5e Review of Business Activities and Financial Statements

Module 2

Review of Business Activities

and Financial Statements

Module 2: Review of Business Activities and Financial Statements

True/False

Topic: Definition of an Asset

LO: 1

1. In order for an asset to be reported on the balance sheet, it must be owned or controlled by the company and be expected to provide future benefits.

Topic: Historical Cost

LO: 1

2. Assets are reported on the balance sheet at their current market value.

Topic: Book vs. Market Value

LO: 1

3. The book value of stockholders’ equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company.

Topic: Reporting of Assets and Liabilities

LO: 1

4. Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity.

Topic: Unrecorded Assets

LO: 1

5. In addition to purchased assets like inventories and equipment, companies also may report on their balance sheets intangible assets such as the value of a brand name.

Topic: Liabilities

LO: 1

6. Liabilities and equities are both claims against the assets of a company.

Topic: Unearned Revenue and Revenue Recognition Principle

(more challenging—involves unearned revenue and recognition thereof.)

LO: 1, 2

7. A customer’s prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle.

Topic: Revenue Recognition Principle and Cash

LO: 2

8. According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors.

Topic: Accrual Accounting for Expenses

LO: 2

9. Under accrual accounting principles, the cost of inventory should be reported as an expense in the income statement when it is sold, regardless of when it was purchased.

Topic: Statement of Cash Flows

LO: 4

10. The statement of cash flows has three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from capital activities.

Topic: Net working Capital

LO: 1

11. Net working capital = Current assets + Current liabilities

Topic: Articulation of Financial Statements

LO: 5

12. Articulation refers to the concept that financial statements are linked to each other and linked across time.

Topic: Articulation of Financial Statements

LO: 5

13. The income statements of the prior and current year are linked via the balance sheet.

Topic: Articulation of Retained Earnings

LO: 5

14. Retained earnings articulate across time which means that last period’s retained earnings plus current period net income (or loss) is equal to the current period’s retained earnings.

Topic: Financial Statement Effects Template

LO: 6

15. The financial statement effects template captures the effects of transactions on all four financial statements.

Topic: Journal Entries

LO: 6

16. Assets, expenses and dividends increase with debits.

Topic: Journal Entries

LO: 6

17. Increases are recorded on the left side of asset T-accounts and on the right side of liability T-accounts.

Topic: Financial Statement Effects of Transactions

LO: 6

18. When shareholders contribute capital to a company, earned capital increases because the company has earned the shareholders’ investments.

Topic: Financial Statement Effects of Transactions

LO: 6

19. Revenues and expenses affect the income statement but not the balance sheet.

Topic: Financial Statement Effects of Transactions

LO: 6

20. Revenue is typically recorded as earned when cash is received because that is when the company can measure the revenue objectively.

Topic: Financial Statement Effects of Transactions

LO: 7

21. Expenses that are paid in advance are held on the balance sheet until the end of the accounting period when they are transferred to the income statement with accounting adjustments.

Topic: Accrual Accounting

LO: 7

22. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid.

Topic: Accrual Accounting

LO: 7

23. The journal entry for recording sales revenue that has been earned is to debit accounts receivable if cash will be received later, or credit unearned revenue if cash was received in advance.

Topic: Accounting Adjustments

LO: 7

24. The journal entry for recording cost of sales is to debit cost of sales expense and credit the inventory account.

Topic: Accounting Adjustments

LO: 7

25. Companies make adjustments to more accurately reflect items on the income statement and the balance sheet.

Topic: Preparing Financial Statements

LO: 8

26. There is a certain order in which a company prepares its financial statements. First, a company prepares its balance sheet.

Topic: Preparing Financial Statements

LO: 8

27. Two steps must be completed in order to prepare financial statements: recording transactions during the period and adjusting records to ensure all events are properly recorded.

Topic: Closing Accounts

LO: 9

28. A company closes all of its accounts in order to zero out the balances so that next period starts with a fresh slate.

Topic: Closing Accounts

LO: 9

29. To close revenue accounts, a company must debit Retained Earnings because Revenue has a credit balance and debits must equal credits.

Topic: Additional Information Sources

LO: 10

30. All companies must file with the SEC a detailed annual report and discussion of their business activities in their Form 10-K.

Topic: Additional Information Sources

LO: 10

31. A publicly traded company must file a Form 8-K with the SEC within four business days following a change in its certified public accounting firm.

Topic: Reporting of Assets

LO: 1

1. Assets are recorded in the balance sheet in order of:

A) Market Value

B) Historic Value

C) Liquidity

D) Maturity

E) None of the above

Topic: Current Assets

LO: 1

2. Which of the following are included in current assets?

A) Prepaid rent

B) Taxes payable

C) Automobiles

D) Common stock

E) None of the above

Topic: Net Working Capital—Numerical calculations required

LO: 1

3. In 2016, Southwest Airlines had negative net working capital of $(2,346) million and current assets of $4,498 million.

