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ACTG 211 Lecture Notes - Lecture 1: Cash Flow, Income Statement, Operating Cash Flow

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School
University of Oregon
Department
Accounting
Course
ACTG 211
Professor
Brandt

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Document Summary

Balance sheet: cash equivalents are short-term investments with a date of three months or less. Accounts receivable is money that other customers or companies owe to rei. Inventory is the amount of money the items in the warehouse are worth: rei has two types of investments; short term and long term. Short term investments are due in one year or less while long term investments are due in more than one year: customer related obligations are requirements that the government makes to have companies help their customers. What is interesting is the patronage dividends are not automatically paid out. The customer has to ask for their amount offered. 100% of dividends are redeemed, the exact number was not given in the annual report. Patrons have until january 3rd, two years after the date the dividends were posted: rei is a cooperative. This means that the members own it instead of a ceo.

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Related Questions

Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three years follow:

CERMCO Balance Sheet December 31
20X5 20X4 20X3
Assets
Current assets
Cash and cash equivalents $390 $1,386 $2,603
Short-term investments — — —
Net receivables 720 664 1,225
Inventory — — —
Other current assets 412 469 892
Total current assets $1,522 $2,519 $4,720
Long-term investments 1,215 — —
Property, plant, and equipment 76 258 454
Goodwill 545 1,757 2,194
Intangible assets 999 1,844 3,644
Accumulated amortization — — —
Other assets — — —
Deferred long-term asset charges — — —
Total assets $4,357 $6,378 $11,012
Liabilities
Current liabilities
Accounts payable $469 $1,174 $1,436
Short/Current long-term debt — — 600
Other current liabilities 1,227 1,358 1,496
Total current liabilities $1,696 $2,532 $3,532
Long-term debt — — —
Other liabilities — — —
Deferred long-term liability charges — — —
Minority Interest — — —
Negative goodwill — — —
Total liabilities 1,696 2,532 3,532
Stockholders' equity
Misc. stock option warrants — — —
Redeemable preferred stock — — —
Preferred stock 3,014 3,211 2,333
Common stock 16 16 13
Retained earnings –25,513 –23,814 –19,165
Treasury stock — — —
Capital surplus 25,168 25,564 25,862
Other stockholders’ equity –24 –1,131 –1,563
Total stockholders’ equity $2,661 $3,846 $7,480

Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.

Cermco produces and sells specialty customer relationshipmanagement (CRM) solutions to small and medium-size businesses inthe United States and Canada. The company is more than 20 years oldand has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of itsproduct to easily integrate with various accounting and ERPsystems. As a result, even when clients upgrade their entireaccounting systems to expensive ERP solutions, they continue to useCermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about$11 million (20X3), $7 million (20X4), and $3 million (20X5),respectively. Overall interest expenses and operating margins haveremained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in marketshare as a result of natural client turnover and the entrance ofmany other small competing software companies into the market.Nevertheless, Cermco’s CRM product continues to enjoy the highestindustry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three yearsfollow:

