AFM121 Chapter Notes - Chapter 3: Accrual, Financial Statement, Income Statement

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erinplatypus481

13 Jul 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM121

Professor

Andrew Ecclestone

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Document Summary

Chapter 3: describe a typical business operating cycle and explain the necessity for the periodicity assumption. Purchase g/s -----> pay cash to suppliers -----> sell goods and services to customers. ----> receive cash from customers -----> repeat: explain how business activities affect the elements of the income statement. Elements on the classified income statement: revenues - increases in assets (sales of g/s) or payments of liabilities from ongoing operations. P. 117: prepare an income statement and understand the difference between profit and cash flow from operations. Total asset turnover ratio = sales (or operating) revenues: measures sales generated from use of assets, high ratio = company is managing assets. Average total assets (beginning total assets + ending total assets) 2 efficiently. Return on assets (roa) = profit + interest expense (net of tax: measures how much company earned from use of assets during period, high ratio = company.

Related Questions

Ravenna Company is a merchandiser that uses the indirect methodto prepare the operating activities section of its statement ofcash flows. Its balance sheet for this year is as follows:

	Ending Balance		Beginning Balance
Cash	$	52,800	$	62,700
Accounts receivable		45,100		48,400
Inventory		60,500		55,000

Total current assets		158,400		166,100

Property, plant, and equipment		165,000		154,000
Less accumulated depreciation		55,000		38,500

Net property, plant, and equipment		110,000		115,500

Total assets	$	268,400	$	281,600

Accounts payable	$	35,200	$	62,700
Income taxes payable		27,500		30,900
Bonds payable		66,000		55,000
Common stock		77,000		66,000
Retained earnings		62,700		67,000

Total liabilities and stockholdersâ equity	$	268,400	$	281,600

During the year, Ravenna paid a $6,600 cash dividend and it solda piece of equipment for $3,300 that had originally cost $6,600 andhad accumulated depreciation of $4,400. The company did not retireany bonds or repurchase any of its own common stock during theyear.

1.	What is the amount of the net increase or decrease in cash andcash equivalents that would be shown on the companyâs statement ofcash flows?
3.	How much depreciation would the company add to net income on itsstatement of cash flows?
5-a.	What is the amount and direction (+ or â) of the accountsreceivable adjustment to net income in the operating activitiessection of the statement of cash flows?

5-b.

What does this adjustment represent?

	Cash collected from customers < Credit sales
	Cash collected from customers > Credit sales
	Cash payments > Cash collected

7-a.

What is the combined amount and direction (+ or â) of theinventory and accounts payable adjustments to net income in theoperating activities section of the statement of cash flows?

7-b.

What does this amount represent?

	Cash paid to suppliers > Purchases
	Cash paid to suppliers < Cost of goods sold
	Cash paid to suppliers > Cost of goods sold

1. Creditors' claims on the assets of a company are called: (Points : 2)

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)

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)

Anderson Accounting Services LLC provides accounting and tax preparation and consulting services. Sometimes customers only wish to have financial statements and/or tax returns prepared. Sometimes customers bundle accounting and tax preparation with consulting services (to be provided over a period of time). Sometimes customers only wish to have consulting services provided over a period of time. Because Anderson is a service firm there is no cost of goods sold associated with their services.

Customer is Civic Corporation	1
Tax consulting begins on November 1st and runs through the next April	11/1/X7
Date of contract	11/1/X7
Length of consulting services	6 months	months
Tax return preparation occurs over the period February through April of	20X8
Length of tax prepartion	3 months
Price of tax preparation to be allocated over the return preparation period	$ 2,000	stand alone price
Price of consulting services to be allocated over consulting period	$ 5,000	stand alone price
Customers are charged a lesser amount as follows for both tax and consulting	$ 6,000
Anderson Accounting Services LLC's current year end	12/31/X7
Customers pay at the contract date for BOTH the consulting and tax preparation services.

What are the performance obligations in the contract?

Tax preparation services

Tax preparation services and tax consulting services

Unable to determine

D.Tax consulting services

QUESTION 3

Determine the transaction price that should be allocated to the consulting services.

	A.	$4,286
	B.	$1,714
	C.	$1,429
	D.	$4,571

QUESTION 4

Calculate the total revenue that should be recognized in the current accounting period.

	A.	$4,571
	B.	$1,714
	C.	$1,429
		D. $4,286

QUESTION 5

What is the total amount in the deferred revenue account(s) at the end of the current accounting period?

	A.	$1,714
	B.	$4,571
	C.	$4,286
	D.	$1,429

QUESTION 6

What is the total amount of revenue that should be recognized in the NEXT accounting period period?

	A.	$1,714
	B.	$4,286
	C.	$1,429
	D.	$4,571

QUESTION 7

The following journal entry has what impact on the income statement?

Debit Cash XXX

Credit Deferred Revenue XXX

	A.	No impact
	B.	Decrease
	C.	Increase

QUESTION 8

The following journal entry has what impact on the income statement?

Debit Cash XXX

Credit Accounts Receivable XXX

	A.	No impact
	B.	Increase
	C.	Decrease

QUESTION 9

Revenue is defined as:

An inflow or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entityâs ongoing major or central operations.

Revenue is recognized from the settlement of which of the following liabilities:

	A.	Discount on Bonds Payable
	B.	Deferred Revenue
	C.	Salaries Payable
	D.	Accrued Interest

QUESTION 10

A customer must have "control" over the good or service in order for a performance obligation to be considered as having been satisfied for purposes of revenue recognition.

	A.	TRUE
	B.	FALSE

AFM121 Chapter Notes - Chapter 3: Accrual, Financial Statement, Income Statement

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