The firm’s current liabilities are:

A) $2,152 million

B) $6,844 million

C) $2,346 million

D) $5,236 million

E) There is not enough information to calculate the amount.

Topic: Net Working Capital—Numerical calculations required

LO: 1

4. In 2016, Delphi Automotive PLC had current assets of $5,419 million and current liabilities of $4,148 million.

The firm’s net working capital is:

A) $ 1,271 million

B) $ 5,419 million

C) $ (1,271) million

D) $ 9,567 million

E) None of the above

Topic: Net Working Capital—Numerical calculations required

LO: 1

5. In 2016, Kohl’s Corporation had net working capital of $2,273 million and current liabilities of $2,974 million.

The firm’s current assets are:

A) $ 8,221 million

B) $ (8,221) million

C) $ 5,247 million

D) $ 2,974 million

E) None of the above

Topic: Liabilities

LO: 1

6. Which one of the following is not a current liability?

A) Taxes payable

B) Accounts payable

C) Wages payable

D) Wage expense

E) None of the above

Topic: Stockholders’ Equity

LO: 1

7. Which of the following is included as a component of stockholders’ equity?

A) Buildings

B) Retained earnings

C) Prepaid property taxes

D) Accounts payable

E) Dividends

Topic: Recognition of Costs as Expense

LO: 1

8. As inventory and property plant and equipment on the balance sheet are consumed, they are reflected:

A) As a revenue on the income statement

B) As an expense on the income statement

C) As a use of cash on the statement of cash flows

D) On the balance sheet because assets are never consumed

E) Both B and C because the financial statements articulate

Topic: Income Statement

LO: 2

9. Interest expense appears in which financial statement?

A) Statement of stockholders’ equity

B) Balance sheet

C) Income statement

D) Statement of cash flows

E) All of the above

Topic: Gross Profit—Numerical calculations required

LO: 2

10. During fiscal 2016, Mattel had sales of $5,456,650, total expenses of $5,138,628 and gross profit of $2,554,391.

What was Mattel’s cost of sales for 2016? ($ in thousands)

A) $ 2,102,065 thousand

B) $ 5,138,628 thousand

C) $ 2,902,259 thousand

D) $ 903,944 thousand

E) There is not enough information to calculate the cost of sales.

Topic: Net Income—Numerical calculations required

LO: 2

11. During fiscal 2016, Kohl’s had sales of $18,686 million, Cost of merchandise sold of $11,944 million, and gross profit of $6,741 million.

What was net income for 2016?

A) $ 6,741 million

B) $ 11,944 million

C) $ 5,299 million

D) $ 18,686 million

E) There is not enough information to calculate the amount.

Topic: Net Income—Numerical calculations required

LO: 2

12. During 2016, Skechers U.S.A., Inc. had Sales of $3,563.3 million, Gross profit of $1,634.6 million and Selling, general, and administrative expenses of $1,278.0 million.

What was Skechers’ Cost of sales for 2016?

A) $ 1,115.7 million

B) $ 1,928.7 million

C) $ 88.1 million

D) $ 1,549.5 million

E) There is not enough information to calculate the amount.

Topic: Components of Financial Statements—Numerical calculations required

(more challenging; total assets not given)

LO: 1

13. In its December 31, 2016 financial statements, Harley-Davidson reported the following (in millions):

At December 31, 2016, current assets amount to:

A) $2,863 million

B) $3,854 million

C) $7,970 million

D) $5,519 million

E) None of the above

Topic: Components of Financial Statements—Numerical calculations required

LO: 1

14. In 2016, Nordstrom, Inc. reported the following (in millions):

What amount did Nordstrom report as total assets?

A) $ 4,616 million

B) $ 3,950 million

C) $ 7,307 million

D) $ 13,170 million

E) None of the above

Topic: Components of Financial Statements—Numerical calculations required

LO: 1

15. In 2016, Caterpillar Inc. reported the following (in millions):

What amount did Caterpillar report as equity in 2016?

A) $36,721 million

B) $13,213 million

C) $84,896 million

D) $17,457 million

E) None of the above

Topic: Articulation of Statement of Retained Earnings with Income Statement—Numerical calculations required

LO: 5

16. During fiscal year-end 2016, Kohl’s Corporation reports the following (in $ millions): net income of $556, retained earnings at the end of the year of $12,522 and retained earnings at the beginning of the year of $12,329. Assume that there were no other retained earnings transactions during fiscal 2016.

What dividends did the firm pay in fiscal year ended January 28, 2017?

A) $ 683 million

B) $ 1,669 million

C) $ 363 million

D) $-0-

E) There is not enough information to calculate the amount.

Topic: Articulation of Statement of Retained Earnings with Balance Sheet—Numerical calculations required

LO: 5

17. Caterpillar Inc. reports a net loss for 2016 of $(67) million, retained earnings at the end of the year of $27,377 million, and dividends during the year of $1,802 million.