CERMCO

Balance Sheet

December 31

20X5

20X4

20X3

Assets

Current assets

Cash and cash equivalents

$390

$1,386

$2,603

Short-term investments

—

—

—

Net receivables

720

664

1,225

Inventory

—

—

—

Other current assets

412

469

892

Total current assets

$1,522

$2,519

$4,720

Long-term investments

1,215

—

—

Property, plant, and equipment

76

258

454

Goodwill

545

1,757

2,194

Intangible assets

999

1,844

3,644

Accumulated amortization

—

—

—

Other assets

—

—

—

Deferred long-term asset charges

—

—

—

Total assets

$4,357

$6,378

$11,012

Liabilities

Current liabilities

Accounts payable

$469

$1,174

$1,436

Short/Current long-term debt

—

—

600

Other current liabilities

1,227

1,358

1,496

Total current liabilities

$1,696

$2,532

$3,532

Long-term debt

—

—

—

Other liabilities

—

—

—

Deferred long-term liability charges

—

—

—

Minority Interest

—

—

—

Negative goodwill

—

—

—

Total liabilities

1,696

2,532

3,532

Stockholders' equity

Misc. stock option warrants

—

—

—

Redeemable preferred stock

—

—

—

Preferred stock

3,014

3,211

2,333

Common stock

16

16

13

Retained earnings

–25,513

–23,814

–19,165

Treasury stock

—

—

—

Capital surplus

25,168

25,564

25,862

Other stockholders’ equity

–24

–1,131

–1,563

Total stockholders’ equity

$2,661

$3,846

$7,480

Produce a valuation estimate for Cermco for December 31, 20X5.Use whatever valuation method you think best but justify yourchoice. Note that you can estimate the annual income fromyear-to-year changes in the balance sheet.


1. As of December 31, 2000, DaltonCompany has $7,240 cash in its checking account, as well as severalother items listed below:



Bank credit card slips signed by customers $ 900


Money market fund balance 4,000


Investment in US Treasury bills 10,000


Checks received from customers, but not


yet deposited in the bank 700


Investment in ATT 10% bonds, maturing June2001 15,000




What amount should be shown in Dalton's December 31,2000, balance sheet as "Cash and cash equivalents"?

A) $15,600.

B) $22,840

C) $37,840

D) $30,600


The Cash account in the ledger of Townhouse Co. shows a balanceof $16,526 at September 30. The bank statement, however, shows abalance of $20,900 at the same date. The only reconciling itemsconsist of a bank service charge of $6, a large number ofoutstanding checks totaling $5,930, and a deposit in transit.


2. Refer to the abovedata. What is the adjusted cash balance in the September30 bank reconciliation?




Answer A) $10,590.

B) $16,520.

C) $14,970

D) $14,964


3. Silbey Inc. had accounts receivable of$200,000 and an allowance for doubtful accounts of $8,700 justbefore writing off as worthless an account receivable from WalleyCompany of $1,200. After writing off this receivable what would bethe balance in Silbey's Allowance for Doubtful Accounts?

Answer A) $8,700 creditbalance.

B) $9,900 credit balance.

C) $7,500 credit balance.

D) $7,500 debit balance.


4. At the start of the current year, AcquaCorporation had a credit balance in the Allowance for DoubtfulAccounts of $1,200. During the year a monthly provision of 2% ofsales was made for uncollectible accounts. Sales for the year were$400,000, and $7,400 of accounts receivable were written off asworthless. No recoveries of accounts previously written off weremade during the year. The year-end financial statements shouldshow:

A) Uncollectible accountsexpense of $15,400.

B) Allowance forDoubtful Accounts with a credit balance of $1,800.

C) Allowance forDoubtful Accounts with a credit balance of $8,600.

D) Uncollectibleaccounts expense of $7,400.


5. Vector Corporation invested $290,000cash in available-for-sale marketable securities in earlyDecember. On December 31, the quoted market price forthese securities is $307,000. Which of the followingstatements is correct?

Answer A) Vector'sDecember income statement includes a $17,000 gain oninvestments.

B) If Vector sellsthese investments on January 2 for $300,000, it will report a lossof $7,000.

C) Vector's December 31balance sheet reports marketable securities at $290,000 and anUnrealized Holding Gain on investments of $17,000.

D) Vector's December 31balance sheet reports marketable securities at $307,000 and anUnrealized Holding Gain on Investments of $17,000.

.

6. On June 1, 2001, Swift Company acquired a 10%, ten-month notereceivable from a customer in settlement of an existing accountreceivable of $120,000. Interest and principal are due atmaturity.

8. Refer to the abovedata. The proper adjusting entry at December 31, 2001,with regard to this note receivable includes a:




A) Debit to Cash of $7,000.

B) Debit to NotesReceivable of $12,000.

