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ACCT 3001 Lecture 3: ACCT 3001: Ch. 5 notes

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School
LSU
Department
Accounting
Course
ACCT 3001
Professor
lydialafleur

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Document Summary

Note: our coverage will omit the te(cid:454)t"s (cid:272)o(cid:448)e(cid:396)age of the statement of cash flows (pages 216- A(cid:374)al(cid:455)ze the (cid:272)o(cid:373)pa(cid:374)(cid:455)"s: liquidity: how quickly you can convert assets to cash, solvency: paying debts when they come due, financial flexibility: adjusting finances to deal with unexpected events. Most assets and liabilities are reported at historical cost. Use of judgments and estimates: estimates need to be objective and accurate. Many items of financial value are omitted: somethings are intangible, which is not reflected in the financial statements. Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Cash equivalents are short-term highly liquid investments that will mature within three months or less: cds or money market accounts. Any restrictions or commitments must be disclosed. Claims held against customers and others for money, goods, or services. Notes receivable written promises (issue date, due date, and payment terms)

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Related Questions

For this assignment you will create a financial business plan thatwill tie together an income statement, a purchases budget, a cashbudget, and a pro forma balance sheet. The completed assignmentshould be printed on two pages. You must also turn in a “hard” copyof your report.

The first step is to produce the income statement.

Income Statement
To complete this first step, we need to project monthly sales andexpenses. This requires estimates of monthly sales volume, sellingprice, and cost behaviors. The following are the estimates youshould use in developing your model.

Annual sales: 18,000 pizzas

Monthly sales pattern:

January 8% April 10.5% July 4% October 10.5%
February 10% May 7% August 6% November 9%
March 11% June 6% September 9.5% December 8.5%

Selling Price: $11.50 per pizza

Annual cost behaviors:
Fixed Variable (per pizza)
Ingredients $ 0 $3.00
Salaries & wages 48,000 .50
Advertising 3,000 .00
Depreciation 9,000 .00
Utilities 3,000 .25
Supplies 0 .15
Local taxes 4,200 .00
Insurance 2,400 .00
Miscellaneous 2,400 .10

The above fixed expenses are for the entire year. Assume fixedexpenses are incurred evenly throughout the year.

Your assignment is to produce a computer spreadsheet that willgenerate monthly income statements for the entire year. Thespreadsheet should allow for easy manipulation of annual volume,selling price, and changes in cost behavior.

Purchases budget, balance sheet, and cash budget
After completing the projected income statement, you are now ableto prepare the purchases budget, cash budget, and balance sheet.The purchasing budget is used to plan raw material (ingredient)purchases. The purpose of the cash budget is to predict our cashposition at the end of each period, thus allowing us to planshort-term borrowing if it is needed. We create the cash budget bydetermining the amount and timing of cash receipts and cashpayments. To do this, we make certain assumptions about expectedcash flow patterns. The following assumptions apply to the PizzaShoppe:

1. Revenues are collected in the month of sale.
2. Ingredients purchased are paid as follows:
• Forty percent in the month of purchase.
• Sixty percent in the month following the purchase.
3. Our policy is to have enough ingredients on hand at the end ofeach month to satisfy 20% of the next month’s cost ofingredients.
4. Salaries and wages are paid as follows:
• Seventy-five percent in the month incurred.
• Twenty-five percent in the following month.
5. Advertising is paid in the month incurred.
6. Utilities are paid in the month after it’s incurred.
7. Supplies are purchased and paid in the month before use.
8. Insurance is paid 50% in January and 50% in July.
9. The local taxes are paid 50% in April and 50% in October.
10. All miscellaneous expenses are paid in the month after they areincurred.
11. The long-term loan carries a 12% interest rate.
12. The owner withdraws $3,000 per month.

In addition to the amount and timing of cash flows, we need to knowwhat our initial financial position is. Financial position iscaptured by the balance sheet. The balance sheet is a listing ofour resources (assets), our obligations (liabilities), and the networth of the business (owner’s equity). The balance sheet for thePizza Shoppe on January 1, just after we purchase it, is asfollows:

ASSETS LIABILITIES
Cash $ 100 Accounts Payable $ 0
Ingredients inventory 700 Salaries & Wages Payable 0
Supplies inventory 216 Utilities payable 500
Prepaid taxes 0 Taxes payable 0
Prepaid insurance 0 Misc. expenses payable 0
Equipment & fixtures 30,000 Short-term bank loan 0
Less: Accumulated deprec. 0 Long-term bank loan 90,000
Building 60,000 Total Liabilities $ 90,500
Less: Accumulated deprec. 0
Land 29,500 OWNERS EQUITY $ 30,016
Total Assets $120,516
TOTAL LIABILITIES & O.E. $120,516