What was the company’s retained earnings balance at the start of 2016?

A) $29,246 million

B) $30,361 million

C) $28,065 million

D) $26,572 million

E) There is not enough information to calculate the amount.

Topic: Articulation of Statement of Retained Earnings with Balance Sheet—Numerical calculations required

LO: 5

18. Pfizer Inc., a pharmaceutical company, reported net income for fiscal 2016 of $7,215 million, retained earnings at the start of the year of $71,993 million and dividends of $7,448 million, and other transactions with shareholders that increased retained earnings during the year by $14 million.

If there were no additional transactions during the year that affected retained earnings, what was the balance of retained earnings at the end of the year?

A) $ 71,774 million

B) $ 38,748 million

C) $ 124,926 million

D) $ 47,729 million

E) There is not enough information to calculate the amount.

Topic: Articulation of Statement of Retained Earnings with Income Statement—Numerical calculations required

LO: 5

19. Intel reports retained earnings at the end of fiscal 2016 of $40,747 million and retained earnings at the end of fiscal 2015 of $37,614 million. The company reported dividends of $4,925 million and other transactions with shareholders that reduced retained earnings during the year by $2,258 million.

How much net income did the firm report in fiscal 2016?

A) $ 3,133 million net income

B) $ 3,133 million net loss

C) $10,316 million net income

D) $10,316 million net loss

E) None of the above

Topic: Articulation of Statement of Cash Flows with Balance Sheet—Numerical calculations required

LO: 4, 5

20. In its fiscal 2016 annual report, Nike, Inc. reported cash of $3,138 million at year end. The statement of cash flows reports the following (in millions):

What was the balance in Nike’s cash account at the start of fiscal 2016?

A) $3,096 million

B) $1,020 million

C) $3,852 million

D) $4,357 million

E) None of the above

Topic: Articulation of Statement of Cash Flows with Balance Sheet—Numerical calculations required

LO: 4, 5

21. In its fiscal 2016 balance sheet, JetBlue Airways Corporation, reported cash of $443 million at year-end. The statement of cash flows reports that cash increased by $115 million during the year and that net cash flow from operating activities was $1,632 million.

What was the cash flow from investing activities during the year?

A) $533 million cash outflow

B) $715 million cash inflow

C) $533 million cash inflow

D) $715 million cash outflow

E) There is not enough information to determine the amount.

Topic: Articulation of Statement of Cash Flows with Balance Sheet—Numerical calculations required

LO: 4, 5

22. In its fiscal year ended January 28, 2017 balance sheet, Big Lots, Inc., reported cash and cash equivalents at the start of the year of $54,144 thousand. By the end of the year, the cash and cash equivalents had decreased to $51,164 thousand. The company’s statement of cash flows reported cash from operating activities of $311,925 thousand, cash from financing activities of $(230,204) thousand.

What amount did the company report for cash from investing activities?

A) $ 122,391 thousand cash inflow

B) $ 7,966 thousand cash outflow

C) $ 84,701 thousand cash inflow

D) $ 84,701 thousand cash outflow

E) None of the above.

Topic: Statement of Cash Flows—Numerical calculations required

LO: 4, 5

23. On its fiscal year ended February 3, 2017 statement of cash flows, Dell Technologies Inc. reports the following (in millions):

What did Dell report for “Net cash from financing activities” during fiscal year ended 2017?

A) $31,932 million cash inflow

B) $31,932 million cash outflow

C) $2,898 million cash inflow

D) $2,898 million cash outflow

E) None of the above

Topic: Transaction Effects on the Balance Sheet

LO: 1

24. How would cash collected on accounts receivable affect the balance sheet?

A) Increase liabilities and decrease equity

B) Decrease liabilities and increase equity

C) Increase assets and decrease assets

D) Increase assets and increase equity

Topic: Transaction Effects on the Income Statement (more challenging)

LO: 2

25. How would a purchase of inventory on credit affect the income statement?

A) It would increase liabilities

B) It would decrease retained earnings

C) It would increase assets

D) Both A and C, above

E) None of the above

Topic: Cash Conversion Cycle

LO: 1

26. The cash conversion cycle is computed as

A) Days sales outstanding + Days inventory outstanding – Days payable outstanding

B) Days sales outstanding – Days payable outstanding

C) Days sales outstanding – Days inventory outstanding

D) Days sales outstanding – Days inventory outstanding + Days payable outstanding

E) None of the above

Topic: Cash Conversion Cycle—Numerical calculations required

LO: 1

27. Prestige Company has determined the following information for its recent fiscal year.

Compute Prestige Company’s cash conversion cycle.

A) 8.2 days

B) 77.2 days

C) 105.4 days

D) 99.5 days

E) None of the above

Topic: Gross Profit Margin—Numerical calculations required

LO: 2

28. Following is Stanley Black & Decker’s income statement for 2016 (in millions):

Compute Stanley Black & Decker’s gross profit margin.

