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ACCT 1201 Lecture Notes - Lecture 3: Accounts Receivable, Earnings Before Interest And Taxes, Accrual

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School
Northeastern University
Department
Accounting
Course
ACCT 1201
Professor
Michelle McAllister

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Document Summary

Chapter 3: the _operating cycle__ begins when a company receives goods to sell and ends when a customer pays cash to the company, four phases of the typical cycle, purchase _goods to sale__ on credit. In other words, receive inventory from suppliers: pay __cash___ to suppliers. An operating loss occurs when operating expenses exceed operating revenues. That is, when the company has fulfilled all obligations related to the sales agreement: the good has been delivered, the service has been provided, __expenses__ are recognized when incurred. Xxx: later on, when the good/service is delivered to the client, revenue is recognized and the liability account is reduced. Xxx: if cash is received at the same time the good or service is delivered revenue is recorded. Xxx: later, when the customer pays its bill, cash is increased and account. Xxx: later, when the goods or services are used, an expense is recorded and the asset account is reduced.

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Related Questions

PROBLEM 15-20 Ethics and the Manager (L015-2, L015-4] Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfin ished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors. Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be getting a loan to pay off his accounts payable-providing that on his most recent financial state- ments the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements. Russ would like to apply for a $80,000 six-month loan bearing an interest rate of 10% per year. The unaudited financial reports of the company appear below: Venice InLine, Inc. Comparative Balance Sheet As of December 31 (dollars in thousands) This Year Last Year $ 70 $150 160 100 $482 Assets Current assets: Cash... Accounts receivable, net ............. Inventory ... Prepaid expenses .................. Total current assets ................... Property and equipment ............... Total assets ........ Liabilities and Stockholders' Equity Current liabilities: Accounts payable ... Accrued liabilities Total current liabilities ................. Long-term liabilities ................... Total liabilities... Stockholders' equity: Common stock and additional paid-in capital ..... Retained earnings .......... Total stockholders' equity .............. Total liabilities and stockholders' equity .... $154 10 164 100 100 296 396 $560 100 282 382 $482 Venice InLine, Inc. Income Statement For the Year Ended December 31 (dollars in thousands) This Year $420 290 130 Sales (all on account) .......... Cost of goods sold ....................... Gross margin ............ Selling and administrative expenses: Selling expenses Administrative expenses ........ Total selling and administrative expenses..... Net operating income...... Interest expense ........................ Net income before taxes ............. Income taxes (30%) ................... Net income 8181818181 Required: 1. Based on the unaudited financial statements and the statement made by the loan officer, would the company qualify for the loan? 2. Last year Russ purchased and installed new, more efficient equipment to replace an older plas- tic injection molding machine. Russ had originally planned to sell the old machine but found that it is still needed whenever the plastic injection molding process is a bottleneck. When Russ discussed his cash flow problems with his brother-in-law, he suggested to Russ that the old machine be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of $45,000. The bank does not require audited financial statements. What advice would you give to Russ concerning the machine?

