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ACC 100 Study Guide - Final Guide: Inventory Control, Financial Statement, Accounts Receivable

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lavendermole636
12 Apr 2016
School
Ryerson University
Department
Accounting
Course
ACC 100
Professor
Else Grech

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Document Summary

This is important to creditors because creditors like the bank use the informaion from the inancial statements to make decisions about how much money to lend a business. When they lend money to a business they want to be repaid the amount of the loan, called the principal, plus any interest. As part of the loan agreement they may use some of the business"s assets as collateral, also called security. It means that, if the business cannot pay of the loan, the bank will come and take their inventory. The bank will sell it themselves to try and make back (recoup) what they lost when the business did not pay their loan. It is therefore important that businesses value their assets, especially their inventory, at the future beneit they will get from selling their inventory. Doing anything else would be misleading to stakeholders like the bank who use the inancial statements to make decisions about their relaionship with the business.

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Related Questions

1. Creditors' claims on the assets of a company are called: (Points : 2)
 
Net losses
Expenses
Revenues
Equity
Liabilities
 
2. The primary objective of financial accounting is: (Points : 2)
 
To serve the decision-making needs of internal users
To provide financial statements to help external users analyze and interpret an organization's activities
To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services
To know what, when and how muchto produce
 
3. Assets created by selling goods and services on credit are: (Points : 2)
 
Accounts payable
Accounts receivable
Liabilities
Expenses
 
4. The debt ratio is used: (Points : 2)
 
To measure the amount of equity relative to the expenses
To reflect the risk associated with a company's debts
Only by banks when a business applies for a loan
To determine how much debt a firm should pay off
 
5. Net Income: (Points : 2)
 
Decreases equity
Represents the amount of assets owners put into a business
Equals assets minus liabilities
Is the excess of revenues over expenses
Represents the owners' claims against assets
 
6. Internal users of accounting information include: (Points : 2)
 
Shareholders
Customers
Creditors
Government regulators
Line Supervisor
 
7. Risk is: (Points : 2)
 
Net income divided by average total assets
The reward for investment
The uncertainty about the expected return that will be earned from an investment
Unrelated to expected return
 
8. An example of an operating activity is: (Points : 2)
 
Paying wages
Purchasing office equipment
Borrowing money from a bank
Selling stock
Paying off a loan
 
9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)
 
Business entity assumption
Monetary unit assumption
Value assumption
Cost assumption
Time period assumption
 
10. Distributions of assets by a business to its stockholders are called: (Points : 2)
 
Dividends
Expenses
Assets
Retained earnings
Net Income

Derek and Meagan Jacoby recently graduated from State Universityand Derek accepted a job in business consulting while Meaganaccepted a job in computer programming. Meagan inherited $32,000from her grandfather who recently passed away. The couple isdebating whether they should buy or rent a home. They located arental home that meets their needs. The monthly rent is $2,350.They also found a three-bedroom home that would cost $112,000 topurchase. The Jacobys could use Meagan’s inheritance for a downpayment on the home. Thus, they would need to borrow $80,000 toacquire the home. They have the option of paying two discountpoints to receive a fixed interest rate of 4.50 percent on the loanor paying no points and receiving a fixed interest rate of 5.75percent for a 30-year fixed loan. Though anything could happen, thecouple expects to live in the home for no more than five yearsbefore relocating to a different region of the country. Derek andMeagan don’t have any school-related debt, so they will save the$32,000 if they don’t purchase a home. Also, consider the followinginformation: The couple’s marginal tax rate is 24 percent.Regardless of whether they buy or rent, the couple will itemizetheir deductions. If they buy, the Jacobys would purchase and moveinto the home on January 1, 2018. If they buy the home, theproperty taxes for the year are $3,700. Disregard loan-related feesnot mentioned above. If the couple does not buy a home, they willput their money into their savings account where they earn 5percent annual interest. Assume that all unstated costs are equalbetween the buy and rent option. Required: Help the Jacobys withtheir decisions by answering the following questions: (Leave noanswer blank. Enter zero if applicable.)

a. If the Jacobys decide to rent the home, whatis their after-tax cost of the rental for the first year (includeincome from the savings account in your analysis)? (Roundyour intermediate calculations to the nearest whole dollaramount.)

b. What is the approximate break-even point inyears for paying the points to receive a reduced interest rate? (Tosimplify this computation, assume the Jacobys will makeinterest-only payments, and ignore the time value of money.)(Do not round intermediate calculations. Round your finalanswer to 1 decimal place.)

c. What is the after-tax cost (in interest andproperty taxes) of living in the home for 2018? Assume that theJacobys' interest rate is 5.75 percent, they do not pay discountpoints, they make interest-only payments for the first year, andthe value of the home does not change during the year.(Round your intermediate calculations to the nearest wholedollar amount.)

d. Assume that on March 1, 2018, the Jacobyssold their home for $133,000, so that Derek and Meagan could acceptjob opportunities in a different state. The Jacobys used the saleproceeds to (1) pay off the $80,000 principal of the mortgage, (2)pay a $10,000 commission to their real estate broker, and (3) makea down payment on a new home in the different state. However, thenew home cost only $60,000. Assume they make interest-only paymentson the loan.

Required:

d1. What gain or loss do the Jacobys realizeand recognize on the sale of their home?

d2. What amount of taxes must they pay on thegain, if any?

Read the situation and determine the type of account ownership,why you chose that type of account, what the tile of the accountwill read and what documents would be required to open theaccount

Situation 1

Bill and Jean Atkinson are both 49 years old. They married lastFriday in the Los Angeles County Courthouse. As practicing lawyers,they knew the judge, and some of their close friends and adultchildren attended the ceremony. In fact, the judge advised themabout the prenuptial agreement, which they filed. That was a monthago. Today they are busy setting up their home. They go to theirbank and begin the process of opening up a deposit account forhousehold expenses (each has an individual checking account). Theyexplain to their banker that they want an account where bothsignatures are required to make a transaction valid.

Situation 2

Edith, a widow, is 90 years old. She has poor eyesight;arthritis makes it difficult to use her hands. And she has troubleremembering recent event, such as whether she deposited her SocialSecurity check. Edith has no immediate family, so her niece, Sally,has taken the necessary step of obtaining a court decree to makeher aunt her ward and assume her financial affairs. Today she is atEdith’s bank and will set up a deposit account so she can writechecks to pay for Edith’s health care and other expenses.

Situation 3

A few months ago, Ramona Castile opened a store called “LookingGood” that specializes in beauty products. It is a great successand has been featured in the local newspaper. Ramona has used herown checking account so far, but now she wants to set up an accountwith the business name.