A) 63.6%

B) 12.2%

C) 37.4%

D) 8.5%

E) None of the above

Topic: Identifying and Classifying Balance Sheet Items

LO: 1

29. Identify which of the following items would be reported in the balance sheet.

Items reported in the balance sheet would include:

A) a, b, c, e, and f

B) b, e, f, h, and i

C) c, d, e, h, and i

D) a, c, e, f, and h

E) c, e, f, h, and i

Topic: Identifying and Classifying Income Statement Items

LO: 2

30. Identify which of the following items would be reported in the income statement.

Items reported in the income statement would include:

A) b, e, g, and h

B) a, b, d, and i

C) b, e, f, and g

D) d, f, g, and h

E) b, d, g, and i

Topic: Financial Statement Effects—Sales on Account

LO: 6

31. Sales on account would produce what effect on the balance sheet?

1. Increase the Revenue account
2. Increase noncash assets (Accounts receivable)
3. Increase cash assets
4. A and B
5. A, B and C

Topic: Financial Statement Effects—Collection of a Receivable

LO: 6

32. Cash collected on accounts receivable would produce what effect on the balance sheet?

1. Increase liabilities and decrease equity
2. Decrease liabilities and increase equity
3. Increase assets and decrease assets
4. Decrease assets and decrease liabilities
5. None of the above

Topic: Financial Statement Effects—Inventory Purchase

LO: 6

33. How would a purchase $400 of inventory on credit affect the income statement?

1. It would increase liabilities by $400.
2. It would decrease liabilities by $400.
3. It would increase noncash assets by $400.
4. Both A and C
5. None of the above

Topic: Financial Statement Effects—Inventory Purchase

LO: 6

34. During fiscal 2016, Shoe Productions recorded inventory purchases on credit of $337.8 million. The financial statement effect of these purchase transactions would be to:

1. Increase liabilities (Accounts payable) by $337.8 million
2. Decrease cash by $337.8 million
3. Increase expenses (Cost of goods sold) by $337.8 million
4. Decrease noncash assets (Inventory) by $337.8 million
5. Both A and D

Topic: Financial Statement Effects—Cost of Goods Sold (Numerical calculation required)

LO: 6

35. During fiscal 2016, Shoe Productions recorded inventory purchases on credit of $337.8 million. Inventory at the start of the year was $38.2 million and at the end of the year was $53.0 million.

Which of the following describes how these transactions would be entered on the financial statement effects template?

1. Increase liabilities (Accounts payable) by $323.0 million
2. Increase expenses (Cost of goods sold) by $337.8 million
3. Increase expenses (Cost of goods sold) by $323.0 million
4. Increase noncash assets (Inventory) by $14.8 million
5. Both A and C

Topic: Financial Statement Effects—Accounts Receivable Collection

LO: 6

36. During fiscal 2016, Plastics and Synthetic Resins Company recorded cash of $87,800 from customers for accounts receivable collections.

Which of the following financial statement effects template entries captures this transaction?

Topic: Financial Statement Effects of Equity Transactions— (Numerical calculations required)

LO: 6

37. During fiscal 2016, Stanley Black & Decker Corporation reported Net income of $965.3 million and paid dividends of $330.9 million.

Which of the following describes how these transactions would affect Stanley Black and Decker’s equity accounts? (in millions)

1. Increase contributed capital by $965.3 and decrease earned capital by $330.9
2. Decrease contributed capital by $330.9 and increase earned capital by $965.3
3. Increase contributed capital by $634.4
4. Increase earned capital by $634.4
5. None of the above

Topic: Financial Statement Effects of Equity Transactions— (Numerical calculations required)

LO: 6

38. Cari’s Bakery, Inc., began operations in October 2017. The owner contributed cash of $18,000 and a delivery truck with fair value of $24,000 to the company.

Which of the following describes how these transactions would affect the company’s equity accounts?

1. Increase contributed capital by $42,000
2. Increase earned capital by $42,000
3. Increase contributed capital by $18,000 and earned capital by $24,000
4. Increase earned capital by $18,000 and contributed capital by $24,000
5. None of the above

Topic: Accounting Adjustment—Accrue Wages

LO: 7

39. An accrual of wages expense would have what effect on the balance sheet?

1. Decrease liabilities and increase equity
2. Increase assets and increase liabilities
3. Increase liabilities and decrease equity
4. Decrease assets and decrease liabilities
5. None of the above

Topic: Accounting Adjustments—Cost of Goods Sold—(Numerical calculations required)

LO: 7

40. At the end of fiscal 2017, Nick’s Greenhouse counted inventory and determined that inventories of $87,160 were on hand. The end of fiscal year the unadjusted inventory account balance is $95,000. Inventory at the start of the year was $99,880.

Which of the following accounting adjustments should Nick’s Greenhouse record?