Company Background & Scenario
The Auto Zone Company is a well-established, publicly-held corporation, operating as a wholesaler in the auto parts industry. Specifically, Auto Zone purchases auto parts from manufacturers and sells them to large business customers. Most purchases and sales are on account, with trade credit terms (specified below).
You’re a Davenport University student pursuing a bachelor’s degree in business and employed at the Auto Zone Company this semester as an intern. You’ve worked in various departments and on several projects so far, learning a lot about the company’s business operations. Management seems impressed with your enthusiasm and the quality of your work.
The company’s accountant has just been called away for a family emergency and will likely be absent for a month or so. The General Manager asks you to take over the accountant’s regular duties on an interim basis. You’re nervous about doing so, but are confident that what you’ve learned in accounting class, plus your personal problem-solving skills, will make this a successful experience. What a great learning opportunity, not to mention an enhancement to your resume!
Part I
Journal Entries
a. Within the "Transactions" worksheet you will find journal entry statements. Use those statements to write the corresponding journal entries. You are to write the journal entries in the proper special journal. The special journals included within this workbook include the Sales Journal, Purchases Journal, Cash Receipts Journal and Cash Payments Journal. Any transaction that does natually work within one of the special journals should be written into the General Journal.
b.Within the "Transactions" worksheet you will find journal entry statements. At the end of this list you will find "adjusting" information. Use this "adjusting" information to write the respective adjusting journal entries. Write all adjusting entries in the worksheet labled "General Journal ADJ".
c. Before starting work, review the entire project: all instructions, business transactions descriptions, workbook sections, check figures, due dates, and submission requirements.
Credit Terms & Inventory Accounting
a. When Auto Zone purchases merchandise from a supplier or vendor on account, they receive credit terms of 2/15, net 30.
b. When Auto Zone sells merchandise to a customer on account, they offer that customer credit terms of 2/30, net 45.
c. Auto Zone uses a perpetual inventory accounting system and a last-in, first-out (LIFO) inventory costing method. Within this workbook there is a worksheet labeled "Inventory Control". You will need to use the "Inventory Control" worksheet to keep a perptual record of your inventory. As part of that process you will be calculating the value of CGS each time you generate a sale. Use the "Inventory Control" worksheet to calcluate your Cost of Goods Sold values.

d. Auto Zone uses the "Gross" method of accounting for purchases and sales. The "Net" method assumes that discounts are taken at the point of sale or purchase.

MAY JOURNAL TRANSACTIONS
May 1 Paid $2,100 to LG for utilities bill that was recorded in April as an Account Payable, Check #1000.
May 1 Purchased 3,000 GPS units on Credit from Yamaha for $35.00 per unit.
May 1 Purchases office supplies from Staples on credit for $1,800
May 1 Signed a one-year 15%, $150,000 note payable with Chase Bank.
May 2 Rented part of the warehouse to a new tenant and received $12,000 for three months rent (May, June, July).
May 2 Sold 2,000 Aux Cords on account to Tesla for $85 per units, Invoice #2000.
May 2 Sold 400 USB Ports for $70 per unit and 1,200 GPS units for $75 per unit on account to Dodge, Invoice #2001.
May 3 Received a bill from the law firm of Davenport Associates for $6,300, payable upon receipt, for bond consulting fees, Check #1001.
May 4 Sold 500 Aux Cords on credit to Buick for $77 per unit, Invoice #2002.
May 4 Purchased 2,100 USB Ports on credit from Shure for $45 per unit.
May 5 Paid for office supplies purchased at Staples on May 1st, Check #1002.
May 7 Sold 200 GPS units on account to Chevrolet for $49 per unit, Invoice #2003.
May 8 Issued 4,750 shares of common stock for $13 per share
May 11 Purchased 1,875 GPS units on credit from Sony for $25 per unit.
May 11 The Board of Directors declared a cash dividend of $7 per share for shareholders of record on May 13th, payable on May 17th.
May 12 Paid in full for the May 1 purchase from Yamaha, Check #1003.
May 13 Received and paid expense reports for travel and entertainment totaling $1,500, Check #1004.
May 13 Took advantage of a special deal to purchase 1,500 Aux Cords on account from Panasonic for $42 per unit.
May 15 Received payment in full from Tesla for the May 2nd sale.
May 15 Sold 1,050 USB Ports on credit to Chevrolet for $57 per unit, Invoice #2004.
May 16 Received payment from Buick for $125,000 of the $300,000 owed from April 5.
May 17 Paid the dividend that was declared on May 11th, Check #1005.
May 17 Check # 1006 was issued for payroll: $14,900 for salaries and $5,100 for wages.
May 20 Issued a credit to Chevrolet for the return of 150 defective units from the May 7th sale. These units has a cost basis of $35 per unit.
May 20 Returned the 150 defective units received from Chevrolet to Yamaha.
May 22 Purchased a $500 international phone card for one of the sales representative's upcoming European business trip, Check #1008.
May 23 Issued bonds payable at face value for $420,000
May 23 Purchased 2,080 USB Ports from Shure for $41 per unit paying in cash, Check #1009
May 24 Check #1010 was issued for payroll: $14,900 for salaries and $5,100 for wages.
May 25 Hired and paid a consultant $50,000 to devise a marketing plan. Auto Zone's management felt this was necessary to develop brand awareness. Check #1011.
May 26 While inspecting the May 11th purchase, it was discovered that the GPS units were programmed for Asia instead of North America. Auto Zone returned the entire order to Sony.
May 27 A bankruptcy judge disallowed Auto Zone's claim for $25,000 due from Jeep. Management Decided to write off this accounts receivable.
May 27 Sold 500 USB Ports on credit to GMC for $61 per unit, Invoice #2005.
May 29 Paid in full for the purchase from Panasonic on May 13, Check #1012.
May 29 Received payment in full from GMC for the May 27th transaction.
May 30 Auto Zone is behind in its mortgage payments to Fifth Third Bank. Paid a total of $20,000 ($5,000 principal and $15,000 interest), Check #1013.
May 31 Paid the first month's principal payment of $12,500 on the note payable. In addition, paid one month's interest, Check #1007
*All purchases on account terms of 2/15, n/30
**All credit sales have terms of 2/30, n/45
May Month-end Adjustments:
( A ) The Company took a physical count of Office Supplies on May 30 and found the following the value of inventory on hand to be $2,500. The beginning inventory was $3,200. Write the adjusting journal entry.
( B ) Auto Zone estimates bad debt expense on a monthly basis rather than waiting until year-end. The company uses the allowance method. Based on recent industry estimates, Auto Zone estimates that the allowance account should be 7.5% of accounts receivable. The ending AR balance is $850,000. At the end of the month (prior to this journal entry) there is a CREDIT balance of $19,000 in the Allowance for Doubtful Accounts account. Write the necessary adjusting entry.
( C ) The Balance of $23,000 in the prepaid insurance account at the beginning of May represents 5 months of coverage. Record the amount of insurance for May.
( D ) The Company took a physical inventory count on May 30 and found the following inventory on hand to be $100,641. The ending balance in the Inventory account (before this adjusting entry) was $128,947. Write the necessary adjusting entry.
( E ) Auto Zone has earned two months of the prepaid rent received from their tenant at the beginning of May.
( F ) Depreciation on the company's fixed assets for the month of May is as follows:
1. The furniture and equipment for the office was purchased last year for $7,350. these assets have a 5 year life, an expected salvage value of $500, and are depreicated using straight-line method.