C) Credit to InterestRevenue of $12,000.

D) Debit to AccruedInterest Receivable of $7,000.

7. In order to achieve internal controlover cash receipts:

A) The employee who handleschecks received in the mail should not prepare the controllisting.

B) The cashier shouldnot deposit cash in the bank.

C) The salesclerkshould not count the cash in the register at the end of theday.

D) The checks receivedin the mail from customers should not be sent to the accountingdepartment to be recorded as cash receipts.


Use the following to answer questions 8 - 9:


On November 1, 2000, Raceway Corporation sold land priced at$700,000 in exchange for a 12%, six-month note receivable.



8 Refer to the above data. Raceway'sbalance sheet at December 31, 2000, includes which of the followingas a result of the sale of land on November 1?




A) Notes Receivable of$700,000 and Interest Receivable of $14,000.

B) Notes Receivable of$742,000 and Interest Receivable of $14,000.

C) Notes Receivable of$700,000 and Interest Receivable of $42,000.

D) Notes Receivable of$700,000 only.

9. Refer to the above data. OnMay 1, 2001 (maturity date), the note is collected in full byRaceway Corporation. Assuming a fiscal year-end of December 31,Raceway recognizes which of the following in its income statementfor 2001 with regard to this note?

A) $742,000 sales revenue

B) $28,000 interest revenue.

C) $14,000 interest revenue

D) $42,000 interest revenue

10. When there is an Allowance for Doubtful Accountsin use, the writing-off of an uncollectible accounts receivablewill:

A). Reduce income

B) Reduce an expense

C). Not change income or totalassets

D). Increase totalassets


11. At the end of January, the unadjusted trialbalance of Windsor, Inc. included the following accounts:


Debit Credit

Sales (80% represent credit sales) 500,000

Accounts Receivable 340,000

Allowance for Doubtful Accounts 800




Refer to the above data. Windsor uses the balance sheet approachin estimating uncollectible accounts expense, and aging theaccounts receivable indicates the estimated uncollectible portionto be $7,400. What is the amount of uncollectible accounts expenserecognized in Windsor's income statement for January?

A). $7,400

B). $6,600

C). $8,200

D). Some otheramount

12. Deegan Industries has an accounts receivableturnover rate of 8. Which of the following statements is nottrue?

A). Deegan's accounts receivableare more liquid than those of a business whose accounts receivableturnover rate is 5

B). Deegan waits approximately 46days to make collections of its credit sales. (Use 365 days in ayear.)

C). Deegan writes off accountsreceivable as uncollectible if they are over 45 daysold.

D). Deegan's net credit sales are about eighttimes the amount of its average accounts receivable

13. Randall, Inc. uses the allowance method supportedby an aging of its accounts receivable to recognize uncollectibleaccounts expense in its financial statements. What method ofrecognizing this expense does Randall use in its income taxreturn?

A). It must use the same method

B). The direct write-offmethod

C). Either the balance sheet or incomestatement approach is acceptable.

D). None, since uncollectible accounts expenseis not deductible for income tax purposes


14. If a 15%, 60-day note receivable is acquired froma customer in settlement of an existing account receivable of$5,000, the accounting entry for acquisition of the note will:


A). Include a debit to Notes Receivable for$5,750

B). Include a debit to Notes Receivable for$5,062.50

C). Include a credit to Interest Revenue for$62.50.

D). Include a debit to Notes Receivable for$5,000 and no entry for interest


15. On June 1, 2009, Jensen Company acquired an 8%,ten-month note receivable from a customer in settlement of anexisting account receivable of $130,000. Interest and principal aredue at maturity. The company has a December 31st year-end. Jensen'sentry to record the collection of this note at maturity includesa:


A). Credit to Accrued Interest Receivable of$6,067

B). Credit to Interest Revenue of$6,067

C). Credit to Interest Receivable of$2,600

D). Credit to Notes Receivable of$140,400