D) No accounting adjustment is required.

Topic: Accounting Adjustment—Supplies Inventory—(Numerical calculations required)

LO: 7

41. During its first three months of operations, Cari’s Bakery, Inc. purchased supplies such as plates, napkins, bags, and cutlery for $9,000 and recorded this as supplies inventory. Supplies on hand at the end of the first quarter, amount to $5,600.

To prepare financial statement for the first quarter, the company must record which of the following accounting adjustments?

1. Increase Supplies expense by $5,600 and decrease Supplies inventory by $5,600
2. Increase Supplies expense by $3,400 and decrease Supplies inventory by $3,400
3. Increase Supplies inventory by $5,600 and decrease Supplies expense by $5,600
4. Increase Supplies inventory by $3,400 and decrease Supplies expense by $3,400
5. None of the above

Topic: Recognition of Costs as Expense

LO: 7

42. As inventory and PPE assets on the balance sheet are consumed, they are reflected:

1. As a revenue on the income statement
2. As an expense on the income statement
3. As a cash flow outflow on the Statement of Cash flows
4. Both B and C
5. Assets are never consumed.

Topic: Accounting Adjustment for Depreciation Expense

LO: 7

43. A company records an adjusting journal entry to record $10,000 depreciation expense. Which of the following describes the entry?

1. Debit Property Plant and Equipment and Credit Depreciation expense
2. Debit Depreciation expense and Credit Property Plant and Equipment
3. Debit Property Plant and Equipment and Credit Cash
4. Debit Depreciation expense and Credit Cash
5. Debit Net Income and Credit Property Plant and Equipment

Topic: Calculating Net Income from Transactions—(Numerical calculations required)

LO: 6, 8

44 During the month of March 2017, Weimar World, a tax-preparation service, had the following transactions.

• Billed $496,000 in revenues on credit
• Received $164,000 from customers’ accounts receivable
• Incurred expenses of $194,000 but only paid $87,700 cash for these expenses
• Prepaid $32,220 for computer services to be used next month

What was the company’s accrual basis net income for the month?

• 1. $ 302,000
  2. $ 264,080
  3. $ 41,860
  4. $408,300
  5. None of the above

Topic: Calculating Cash Balance from Transactions—(Numerical calculations required)

LO: 6

45. Weimar World, a tax-preparation service, had a cash balance of $122,500 as of March 1, 2017. During the month of March, Weimar World had the following transactions.

• Billed $496,000 in revenues on credit
• Received $164,000 from customers’ accounts receivable
• Incurred expenses of $194,000 but only paid $87,700 cash for these expenses
• Prepaid $32,200 for computer services to be used next month

What was the company’s cash balance on March 31, 2017?

• 1. $332,000
  2. $166,600
  3. $ 496,000
  4. $198,800
  5. None of the above

Topic: Items Involved in Preparing Income Statement

LO: 8

46. Which of the following accounts would not be involved in preparing the income statement?

• 1. Depreciation expense
  2. Accumulated depreciation
  3. Taxes payable
  4. Interest income
  5. B and C

Topic: Closing Entries

LO: 9

47. Which of the following accounts would not appear in a closing entry?

• 1. Net income
  2. Depreciation expense
  3. Cost of goods sold
  4. Inventory
  5. Both A and D

Topic: Closing Entries – Dividends—(Numerical calculations required)

LO: 9

48. During 2016, Nike Inc., reported net income of $3,760 million. The company declared dividends of $1,022 million.

The closing entry for dividends would include which of the following?

• 1. Credit Cash for $1,022 million
  2. Credit Dividends for $1,022 million
  3. Debit Net income for $1,022 million
  4. Credit Retained earnings for $1,022 million
  5. Debit Dividends for $1,022 million

Topic: Closing Entries

LO: 9

49. Which of the following accounts would not appear in a closing entry?

• 1. Interest expense
  2. Accumulated depreciation
  3. Cost of goods sold
  4. Dividends
  5. Both B and D

Topic: Closing Entries—Inventory and Cost of Goods Sold

LO: 9

50. During fiscal 2016, Caleres Inc. (formerly Brown Shoe Company), reported cost of goods sold of $1,517.4 million. Inventory at the start of the year was $546.7 million and at the end of the year was $585.8 million.

Which of the following describes the closing entry that the company will make for these accounts?

• 1. Debit Inventory $39.1 million
  2. Credit Inventory $585.8 million
  3. Credit Cost of goods sold $1,517.4 million
  4. Both A and C
  5. None of the above

Topic: Accounting Adjustment for Unearned Revenue

LO: 7

51. On January 1, Fey Properties collected $7,200 for six months’ rent in advance from a tenant renting an apartment. Fey Company prepares monthly financial statements.

Which of the following describes the required adjusting entry on January 31?

