line depreciation method. 4. An insurance policy was acquired on June 30, 2012; the premium paid for 2 years was \$18, Shift received \$1,500 of revenue in advance from a customer on November 1, Two-thirds of this

2 amount was earned by November Accounts Receivable... 5,000 Service Revenue... 5, Interest Expense (\$24,000 6% 1/12) Interest Payable Depreciation Expense [(\$40,000 - \$4,000) 60] Accumulated Depreciation Insurance Expense (\$18,000 24) Prepaid Insurance Unearned Revenue (\$1,500 2/3)... 1,000 Service Revenue... 1,000 Ex. 260 A review of the ledger of Wilde Insurance Co. at December 31, 2011, produces the following data pertaining to the preparation of annual adjusting entries: Instructions: Prepare the adjusting entries at December 31, Show all computations. (a) Dec. 31 Salaries Expense 2,320 Salaries Payable 2,320 (5 X \$800 X 2/5 = \$\$1,600) (3 X \$600 X 2/5 = \$ 720) (b) 31 Unearned Insurance Revenue 9,000 Insurance Revenue 9,000 (3/12 X \$8,000 X 3 = \$6,000) (1/12 X \$18,000 X 2 = \$3,000) (c) 31 Interest Revenue 1,200 Interest Receivable 1,200 (\$90,000 X.08 X 2/12 = \$1,200) (a) Salaries Payable \$0: Salaries are paid every Friday for the current week. Five employees receive a weekly salary of \$800, and three employees earn a weekly salary of \$600. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. (b) Unearned Insurance Revenue \$58,000: The company sold several insurance policies during the year as shown below: Premium Term Per Number of Date (in months) Policy Policies Oct \$ 8,000 3 Dec ,000 2

3 (c) Notes Receivable \$90,000: This is a 6-month note, dated November 1, 2011, with an 8% interest rate. CH5 & 6 PART II JOURNAL ENTRIES The ledger accounts given below, with an identification number for each, are used by West Company. West uses a perpetual inventory system. Instructions: Prepare appropriate entries for the month of October by placing the appropriate identification number(s) in the debit and credit columns provided and the dollar amounts pertaining to each account in the adjoining columns. Item 0 is given as an example. 1. Cash 7. Accounts Payable 2. Accounts Receivable 8. Sales Returns and Allowances 3. Notes Receivable 9. Sales Discounts 4. Inventory 10. Sales Revenue 5. Supplies 11. Cost of Goods Sold 6. Land 12. Freight-out Account(s) Account(s) Debit Credit Entry Information Debited Credited Amount(s) Amount(s) 0. Oct. 1 Sold merchandise for cash \$ \$500 \$500 The cost of the merchandise sold was \$ Oct. 2 Purchased merchandise from XYZ Co. on account for \$4,000; terms 2/10, n/ Oct. 4 Returned \$500 of merchandise Purchased from XYZ Co. on Oct Oct. 6 Sold merchandise to G. Lender on account for \$800, terms 2/10, n/30. G. Lender will pay \$50 freight costs per the shipping terms. The merchandise sold cost \$ Oct. 8 Accepted a sales return of defective merchandise from G. Lender credit granted was \$150. The returned merchandise cost \$ Oct. 11 Purchased merchandise from Officemate on account for \$1,800; terms 1/10, n/ Oct. 12 Paid freight of \$250 on the shipment from XYZ Co. per the shipping terms of purchase on Oct 2.

4 7. Oct. 15 Received payment in full from F. Bannker. 8. Oct. 19 Paid XYZ Co. in full. 9. Oct. 20 Paid Officemate in full. 10. Oct. 27 Purchased office supplies for \$550 cash. ANSWERS Account(s) Account(s) Debit Credit Debited Credited Amount(s) Amount(s) \$ 500 \$ ,000 4, ,600 1, ,500 3, , , PART IV RATIOS Lurid Company reported the following information for 2012: Beginning inventory \$ 90,000 Cost of goods sold 336,000 Ending inventory 110,000 Net income 35,000 Net sales 525,000 Operating expenses 60,000 Sales 550,000 Instructions: Compute each of the following ratios: (1) Gross profit rate: (\$525,000 - \$336,000) \$525,000 = 36% (2) Inventory turnover ratio: \$336,000 [(\$90,000 + \$110,000) 2] = 3.4 times (3) Days in inventory: = days (4) Profit margin ratio: \$35,000 \$525,000 = 6.7% PART V COMPUTATION OF NET PURCHASES/COST OF GOODS SOLD Rodriquez Company uses a periodic inventory system and has the following account balances: Beginning