2. The furniture and equipment for the warehouse was purchased a few years ago for $30,000. These assets have a 8-year life, an expected salvage value of $5,000, and are depreciated using the straight-line method.

Shoe: GPS
Beginning Inventory (BI) Purchases Sales Ending Inventory (EI)
Date BI Units BI $/Unit BI $ Purch Units Purch $/Unit Purch $ Sale Units (CGS) Sale $/Unit (CGS) Sale $ (CGS) EI Units EI $/Unit EI $
1-May 3300 $35.00 $115,500.00 $- $- $115,500.00
Shoe: Aux Cord
Beginning Inventory (BI) Purchases Sales Ending Inventory (EI)
Date BI Units BI $/Unit BI $ Purch Units Purch $/Unit Purch $ Sale Units (CGS) Sale $/Unit (CGS) Sale $ (CGS) EI Units EI $/Unit EI $
1-May 2500 $65.00 $162,500.00 $- $- $162,500.00
Shoe: USB Port
Beginning Inventory (BI) Purchases Sales Ending Inventory (EI)
Date BI Units BI $/Unit BI $ Purch Units Purch $/Unit Purch $ Sale Units (CGS) Sale $/Unit (CGS) Sale $ (CGS) EI Units EI $/Unit EI $
1-May 1400 $40.00 $56,000.00 $- $56,000.00

1. If a firm wants to grow at a rate faster than its sustainablegrowth rate, it could _____.
I. issue new equity shares
II. increase its debt ratio
III. increase its dividend payout ratio
IV. reduce its return on sales
A. I and II only
B. III and IV only
C. I, II and III only
D. II and III only
E. I, II, III and IV