1. Debit Cash for $7,200 and Credit Rent revenue for $7,200
2. Debit Unearned rent revenue for $1,200 and Credit Rent revenue for $1,200
3. Debit Rent revenue for $1,200 and Credit Unearned rent revenue for $1,200
4. Debit Cash for $6,000 and Credit Unearned rent revenue for $6,000
5. Debit Unearned rent revenue for $6,000 and Credit Cash for $6,000

Topic: Accounting Adjustment for Prepaid Insurance

LO: 7

52. On January 1, Fey Properties paid $12,600 for a three-year insurance premium, with coverage beginning immediately. Fey Company prepares monthly financial statements.

Which of the following describes the required adjusting entry on January 31?

1. Debit Cash for $4,200 and Credit Prepaid insurance for $4,200
2. Debit Prepaid insurance for $350 and Credit Insurance expense for $350
3. Debit Insurance expense for $350 and Credit Prepaid insurance for $350
4. Debit Cash for $8,400 and Credit Prepaid insurance for $8,400
5. Debit Insurance expense for $4,200 and Credit Prepaid insurance for $4,200

Topic: Transaction Effects on the Financial Statements

LO: 6

53. How would a sale of $400 of inventory on credit affect the balance sheet if the cost of the inventory sold was $160?

1. It would increase noncash assets by $400 and increase equity by $400
2. It would decrease noncash assets by $160 and decrease equity by 160
3. It would increase cash by $400 and increase equity by $400
4. Both A and B, above happen simultaneously
5. None of the above

Topic: Financial Statement Effects Template

LO: 6

54. Examine the financial statements effects template below. Then select the answer that best describes the transaction.

1. Repay accounts payable of $300 with cash
2. Collect cash for accounts receivable of $300
3. Purchase inventory of $300 on account
4. Purchase inventory of $300 for cash
5. None of the above

Topic: Financial Statement Effects Template

LO: 6

55. Examine the financial statements effects template below. Then select the answer that best describes the transaction.

1. Repay accounts payable of $120, net
2. Record accounts receivable of $600 and cash collected of $120
3. Purchase inventory of $600 partially on account
4. Purchase $600 of equipment on account
5. None of the above

Topic: Financial Statement Accounts

LO: 1, 2, 3, 4

1. Identify the financial statements in which you would find each of the items listed below. Some items may appear on more than one statement. Indicate all financial statements that apply to each item. The possible choices are:

Topic: Financial Statement Accounts

LO: 1, 2, 3, 4

2. Identify the financial statements in which you would find each of the items listed below. Some items may appear on more than one statement. Indicate all financial statements that apply to each item. The possible choices are:

Topic: Balance Sheet Relations

LO: 1

3. Compute the missing amounts for Nike Inc. for 2016 and 2015, in the table below:

Topic: Balance Sheet Accounts

LO: 1

4. Identify the following as a component of Assets (A), Liabilities (L), or Equity (E)

Topic: Reporting of Assets

LO: 1

5. Indicate the order of appearance on the balance sheet of the assets listed on the left.

Topic: Reporting of Liabilities and Equity

LO: 1

6. Indicate the order of appearance on the balance sheet of the liabilities and equity accounts listed on the left.

Topic: Balance Sheet Accounts

LO: 1

7. For each of the following financial statement items, indicate the correct balance sheet classification, from the list below. You may use each balance sheet classification item only once.

Topic: Articulation of Retained Earnings Account

LO: 5

8. Caterpillar Inc.’s statement of stockholders’ equity for 2016 and 2015 shows the following amounts. Fill in the missing items to show how retained earnings articulate across the years.

Topic: Preparation of Financial Statements and Income Statement / Balance Sheet Articulation (more challenging—requires preparation of two financial statements)

LO: 1, 2

9. Super Style Clothing begins operations in November. During the month the company receives $46,000 from a shareholder for common stock and gets a $6,000 loan from a bank. The company buys $38,000 of inventory for cash and sells half of the inventory for $30,000 on credit. The company had no other transactions in November. Fill in the missing amounts below.

Topic: Applying Financial Statement Linkages to Understand Transactions

LO: 1, 2, 3, 4, 5

10. Consider the effects of the independent transactions, a through d, on a company’s balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity.

1. Services were performed for cash.
2. Inventory was purchased for cash.
3. Wages were accrued at the end of the period.
4. Rent was paid in cash.

Complete the table below to explain the effects and financial statement linkages. Use “+” to indicate the account increases and “–” to indicate the account decreases.

Topic: Effects of Transactions on Balance Sheet Accounts

LO: 1

11. Miguel decided to open a lemonade stand on Saturdays. Match Miguel’s business activities to the following balance sheet items. (Note: each balance sheet item can only be used once).

