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Questions and Answers of Public Accounting

=+2009, is as follows:Dec. 31, 2010 Dec. 31, 2009 Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 158,300 $ 128,900 Accounts receivable (net). . . . . . . . . . . .
=+Liabilities and Stockholders’ Equity Accounts payable (merchandise creditors) . . . . . . . . $ 299,100 $ 331,100 Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . 11,700 9,000
=+a. Net income, $184,150.b. Depreciation expense reported on the income statement: buildings, $18,450; machinery and equipment, $8,100.c. Patent amortization reported on the income statement,
=+g. Cash dividends declared, $46,800.Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
=+PR 16-2B Statement of cash flows—indirect method obj. 2✔ Net cash flow from operating activities, $200,500 The comparative balance sheet of Cantor Industries, Inc. at December 31, 2010 and
=+PR 16-3B Statement of cash flows—indirect method obj. 2✔ Net cash flow from operating activities, $7,800 Liabilities and Stockholders’ Equity Accounts payable (merchandise creditors) . . . .
=+756 Chapter 16 Statement of Cash Flows The noncurrent asset, noncurrent liability, and stockholders’ equity accounts for 2010 are as follows:ACCOUNT Accumulated Depreciation—Buildings ACCOUNT
=+Date Item Debit Credit Debit Credit 2010 Balance Realized $76,000 cash from sale 120 Jan.Apr.231,000 66,000 165,000 ACCOUNT Buildings ACCOUNT NO.Balance
=+Date Item Debit Credit Debit Credit 2010 Balance Acquired for cash 120 Jan.Apr.165,000 165,000 330,000 ACCOUNT Equipment ACCOUNT NO.Balance Date Item Debit Credit Debit Credit 2010 Balance
=+ACCOUNT Accumulated Depreciation—Equipment ACCOUNT NO.Balance Date Item Debit Credit Debit Credit 2010 Balance Equipment discarded Depreciation for year 126 31 Jan.Dec.27,000 16,000 6,200 22,200
=+ACCOUNT Bonds Payable ACCOUNT NO.Balance Date Item Debit Credit Debit Credit 2010 May 1 Issued 20-year bonds 55,000 55,000 Chapter 16 Statement of Cash Flows 757 ACCOUNT Common Stock, $1 par
=+ACCOUNT Paid-In Capital in Excess of Par—Common Stock ACCOUNT NO.Balance Date Item Debit Credit Debit Credit 2010 Balance Issued 6,000 shares of common stock for $11 per share 17 Jan.Dec.135,000
=+Date Item Debit Credit Debit Credit 2010 Balance Net income Cash dividends 131 31 Jan.Dec.429,100 464,200 451,000 35,100 13,200
=+The comparative balance sheet of Lim Garden Supplies Inc. for December 31, 2010 and 2011, is as follows:Dec. 31, 2011 Dec. 31, 2010 Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . .
=+$1,583,820 $1,336,300 ___________ ___________ PR 16-4B Statement of cash flows—direct method obj. 3✔ Net cash flow from operating activities, $169,740 Instructions
=+Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.Liabilities and Stockholders’ Equity Accounts payable (merchandise creditors) . . .
=+The income statement for the year ended December 31, 2011, is as follows:Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,504,000 Cost of merchandise sold . . . . . . . . .
