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Questions and Answers of Accounting

Rodriguez Company acquired sophisticated production equipment at a cost of $450,000. In addition, the firm paid $7,540 to have the equipment delivered and another $11,435 was spent on installation
Clemson Manufacturing Company produces specialty textiles. On January 1, it purchased a new weaving machine at a cost of $600,000. The machine has an expected life of five years and an estimated
McGuire Batt Company produces a wide line of insulation materials. On January 1, it acquired new production equipment at a cost of $1,200,000. The machine has an expected life of four years and an
Sioux City Minerals acquired a copper mine, paying $40,000,000. The mine is expected to be productive for 10 years and yield 500,000 tons of copper ore. At the end of that time, the property will be
Portia Enterprises manufactures automobiles and occasionally makes small investments in other corporations for long-term purposes. During its 2003 fiscal year, Portia purchased 100,000 common shares
On January 1, the Cheng Corporation purchased $10,000 of 5%, five-year bonds as a long term investment. Interest is paid annually. The company is not involved in active trading of
On January 1, Gandini Company purchased $300,000 face value of Battagliaâ€™s 8.4% bonds at a price of $283,439. At this price, the bonds yielded 9% annually. At December 31, Gandini received an
On August 22, 2004, Burgess Company purchased 20,000 common shares of Radius Measurement, Inc. at a price of $8 per share. Brokerage commissions, taxes, and transfer fees totaled an additional $800.
The accounting staff at Golden Mining Company will soon prepare year-end entries to the accounting system to record the partial consumption of certain long-term assets. Your advice is sought
On the last day of the fiscal year, the chief financial officer of MultiPlex Industries is reviewing several accounting matters. They are as follows:1. Equipment purchased seven years ago at a cost
Garland Company purchased construction equipment on July 1, 2001, for $800,000. The equipment was expected to have a useful life of five years and a residual value of $50,000. On June 30, 2004,
Show-Me-the-Money, Inc. is a medium-sized bank. The bank’s stock is owned primarily by residents in the city where the bank operates. During the last decade, the bank lent money for numerous real
On January 1, Schuster Company bought 2,400 of Helio Corporationâ€™s 10,000 outstanding shares of common stock as a long-term investment. The stock was acquired at a cost of $24,000. On December
The Book Wermz expanded its operations in March 2005 by purchasing an existing chain of bookstores. The total cost of the purchase was $5 million. Of this amount, $2.2 million was allocated to the
1. Which of the following is (are) used to determine how a given asset will be reported on the balance sheet?2. Belly-Acres Land Company made capital expenditures during the current year. At yearend,
Swenson Company plans to acquire new chemical processing equipment on January 1, the beginning of the company’s fiscal year. The equipment costs $2 million. Swenson can either borrow $2 million
Appendix B of this book contains a copy of the 2002 annual report of General Mills, Inc. RequiredReview the annual report and write a short report in which you respond to each of the issues raised
How do assets create value for our business? Investing decisions affect a company’s profits, risk, and value. Investment decisions that result in fixed costs increase risk and the ability of a
Why are investing activities critical to the success of a company?
How do investing activities affect a company’s growth?
How do investing choices affect the choices available to a company in the future? Explain.
A friend who is approaching retirement is discussing her investment plan. She tells you that she wants to find a mutual fund that invests in stock of companies with high fixed costs, such as
The balance sheet and statement of cash flows provide information about a company’s access to and use of cash. What differences would you expect to see in the information related to cash on these
In reviewing a company’s financial statements you observe that the company is consistently profitable and has consistent positive cash flows from operations and investing activities. Its cash flow
Why do some companies have a very large portion of total assets invested in property, plant, and equipment while other companies have just a small portion of assets invested in this manner?
What useful information can be obtained by comparing a firm’s cost of plant, property, and equipment to the amount of its accumulated depreciation?
Why might a company wishing to increase its asset turnover acquire new assets? Wouldn’t the greater amount of assets merely decrease asset turnover?
How do investing activities affect company value?
How is return on assets related to investing decisions?
Asset turnover is a measure of effectiveness. How can a firm increase its effectiveness?
How is it possible that profits can increase by 40% when sales increase by a much smaller amount?
Why is information about investing activities of interest to creditors?