2. The box Store has an inventory period of 50 days, areceivables period of 55 days and a payables period of 40 days.Compute the cash cycle time.
A. 35 days
B. 45 days
C. 65 days
D. 105 days
E. 145 days

3. What is the sustainable growth rate for a firm with netincome of $2.5 million, cash dividends of $1.5 million, and acurrent and expected return on equity of 18%?
A. 18.0%
B. 15.4%
C. 10.8%
D. 7.2%
E. 4.9%

4. As of the most recent fiscal year end, Box GoTo (BGT) hadtotal assets of $500 million, a current and expected ROE of 13%, adividend payout ratio of 35%, and a ratio of equity to total assetof 40%. BGT projects sales growth of 15% for the current year. Whatis BGT's estimated total external financing need?
A. zero
B. $75 million
C. $58.1 million
D. $46.7 million
E. $32.75 million

5. Consider the situation where you have won a $10 millionlottery to be received in 25 annual equal payments of $400,000.What will happen to the present value of these winnings if theinterest rate increases during the next 25 years?
A. it will not change
B. it will be worth more
C. it will be worth less

6. When you receive your monthly statement regarding your bankcredit card, it shows that the monthly rate of interest is 1.8%.What is the annual effective rate of interest you are being chargedon your credit card?
A. 22.87%
B. 23.87%
C. 14.98%
D. 1.8%
E. 21.6%

7. Calculate the NPV of the following cash flows: you invest$3,000 today and receive back $300 one year from now, $700 twoyears from now and $1,100 four years from now. (Note: nothing threeyears from now) Assume that the interest rate is 7%.
A. $1,269
B. -$4,731
C. -$1,269
D. $4,731
E. $5,470

8. The earnings of BGB Computers have grown from $3.20 (yr0) to$6.90 (yr6) in 6 years. Determine the annual compound rate(CAGR).
A. 8.8%
B. 12.1%
C. 13.7%
D. 46%
E. 16.6%

9. A rule of thumb with using the internal rate of return is toinvest in a project if the IRR is _____________ than theopportunity cost of capital.
A. greater
B. less
C. less than or equal to
D. indeterminate relative to

10. Consider a zero coupon bond (one with zero interestpayments). If the bond has a maturity value in seven years of $1000and you would currently pay $850 for the bond, what is the yield tomaturity?
A. -3.5%
B. -2.35%
C. 23.5%
D. 2.35%
E. 17.6%

11. If you purchased a $10,000 certificate of deposit (CD) todaywith a nominal annual interest rate of 12%, with monthlycompounding, what would be the CD worth when it matures in 6years?
A. $20,471
B. $21,159
C. $20,191
D. $20,208
E. $10,615

12. The manufacturing manager of CyberProducts Inc. estimatesthat she can save the company $16,000 cash per year over the next 8years by implementing a recycling plan. What is the value of thesavings today if the appropriate interest rate for the firm is 9%?Assume cash flows occur at the end of the year.
A. $68,460
B. $117,600
C. $73,020
D. $115,500
E. $88,557

13. You take out a $350,000, 30 year mortgage (monthly paymentsand compounding) at an annual 8 percent rate. The scheduled monthlypayment will be what amount (rounded to nearest dollar)?
A. $28,000
B. $2,591
C. $2,568
D. $2,333
E. $12,911

14. If the exchange rate between the U.S. dollar and theJapanese yen is $0.00745 per yen, the dollar interest rate is 6%per year, and the Japanese interest rate is 7% per year, what isthe "break-even" value of the future dollar/yen exchange rate oneyear from now (the rate at which the returns will have equalvalue)?
A. $135.49 per yen
B. $135.23 per yen
C. $0.00752 per yen
D. $0.00738 per yen
E. $0.00745 per yen

15. What is the real interest rate (rounded to nearest 100th ofa percent) if the nominal interest rate is 9% per year and the rateof inflation is 6% per year?
A. 6.75%
B. 2.75%
C. 2.83%
D. 8.50%
E. 9.00%