Topic: Effects of Transactions on Balance Sheet

LO: 1

12. Consider the transactions listed on the left. Match them to the financial statement effects listed on the right.

Topic: Effects of Transactions on Balance Sheet

LO: 1

13. Consider the transactions listed on the left. Match them to the financial statement effects listed on the right.

Topic: Using the Financial Statements Effects Template—Balance Sheet and Income Statement

LO: 6

14. Record the following transactions in the financial statements effects template below.

Topic: Using the Financial Statements Effects Template – Balance Sheet Only

LO: 6

15. Record the following transactions in the financial statements effects template below.

1. Founder contributes $44,000 in cash in exchange for common stock.
2. Obtain $26,000 short-term bank loan.
3. Purchase equipment costing $24,000 for cash.
4. Purchase inventory costing $14,000 on account.

Topic: Inferring Transactions from Reported Financial Statements

LO: 6

16. The January 28, 2017 income statement and balance sheet for Kohl’s Corporation shows the following items (in millions):

Required: Prepare the journal entries to record Net sales and Cost of goods sold for Kohl’s for the fiscal year ended January 28, 2017. Assume all sales are for cash.

Topic: Using the Financial Statements Effects Template (Numerical calculations required)

LO: 6, 7

17. Record the following transactions in the financial statements effects template below.

1. Company receives $6,000 from the sale of gift certificates.
2. Customers used $5,700 gift certificates. The cost of the inventory sold is $3,900.
3. The balance of the gift certificates expire unused.

Topic: Preparing Accounting Adjustments and Closing Entries (Numerical calculations required)

LO: 7, 9

18. The balance sheet of Taos Promotion includes the amounts shown below. Analysis of the company’s records reveals the following transactions during 2017, the company’s first year of operations:

Cash received from customers, recorded as service revenue $311,475

Purchase of supplies for cash, expensed $ 43,500

Cash paid for salaries, expensed $ 28,100

Analysis of the company’s balance sheet accounts reveals that at year-end, supplies on hand total $7,950, employees have earned $12,000 but have not yet been paid, and on the last day of the fiscal year, customers paid deposits of $22,050 for future promotions (this is included in total cash received from customers, above).

Required: Prepare journal entries to adjust the account balances for revenue, supplies expense and salary expense for the year-end. Prepare closing entries.

Topic: Adjusting Accounts

(Numerical calculations required—More challenging, requires decrease to expense account)

LO: 7

19. Select accounts of Pete’s Pizza are shown below as of the end fiscal 2017, before any accounts have been adjusted for the current fiscal year.

Your analysis reveals additional information as follows:

• The cost of inventory items on hand is $69,600.
• Employee wages earned prior to year-end were $23,400. These will not be paid until the 2018 fiscal year.
• The unexpired portion of the company’s insurance policy at year end was $13,800.
• The company’s tax accountant reports that the company will owe $162,000 for income taxes for fiscal 2017.

Prepare journal entries for any required accounting adjustments.

Topic: Adjusting Accounts

(Numerical calculations required – More challenging, requires decrease to expense account)

LO: 7

20. Select accounts of Burger Express are shown below as of December 31, 2017, before any accounts have been adjusted for the current fiscal year.

Your analysis reveals additional information as follows:

• On June 1, 2017, the company prepaid rent of $8,640 per month for a 12-month lease on its building.
• The company bought the van on January 1, 2015 for the cost of $132,000. The van is expected to last eight years. The company’s policy is to record depreciation evenly over the asset’s useful life. No depreciation has been recorded during fiscal year 2017.
• When purchased on January 1, 2014, the stoves had expected lives of 10 years. The company’s policy is to record depreciation evenly over the asset’s useful life. No depreciation has been recorded on the stoves during fiscal 2017.
• The company sells numbered gift certificates in $60 denominations. At year-end there were 30 unredeemed gift certificates.

Prepare journal entries for any required accounting adjustments.

Topic: Adjusting Accounts

(Numerical calculations required—More challenging, using T-account to infer adjustments)

LO: 7

21. During the year ended December 31, 2016, Cabela’s, Inc., a retailer of outdoor equipment and apparel, purchased merchandise inventory at a cost of $2,413,850 (in thousands). The following T-account reflects information contained in the company’s 2015 and 2016 balance sheets (in thousands).

Calculate Cabela’s cost of sales for 2016 and complete the T-account.

Topic: Adjusting Accounts

(Numerical calculations required—More challenging, using T-account to infer adjustments)

LO: 7

22. During the year ended December 31, 2016, Cabela’s, Inc., a retailer of outdoor equipment and apparel, purchased merchandise inventory at a cost of $2,413,850 (in thousands). Assume that all inventory purchases were on account (on credit) and that accounts payable is only used for inventory purchases. The following T-account reflects information contained in the company’s 2015 and 2016 balance sheets (in thousands).

Calculate the amount Cabela’s paid in cash to its suppliers during 2016 and complete the T-account.

Topic: Constructing Financial Statements from Transaction Data (Numerical calculations required)

LO: 8

23. Organic Floral is an organic flower shop. After its first quarter of operations, the company’s accountant prepared the following list of account balances, in alphabetical order. The accountant also tells you that net income for the quarter was $52,500.