=+a. Equipment and land were acquired for cash.b. There were no disposals of equipment during the year.c. The investments were sold for $196,000 cash.d. The common stock was issued for cash.e. There
=+Instructions Prepare a statement of cash flows, using the direct method of presenting cash flows from operating activities.The comparative balance sheet of House Construction Co. for June 30, 2010
=+Accumulated depreciation . . . . . . . . . . . . . . . . . . . (58,300) (49,600) _________ _________$712,800 $530,400 _________ _________ _________ _________ Liabilities and Stockholders’ Equity
=+$712,800 $530,400 _________ _________ _________ _________ The income statement for the year ended June 30, 2010, is as follows:Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,134,900
=+Loss on sale of investments . . . . . . . . . (6,000) __________ Income before income tax . . . . . . . . . . . . $ 132,000 Income tax expense . . . . . . . . . . . . . . . . 52,800 __________ Net
=+PR 16-5B Statement of cash flows—direct method applied to PR 16-1B obj. 3✔ Net cash flow from operating activities, $86,600
=+Chapter 16 Statement of Cash Flows 759 Special Activities Kelly Tough, president of Tu-Rock Industries Inc., believes that reporting operating cash flow per share on the income statement would be a
=+Tripp: What do you mean? The past is the past, and the numbers are in. There isn’t much that can be done about it. Our financial statements were prepared according to generally accepted
=+Kelly: No, no. I’m not suggesting that we “cook the books.” But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has
=+will be able to see the improved cash flow figures there.Kelly: This is true, but somehow I feel that this information should be given a much higher profile. I don’t like this information being
=+users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statement—someplace under the earnings per share
=+one place where users can see and compare the figures. What do you think?Tripp: I’ve never really thought about it like that before. I guess we could put the operating cash flow per share on the
=+How would you interpret this situation? Is Tripp behaving in an ethical and professional manner?
=+SA 16-1 Ethics and professional conduct in business The following additional information was taken from the records:a. Equipment and land were acquired for cash.b. There were no disposals of
=+e. There was a $60,000 debit to Retained Earnings for cash dividends declared.Instructions Prepare a statement of cash flows, using the direct method of presenting cash flows from operating
=+SA 16-2 Using the statement of cash flows You are considering an investment in a new start-up company, Steamboat IQ Inc., an Internet service provider. A review of the company’s financial
=+Jim Walker is the president and majority shareholder of Tech Trends Inc., a small retail store chain. Recently, Walker submitted a loan application for Tech Trends Inc. to Yadkin National Bank. It
=+SA 16-3 Analysis of statement of cash flows 760 Chapter 16 Statement of Cash Flows As a close family friend, Walker asked you to prepare a statement of cash flows.From the records provided, you
=+Cash flows from investing activities:Cash received from investments sold . . . . . . . . . . . . . . . . . . . . . $60,000 Less cash paid for purchase of store equipment . . . . . . . . . . . . .
=+1. “How can depreciation be a cash flow?”
=+2. “Issuing common stock for the land is listed in a separate schedule. This transaction has nothing to do with cash! Shouldn’t this transaction be eliminated from the statement?”
=+3. “How can the gain on sale of investments be a deduction from net income in determining the cash flow from operating activities?”
=+4. “Why does the bank need this statement anyway? They can compute the increase in cash from the balance sheets for the last two years.”After jotting down Walkers’ questions, you assured him
=+a. How would you respond to each of Walkers’ questions?
=+b. Do you think that the statement of cash flows enhances the chances of Tech Trends Inc. receiving the loan? Discuss.The Retailing Division of Most Excellent Purchase Inc. provided the following
=+From: Senior Vice President, Retailing Division I am pleased to report that we had earnings of $540,000 over the last period. This resulted in a return on invested capital of 10%, which is near our
=+SA 16-4 Analysis of cash flow from operations Chapter 16 Statement of Cash Flows 761 This activity will require two teams to retrieve cash flow statement information from the Internet. One team is
=+The statement of cash flows is included as part of the annual report information that is a required disclosure to the Securities and Exchange Commission (SEC).SEC documents can be retrieved using
=+To obtain annual report information, type in a company name in the appropriate space. EdgarScan will list the reports available to you for the company you’ve selected.Select the most recent
=+a. How are Johnson & Johnson and AMR Corp. similar or different regarding cash flows?
=+b. Compute and compare the free cash flow for each company, assuming additions to property, plant, and equipment replace current capacity.
=+8. What was the total income (loss) from equity investees?
=+7. What was the realized net gain or loss from sale of investments?
=+6. What was the total combined dividend and interest revenue?