1. Which of the following identifies the proper order of theaccounting cycle?

A. Analyze, Journalize, Unadjusted Trial Balance

B. Analyze, Post, Unadjusted Trial Balance

C. Journalize, Post, Adjusted Trial Balance

D. Unadjusted Trial Balance, Adjusted Trial Balance, Close

E. Adjusted Trial Balance, Adjustments, Financial Statements

2. Interim financial statements refer to financial reports:

A. That cover less than one year, usually spanning one, three orsix-month periods

B. That are prepared before any adjustments have beenrecorded

C. That show the assets above the liabilities and theliabilities above the equity

D. Where revenues are reported on the income statement when cashis received and expenses are reported when cash is paid

E. Where the adjustment process is used to assign revenues tothe periods in which they are earned and to match expenses withrevenues

3. The accounting principle that requires revenue to be reportedwhen earned is the:

A. Matching principle

B. Revenue recognition principle

C. Time period principle

D. Accrual reporting principle

E. Going-concern principle

4. Adjusting entries:

A. Affect only income statement accounts

B. Affect only balance sheet accounts

C. Affect both income statement and balance sheet accounts

D. Affect only cash flow statement accounts

E. Affect only equity accounts

5. The system of preparing financial statements based onrecognizing revenues when the cash is received and reportingexpenses when the cash is paid is called:

A. Accrual basis accounting

B. Operating cycle accounting

C. Cash basis accounting

D. Revenue recognition accounting

E. Current basis accounting

6. If throughout an accounting period the fees for legalservices paid in advance by clients are recorded in an accountcalled Unearned Legal Fees, the end-of-period adjusting entry torecord the portion of those fees that has been earned is:

A. Debit Cash and credit Legal Fees Earned

B. Debit Cash and credit Unearned Legal Fees

C. Debit Unearned Legal Fees and credit Legal Fees Earned

D. Debit Legal Fees Earned and credit Unearned Legal Fees

E. Debit Unearned Legal Fees and credit Accounts Receivable

7. A company had no office supplies available at the beginningof the year. During the year, the company purchased $250 worth ofoffice supplies. On December 31, $75 worth of office suppliesremained. How much should the company report as office suppliesexpense for the year? A. $75 B. $125 C. $175 D. $250 E. $325 8. OnJanuary 1 a company purchased a five-year insurance policy for$1,800 with coverage starting immediately. If the purchase wasrecorded in the Prepaid Insurance account and the company recordsadjustments only at year-end, the adjusting entry at the end of thefirst year is:

A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800

B. Debit Prepaid Insurance, $1,440; credit Insurance Expense,$1,440

C. Debit Prepaid Insurance, $360; credit Insurance Expense,$360

D. Debit Insurance Expense, $360; credit Prepaid Insurance,$360

E. Debit Insurance Expense, $360; credit Prepaid Insurance,$1,440

9. Unearned revenue is reported on the financial statementsas:

A. A revenue on the balance sheet

B. A liability on the balance sheet

C. An unearned revenue on the income statement

D. An asset on the balance sheet

E. An operating activity on the statement of cash flows

10. Which of the following assets is not depreciated?

A. Store fixtures

B. Computers

C. Land

D. Buildings

E. Vehicles

11. On April 30, 2011, a three-year insurance policy waspurchased for $18,000 with coverage to begin immediately. What isthe amount of insurance expense that would appear on the company'sincome statement for the year ended December 31, 2011? A. $500 B.$4,000 C. $6,000 D. $14,000 E. $18,000 12. Expenses incurred butunpaid that are recorded during the adjusting process with a debitto an expense and a credit to a liability are:

A. Intangible expenses

B. Prepaid expenses

C. Unearned expenses

D. Net expenses

E. Accrued expenses

13 The difference between the cost of an asset and theaccumulated depreciation for that asset is called

A. Depreciation Expense

B. Unearned Depreciation

C. Prepaid Depreciation

D. Depreciation Value

E. Book Value

14. A company purchased a new truck at a cost of $42,000 on July1, 2011. The truck is estimated to have a useful life of 6 yearsand a salvage value of $3,000. How much depreciation expense willbe recorded for the truck for the year ended December 31, 2011?

A. $3,250

B. $3,500

C. $4,000

D. $6,500

E. $7,000

15. A company's Office Supplies account shows a beginningbalance of $600 and an ending balance of $400. If office suppliesexpense for the year is $3,100, what amount of office supplies waspurchased during the period?

A. $2,700

B. $2,900

C. $3,300

D. $3,500

E. $3,700