5 Inventory \$45,000, Ending Inventory \$60,000, Freight-in \$10,000, Purchases \$275,000, Purchase Returns and Allowances \$8,000, and Purchase Discounts \$5,000. Instructions: Compute each of the following: (1) Net purchases. (2) Cost of goods available for sale. (3) Cost of goods sold. (1) Net purchases: \$275,000 - \$8,000 - \$5,000 = \$262,000 (2) Cost of goods available for sale: \$45,000 + \$262,000 + \$10,000 = \$317,000 (3) Cost of goods sold: \$317,000 - \$60,000 = \$257,000 PART V INVENTORY Potter Company had a beginning inventory of 100 units at a cost of \$13 per unit on August 1. During the month, the following purchases and sales were made. Purchases Sales August units at \$14 August units August units at \$15 August units August units at \$16 August units August units Potter uses a periodic inventory system. Instructions: Determine ending inventory and cost of goods sold under 1, FIFO, and 2, LIFO. 1. FIFO ending inventory: FIFO cost of goods sold: 200 \$16 = \$3,200 Cost of goods available for sale \$13, \$15 = 750 Less: Ending inventory 3,950 \$3,950 Cost of goods sold \$9,300

6 2. LIFO ending inventory: LIFO cost of goods sold: 100 \$13 = \$1,300 Cost of goods available for sale \$13, \$14 = 2,100 Less: Ending inventory 3,400 \$3,400 Cost of goods sold \$9,850 Ex. 207 Wooderson Company sells many products. Gizmo is one of its popular items. Below is an analysis of the inventory purchases and sales of Gizmo for the month of March. Wooderson Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 \$40 3/3 Purchase 60 \$50 3/4 Sales 60 \$80 3/10 Purchase 200 \$55 3/16 Sales 70 \$90 3/19 Sales 80 \$90 3/25 Sales 60 \$90 3/30 Purchase 40 \$60 Instructions (a) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (Show computations) (b) Using the weighted-average method, calculate the amount assigned to the inventory on hand on March 31. (Show computations) (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31. (Show computations) Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 \$40 3/3 Purchase 60 \$50 3/4 Sales 60 \$80 3/10 Purchase 200 \$55 3/16 Sales 70 \$90 3/19 Sales 80 \$90 3/25 Sales 60 \$90 3/30 Purchase 40 \$ (a) (b) Using FIFO - the earliest units purchased were the first sold. 3/1 \$40 = \$ 4,000 3/3 50 = 3,000 3/10 55 = 6, units \$13,050 = the cost of goods sold Calculate the weighted average unit cost: \$20, = \$51 \$51 units in ending inventory (400 available less 270 sold = 130) \$ = \$6,630

7 (c) There are 130 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 \$40 = \$4,000 3/3 \$50 = 1, units \$5,500 = Ending inventory Ch8 & 9 1. Nyguen Company bought real estate, on which there was an old office building, for \$700,000. They paid \$90,000 in cash as a down payment and signed a 6% mortgage for the remainder. They immediately had the old building razed at a net cost of \$30,000, the salvaged materials were sold for \$4,200. Attorneys were paid \$7,000 in connection with the land purchase and an additional \$3,000 in connection with permits and zoning variances necessary for Nyguen's new office building. \$25,000 was paid for excavation for the basement of the new building. \$2,400,000 was paid for construction of the new building, and \$95,000 was paid for a parking lot and necessary walkways and driveways. The new office building should be recorded at: a. \$2,400,000. b. \$2,428,000. c. \$2,425,000. d. \$2,400, Nyguen Company bought real estate, on which there was an old office building, for \$700,000. They paid \$90,000 in cash as a down payment and signed a 6% mortgage for the remainder. They immediately had the old building razed at a net cost of \$30,000, the salvaged materials were sold for \$4,200. Attorneys were paid \$7,000 in connection with the land purchase and an additional \$3,000 in connection with permits and zoning variances necessary for Nyguen's new office building. \$25,000 was paid for excavation for the basement of the new building. \$2,400,000 was paid for construction of the new building, and \$95,000 was paid for a parking lot and necessary walkways and driveways. Land should be recorded at a cost of: a. \$732,800. b. \$737,000. c. \$ d. \$760,800. PART V RATIO ANALYSIS Darlington Corporation and Martin Corporation, two corporations of roughly the same size, are both involved in the manufacture of telephones. Each company depreciates its plant assets using the straight-line approach. An investigation of their financial statements reveals the following information. Darlington Corp. Martin Corp. Net income \$ 400,000 \$ 800,000 Sales 1,200,000 1,500,000 Total assets (average) 1,600,000 2,000,000 Plant assets (average) 1,200,000 1,400,000 Intangible assets (goodwill) 0 200,000 Instructions: 1. For each company, calculate these values: (1) Return on assets ratio. (2) Profit margin. (3) Asset turnover ratio. 1. Darlington Corp. Martin Corp.