Malcolm Greenlees is a friend who is planning to be a business manager. In a recent discussion about financial matters, Malcolm made the following statement. “A company’s balance sheet measures
Sanders Company recorded sales revenues of $10 million for the year just ended. It recorded expenses totaling $9 million. Of these expenses, $4 million were expenses that would not have been
The Kolby and Kent companies both increased sales by 30% this year when compared with last year’s results. Kolby’s net income increased 40% as a result of the increased sales. Kent’s net income
Given below is selected information about two companies.a. Calculate net income for each company.b. What is operating leverage? Is it present in the operations of these two companies? If so, which
The following information was reported by McDonaldâ€™s Corporation in its 2001 annual report.Evaluate McDonaldâ€™s Corporationâ€™s investing decisions by computing the ratio of cash
Information is provided below for two companies that produce similar jewelry items for the same market.Compute the asset turnover, profit margin, and return on assets for each company for each of the
Given below is information about four companies.a. Which company generated the greatest profit?b. Which company is the most efficient? Why?c. Which company is the most effective? Why?d. Which company
Following is information about current and projected sales and expenses for Squiggy Company. The companyâ€™s total assets are also given.a. Calculate the percentage changes in net income that
At a meeting of the top managers in your company, President Anne Thompson points out that stockholders have been pressuring the organization to increase return on assets. She asks for suggestions.
In a continuation of E12-14, another member of the group comments that to maximize return on assets, both efficiency and effectiveness are necessary. Explain what is meant by “efficiency” and
Bumblebee Enterprises is considering adding another product line. Below are results from last year and pro forma (expected) results with the addition of the new line. Little change in sales from the
Winger, Inc. is in the business of renting medical equipment for home health care. New government standards for lifts for disabled patients have rendered some equipment obsolete.Winger owns 10
Yarrow Company increased its investment in long-term assets by 20% in the past three years. This investment was financed by rapid increases in cash generated from operating activities. Cash from
Abdullah Company reported the following information on its statement of cash flows.Interest expense for the past three years has been $372, $420, and $514. The company does not pay dividends. What
You have graduated with a business degree, and you have worked for three years for a small management consulting firm. Ivan Steeger (1352 Bull Run Road, Milltown, OR 97111) is a client who has been
Following is a set of pro forma (or projected) income statements for a company. The columns labeled A are projected results for the company if it follows Strategy A. The columns labeled B are
The Book Wermz reported sales for 2005 of $6,230,000. Cost of goods sold was 55% of sales, and operating expenses were $2,155,000. Interest expense was $190,000. Income taxes were 35% of pretax
1. As defined in this text, return on assets involves a comparison of total assets witha. Net income.b. Net income adjusted for dividends.c. Net income adjusted for income taxes.d. Net income
Appendix B of this book contains a copy of the 2002 annual report of General Mills, Inc.RequiredReview the annual report and write a short report in which you cover each of the following:A. What
You are a financial analyst with a major corporation, High Hopes Company. You have been assigned the task of evaluating a potential acquisition candidate, Roll-the-Dice, Inc. Selected accounting
Employees of the divisions of JX Controls, Inc. receive a bonus of 4% of their salary in any year in which the divisional return on assets is above 10%. Toward the end of 2004, accountants for the
How do we account for operating activities? This chapter considered the estimation and reporting of revenues and expenses. A company’s income statement is affected by estimates of sales returns,
If the purpose of the income statement is to report the results of operating activities, why is there a section on the statement of cash flows that reports the results of operating activities?
Why is an income statement divided into so many different categories? Couldn’t all the revenues and all the expenses each be totaled and then subtracted from each other to determine net income?
A friend tells you, “I just ignore the income statement when I’m making an investment decision. All I care about is the cash, so that the company can pay me dividends. The balance sheet tells me
When goods are sold FOB shipping point, the buyer usually pays the freight cost. Does this make sense? Why or why not?
Sales discounts and sales returns are accounted for as reductions of revenue. If they were accounted for as expenses, wouldn’t the effect on net income be the same? Why not just treat sales
Gross profit results from a company’s transactions with its customers and suppliers. What types of transactions affect gross profit? How does the accounting for timing differences between cash flow
At a meeting of your manufacturing team, a coworker groans: “We were working so hard to get the income for our bonus this year. Then they got all that raw material inventory in—and even paid for
On December 28, Hadley Company purchased goods FOB destination at a cost of $38,000. The goods arrived at Hadley’s warehouse and were unloaded on January 5. Hadley’s bookkeeper is unsure whether
A friend notes that when a company uses an accounting method such as LIFO, FIFO, or weighted-average, it is merely estimating (guessing) about the amount of inventory on hand. Is this true?
Some corporations use FIFO to estimate their inventory costs. Others use LIFO. What issues are important to this decision? What effect can the choice have on a company’s net income and cash flow
When inventory prices are rising, the LIFO method yields lower net income and lower values for ending inventory than does FIFO. The opposite is true when prices are declining. Why is this the case?
GAAP require companies to report inventories on a lower of cost or market basis. What is the purpose of this measurement rule? What effect does it have on a company’s financial statements?