16. Suppose your child is 9 years old and you are planning toopen a fund to provide for the child's college education.Currently, tuition for one year of college is $22,000. How muchmust you invest now in order to pay enough for the first year ofcollege nine years from now, if you think you can earn a rate ofinterest that is 4% more than the inflation rate? Assume thattuition moves with inflation.
A. $8,500
B. $10,129
C. $16,988
D. $15,457
E. $21,154

17. You have determined the present value of an expected cashinflow stream. Which of the following would cause the stream tohave a higher present value?
A. The discount rate increases.
B. Total cash flows remain the same but are paid over a shorterperiod of time.
C. The discount rate decreases.
D. Statements (b) and (c) are both correct.
E. Statements (a) and (b) are both correct.

18. Lucinda is currently thirty years old and she plans toretire at age sixty (30 more years to work). She is expected tolive to age eighty-five (25 years of retirement). Her labor incomeis $45,000 per year and she intends to maintain a constant level ofreal consumption spending over the next fifty-five years. Assuminga real interest rate of 4% per year, no taxes, and no growth inreal labor income, what is the value of Lucinda's humancapital?
A. $35,196
B. $40,005
C. $994,888
D. $778,141
E. $45,000

19. Let us suppose you have a choice between investing in a banksavings account which pays 9% compounded annually (Bank Yearly) andone which pays 8.5% compounded daily (Bank Daily). (Assume this isbased on 365 days). What is the Bank Daily effective annual rate(EAR), and using only effective annual rates, which bank would youprefer? (round EARs to 100th of a percent)
A. 8.87%, Bank Yearly
B. 8.87%, Bank Daily
C. 9.00%, either Bank Yearly or Bank Daily (indifferent)
D. 8.50%, Bank Daily
E. 8.50%, Bank Yearly

20. You are 60 years old and are considering whether it pays tobuy an annuity from an insurance company. For a cost of $25,000,the insurance company will pay you $3,000 per year for the rest ofyour life starting one year from now. Assume you can earn 8% peryear on your money in a bank account and you expect to live untilage 80 (another 20 years). What implied interest rate is theinsurance company paying you and should you buy the annuity?
A. Greater than 10%; Yes, buy
B. Greater than 10%; No, don't buy
C. Less than 8%; Yes, buy
D. Less than 8%; No, don't buy
E. Between 8% & 10%; No, don't buy

21-25 are short answer

21. You have just taken out a $300,000, 30 year mortgage(monthly payments and compounding) at an annual 8 percent rate.Scheduled monthly payments are $2,201.29. You decide to pay anadditional $100 each month towards the mortgage (you make thescheduled payment plus an extra $100 each month). How many paymentsmust you make before the mortgage is paid off? (round up to thenext whole payment)

22. If you can at most afford $1,200 a month and current annualmortgage rates are 6%, what is the most you can borrow to be repaidover 30 years? (Assume monthly payments/compounding and round yourfinal answer to the nearest dollar)

23. You want to buy a new Subaru Forester. You plan to borrow theentire purchase price of $25,000. Subaru offers two choices: (i) animmediate $1500 rebate and financing at the regular rate of 7.2%APR for 48 months, or (ii) low percentage financing for 48 months.What financing rate (stated per annum, APR) would make you beindifferent between the rebate and the low percentage loan? (assumemonthly compounding & payments and round your final answer to100th of a percent)

24. Your financial planning client wishes to have investmentsavings in 20 years that will provide $1.0 million dollars ofpurchasing power, measured in today's (real) dollars. The currentbalance of the client's investment account is $75,000. Nominalinvestment rates of return are 9.2% per annum, the expectedinflation rate is 4% per annum, and the real rate of return is 5%per annum. In today’s (real) dollars, how much must the client saveper month starting at the end of the current month to accomplishthis goal, given these rates of return? Assume monthly compounding.(round your final answer to the nearest dollar)

25. What is the value today of a security that promises to pay$1,000 in one quarter, with payments increasing at 1% per quarterthereafter? Payments are made each quarter forever. Our opportunitycost of capital is 12% per annum. (round your final answer to thenearest dollar)