8 Return on assets Profit margin Asset turnover \$400,000 \$800,000 =25% \$1,600,000 \$2,000,000 \$400,000 \$800,000 =33.3% \$1,200,000 \$1,500,000 \$1,200,000 \$1,500,000 =0.75 \$1,600,000 \$2,000,000 =40% =53.3% = Martin Corp. s overall measure of profitability, Return on assets, was better than that of Darlington Corp. This indicates that Martin generates more net income by each dollar invested in assets. Martin s higher profit margin also suggests that they have better control of their costs than does Darlington Corp. Martin is more effective at turning its sales into income. The asset turnover ratios are equal. 3. On March 1, the Levers Company borrows \$90,000 from New National Bank by signing a 6-month, 8%, interest-bearing note. Instructions: Prepare the necessary entries below associated with the note payable on the books of Levers Company. (a) Prepare the entry on March 1 when the note was issued. (b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual financial statements. Assume no other interest accrual entries have been made. (c) Prepare the entry to record payment of the note at maturity. 3. (a) March 1 Cash... 90,000 Notes Payable... 90,000 (b) June 30 Interest Expense... 2,400 Interest Payable... 2,400 (\$90,000 8% [4 12]) (c) Sept. 1 Notes Payable... 90,000 Interest Payable... 2,400 Interest Expense... 1,200 Cash... 93,600

9 Ex. 246 Here are selected 2012 transactions of Howe Corporation. Jan. 1 Retired a piece of equipment that was purchased on January 1, The equipment cost \$55,000 and had a useful life of 10 years with no salvage value. June 30 Dec. 31 Sold equipment that was purchased on January 1, The equipment cost \$66,000 and had a useful life of 3 years with no salvage value. The equipment was sold for \$9,000 cash. Sold equipment for \$9,500 cash. The equipment cost \$33,000 when it was purchased on January 1, 2009, and was depreciated based on a 5-year useful life with a \$3,000 salvage value. Instructions Journalize all entries required on the above dates, including entries to update depreciation on assets disposed of, where applicable. Howe Corporation uses straight-line depreciation. Jan. 1 Accumulated Depreciation Equipment... 55,000 Equipment... 55,000 June 30 Depreciation Expense... 11,000 Accum. Depreciation Equipment (\$66,000 1/3 6/12)... 11,000 Cash... 9,000 Accumulated Depreciation Equipment... 55,000 (\$66,000 2/3 = \$44,000; \$44,000 + \$11,000) Loss on Disposal [\$9,000 (\$66,000 \$55,000)]... 2,000 Equipment... 66,000 Dec. 31 Depreciation Expense... 6,000 Accumulated. Depreciation Equipment [(\$33,000 \$3,000) 1/5)... 6,000

10 31 Cash... 9,500 Accumulated Depreciation Equipment [(\$33,000 3,000) 4/5]... 24,000 Gain on Disposal Equipment... 33,000 Be. 215 The ledger of the Ramirez Company at the end of the current year shows Accounts Receivable of \$150,000. Instructions (a) If Allowance for Doubtful Accounts has a credit balance of \$3,000 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for end of the period. (Show all calculations.) (b) If Allowance for Doubtful Accounts has a debit balance of \$3,000 in the trial balance and bad debts are expected to be 8% of accounts receivable, journalize the adjusting entry for end of the period. (Show all calculations.) (a) Bad Debts Expense... 9,000 Allowance for Doubtful Accounts (\$12,000 \$3,000)... 9,000 (To adjust the allowance account to total estimated uncollectible, \$150, = \$12,000) (b) Bad Debts Expense... 15,000 Allowance for Doubtful Accounts (\$12,000 + \$3,000)... 15,000 (To adjust the allowance account to total estimated uncollectible) Ex. 228 Prepare journal entries to record the following transactions entered into by the Merando Company: 2011 June 1 Received a \$9,000, 6%, 1-year note from Dan Gore as full payment on his account. Nov. 1 Sold merchandise on account to Barlow, Inc., for \$12,000, terms 2/10, n/30.

11 Nov. 5 Barlow, Inc., returned merchandise worth \$1,000. Nov. 9 Received payment in full from Barlow, Inc. Dec June 1 Accrued interest on Gore's note. Dan Gore honored his promissory note by sending the face amount plus interest June 1 Notes Receivable... 9,000 Accounts Receivable D. Gore... 9,000 Nov. 1 Accounts Receivable Barlow, Inc ,000 Sales... 12,000 Nov. 5 Sales Returns and Allowances... 1,000 Accounts Receivable Barlow, Inc.... 1,000 Nov. 9 Cash... 10,780 Sales Discounts (\$11,000.02) Accounts Receivable Barlow, Inc ,000 Dec. 31 Interest Receivable Interest Revenue (\$9,000 6% 7 12 = \$315)

12 2012 June 1 Cash... 9,540 Notes Receivable... 9,000 Interest Receivable Interest Revenue (\$9,000 6% 5 12)

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