Use the information below along with the net income information to prepare a balance sheet for Organic Floral.

Topic: Constructing Financial Statements from Transaction Data (Numerical calculations required)

LO: 8

24. Green Garden Company made $192,000 in net income during September 2017, its first month of business. It sold its services on credit and billed its customers $360,000 for September sales. The company collected $24,000 of these receivables in September. Company employees earned September wages (the company’s only expense), but those are not paid until the first of October.

Complete the following financial statements for the end of September 2017.

Topic: Constructing Financial Statements from Transaction Data (Numerical calculations required)

LO: 8

25. Craft Corner began operations in March with cash and common stock of $36,000. The company made $582,000 in net income its first month. It performed print jobs for customers and billed these customers $900,000. The company collected half of its receivables by the end of the month. The company had cost of goods sold of $162,000 paid for in cash and $6,000 inventory left over at the end of the month. Craft Corner employees earned wages but those are not paid until the first of April. This was the company’s only liability.

Complete the following statements for the end of March.

Topic: Preparing Closing Entries from Income Statement

LO: 9

26. The December 28, 2016 income statement of Snap-On Incorporated includes the amounts shown below. The company paid dividends of $147.5 (in millions).

Prepare the closing entries for the company for 2016.

Topic: Analyzing Balance Sheet Accounts

LO: 1

1. Selected balance sheet amounts for Harley Davidson Inc. for five recent years follow.

Compute the missing balance sheet amounts for each of the five years.

Topic: Analyzing Balance Sheet Accounts

LO: 1

2. Selected balance sheet amounts for Nordstrom Inc. for four recent years follow.

Compute the missing balance sheet amounts for each of the four years.

Topic: Preparing a Balance Sheet from a List of Accounts

LO: 1

3. Use the accounts below for Stanley Black & Decker, Inc. to prepare a balance sheet at December 31, 2016.

Topic: Preparing an Income Statement from a List of Accounts

LO: 2

4. Use the accounts below for Stanley Black & Decker, Inc. to prepare an income statement for the year ended December 31, 2016.

Topic: Preparing a Balance Sheet and Income Statement from a List of Accounts

LO: 1, 2

5. Use the accounts below for Delphi Automotive PLC for December 31, 2016 to prepare an income statement and a balance sheet.

Topic: Market to Book Value and Unrecorded Intangible Assets

LO: 1

6. Below are selected balance sheet and market data for three shoe companies. ($ millions)

a. Calculate the market capitalization of each company.

b. Calculate the market to book ratio for each company.

c. Comment on differences you observe.

Topic: Articulation of Retained Earnings

LO: 5

7. Following is information for Snap-On, Inc., for three recent years. Reconcile the retained earnings account for the three-year period.

*Dividends include “dividend reinvestment plan and other” amounts of: 1.2 (2014), 1.1 (2015) and 0.9 (2016).

Topic: Articulation of Retained Earnings

LO: 5

8. Following is information for Goodyear Tire & Rubber Company for three recent years. Reconcile the retained earnings account for the three-year period.

Topic: Applying Financial Statement Linkages to Understand Transactions

LO: 1, 2, 3, 4, 5

9. Consider the effects of the independent transactions, a through f, on a company’s balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity.

1. Owner invests cash into the business in exchange for stock.
2. Recognizes account receivable for services provided.
3. Pays account payable with cash.
4. Buys land with cash.
5. Buys plant equipment on credit.
   • • • 1. Borrows money by taking out loan at bank.

Complete the table below to explain the effects and financial statement linkages. Use “+” to indicate the account increases and “–” to indicate the account decreases.

Topic: Applying Financial Statement Linkages to Understand Transactions

LO: 1, 2, 3, 4, 5

10. Consider the effects of the independent transactions, a through d, on a company’s balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity.

1. The company purchased inventory on credit.
2. The company paid cash for rent expense.
3. The company collected cash from clients previously billed for goods sold.
4. The company paid cash for inventory purchased in Transaction a.

Complete the table below to explain the effects and financial statement linkages. Use “+” to indicate the account increases and “-” to indicate the account decreases.

Topic: Applying Financial Statement Linkages to Understand Transactions

LO: 1, 2, 3, 4, 5

11. Consider the effects of the independent transactions, a through h, on a company’s balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity.

1. The company purchased inventory on credit.
2. The company sold all inventory purchased in transaction a) on credit (and for more than its cost).
3. The company collected cash from customers from transaction b).
4. The company purchased equipment with cash.
5. The company paid cash for a note payable that came due.
6. The company paid cash for interest on borrowings.
7. Wages were earned by company employees but not yet paid.
8. The company paid cash in dividends.

Complete the table below to explain the effects and financial statement linkages. Use “+” to indicate the account increases and “–” to indicate the account decreases.