You are aware that GAAP require expenditures for research and development to be charged to expense when incurred. This implies that such expenditures do not provide any benefit to future accounting
You are an investor in the common stock of Malapoosa Company. You notice in the firm’s most recent annual report that net income was $3.75 million but that the net income available for common
An acquaintance with an interest in investing says, “Earnings per share is so complicated! I really only want one number—how much the company earned on my investment. But this company has
At December 31, 2004, the general ledger of Hoffman Electric had the following account balances. All adjusting entries (except for income taxes at 35%) have been made. The company had 10,400 shares
An excerpt from the income statement from the 2001 annual report of Alcoa, Inc. is provided below.For the year ended December 31, ..............2001(In millions except share amounts)RevenuesSales
San Miguel Company manufactures specialized industrial equipment. The equipment often is sold under credit terms that provide for payment over a two- or three-year period. A substantial prepayment is
Goodman Company sold merchandise during its 2004 fiscal year. The total sales price of the merchandise was $30 million. Because of quantity sales discounts, the company billed its customers 29.1
For each of the following transactions of Yeats Machinery, indicate in which month or months the related revenue or expense should appear in the monthly income statement, and why. a. In January, the
During 2004, Abdulla Construction Company started a two-year construction project having a total contract price of $1,800,000. At December 31, 2004, the firm’s construction engineers estimated that
Sandoval, Inc. signed a $40 million contract to build a new office building. The company expected that the project would take about two and one-half years. During the first year, the company incurred
Boris, Inc. purchased an inventory item for $400 on February 27, 2004, and paid the bill on March 12. On April 4, Boris sold the item for $625; the customer paid in full on May 15. Use the format
The Nifty Threads Company, a popular clothing store, had the following transactions for 2004.1. Nifty Threads purchased $600,000 of clothing from several manufacturers, on credit.2. The company sold
Yeltsin Company purchased a truckload of 1,000 small motors for an invoice price of $50 each on January 28. Since the company paid the bill within 10 days, on February 6, it received a 2% discount.
Think carefully about each of the following statements. For each one, indicate whether you believe it to be always true, generally true, generally false, or always false. For any item you judge to
Ten transactions are shown on the next page as they were entered into the accounting system. For each, explain the event that caused the entry to bemade.
The following information regarding inventory transactions is available for the month of May.Determine the correct balances at May 31 for Merchandise Inventory and Cost of Goods Sold under each of
Randolph Company is a retailer that sells appliances to institutions such as schools, universities, and state governments. During the month of January, Randolph Company recorded the following
The Hot Aire Company reported the following items on its income statement for 2004.a. Net operating revenues, $956,000b. Cost of goods sold, $312,000c. Selling and administrative expense, $245,000d.
Explain whether each of the following would be expensed on the income statement in 2004 or in some later year, and why.a. Inventory purchased in 2004 but sold in 2005.b. Estimated warranty costs for
Several situations in which the timing of revenue is in doubt are listed below.a. An appliance manufacturer sent out a truckload of dishwashers FOB destination in late January; they arrived February
The following excerpt is from Unisys Corporation’s 2001 annual report. Revenue Recognition. Revenue from hardware sales is recognized upon shipment and the passage of title..Revenue from software
Georgia Company reported accounts receivable of $16.5 million at the end of its 2004 fiscal year. This amount was net of an allowance for doubtful accounts of $1,800,000. During 2005, Georgia sold
The following information is taken from the records of the Carolby Company, a manufacturer of lawn furniture. Indicate whether the cost of each item should be included as part of the finished goods
Modern Industries manufactures a variety of computer parts and accessories in a rapidly changing technological environment. At year-end 2004, it reported the following comparative information
Records of the Genesis Corporation reveal the following information about inventory during the year.The companyâ€™s accountant is trying to decide whether to determine Cost of Goods Sold using
Worldwide Corporation reported the following income statement for 2005.Required Answer each of the following questions.A. For 2005, calculate the gross profit on product sales and on service sales.
Pelican Enterprises had the following account balances in its general ledger at June 30, 2004, the end of the companyâ€™s fiscal year. All adjusting entries (except for the accrual of income
Ginsberg Company is a recently formed, publicly traded company. At the end of its most recent fiscal year, the company reported the following information.a. Sales revenues were $13,680,000, and
Goose Hollow Company had the following entries to its account system during a recent week.RequiredStudy each entry and write a short description of the event that occurred to cause theentry.
A partial income statement for Half Moon, Inc. is reported below.In addition, the following disclosure was found in the notes to the financial statements.Note 7: Projected benefit obligation
The Book Wermz purchases books for all of its stores through a central purchasing department. Books are then shipped to different stores for sale. One of the companyâ€™s largest selling items is
How do operations create value for our business? Companies use different strategies to earn profits. Successful use of these strategies results in high return on the company’s investment and a high
Sales at Tulip Manufacturing Company are expected to double during the coming year. The company has unused capacity available and should be able to handle the new business. If a large portion of the
Sales at Borderline Insurance Agency are expected to double during the coming year. The company has been growing in recent years but generally has no trouble hiring more agents or leasing additional

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