=+c. Equity and other investments (long term)
=+5. What percent of total investments are:a. Cash and equivalentsb. Short-term investments
=+4. What is the total unrealized loss from investments?
=+3. What is the total unrealized gain from investments?
=+2. What is the fair value of investments?
=+1. What is the total cost of investments?
=+The notes to the financial statements include details of Microsoft’s investments.Find the notes that provide details of its investments (Note 3) and the income from its investments (Note 4).From
=+SA 15-4 Warren Buffett and“look-through”earnings 706 Chapter 15 Investments and Fair Value Accounting In groups of three or four, find the latest annual report for Microsoft Corporation. The
=+I believe the best way to think about our earnings is in terms of “look-through” results, calculated as follows: Take $250 million, which is roughly our share of the operating earnings retained
=+The value to Berkshire Hathaway of retained earnings (of our investees) is not determined by whether we own 100% , 50% , 20% , or 1% of the businesses in which they reside. . . . Our perspective
=+Many of these companies (in the less than 20% owned category) pay out relatively small proportions of their earnings in dividends. This means that only a small proportion of their earning power is
=+SA 15-3 Ethics and fair value measurement Berkshire Hathaway, the investment holding company of Warren Buffett, reports its “less than 20% ownership” investments according to generally accepted
=+SA 15-2 International fair value accounting Financial assets include stocks and bonds. These are fairly simple securities that can often be valued using quoted market prices. However, Wall Street
=+3. Why are there different treatments for increases and decreases in the fair value of property, plant, and equipment over a period?
=+2. What would be some of the disadvantages of using fair value accounting for property, plant, and equipment?
=+1. Why do International Accounting Standards influence U.S. GAAP?
=+SA 15-1 Benefits of fair value International Accounting Standard No. 16 provides companies the option of valuing property, plant, and equipment at either historical cost or fair value. If fair
=+2. How might fair value accounting aid comparability when evaluating these two companies?
=+1. What are the valuations of land on the balance sheets of Parson Corp. and Mobile Air, Inc., using generally accepted accounting principles?
=+On August 16, 1995, Parson Corp. purchased 20 acres of land for $300,000. The land has been held for a future plant site until the current date, December 31, 2010. On December 5, 2010, Mobile Air,
=+Unrealized gain (loss) on available-for-sale investments (27,000)Valuation allowance for available-for-sale investments (27,000)Chapter 15 Investments and Fair Value Accounting 705 Special
=+Store buildings and equipment 12,560,000 Treasury stock (5,700 shares of common stock at cost of $52 per share) 296,400
=+Preferred 6% stock, $120 par (30,000 shares authorized;22,500 shares issued) 2,700,000 Premium on bonds payable 760,000 Prepaid expenses 26,500 Retained earnings, January 1, 2010 4,420,800
=+cost (FIFO) or market 780,000 Office buildings and equipment 4,320,000 Paid-in capital from sale of treasury stock 28,500 Paid-in capital in excess of par—common stock 842,000 Paid-in capital in
=+Interest receivable 1,290 Investment in Amigo Co. stock (equity method) 7,030,520 Investment in Game Gear Inc. bonds (long term) 86,000 Merchandise inventory (December 31, 2010), at lower of
=+Cash dividends for common stock 316,310 Cash dividends for preferred stock 162,000 Stock dividends for common stock 121,550 Goodwill 510,000 Income tax payable 40,000
=+Accumulated depreciation—office buildings and equipment 1,580,000 Accumulated depreciation—store buildings and equipment 4,126,000 Allowance for doubtful accounts 8,150 Available-for-sale
=+Interest revenue 1,650 Miscellaneous administrative expense 7,500 Miscellaneous selling expense 13,750 Office rent expense 50,000 Office salaries expense 140,000 Office supplies expense 10,000
=+c. Prepare a balance sheet in report form as of December 31, 2010.Income statement data:Advertising expense $ 125,000 Cost of merchandise sold 3,240,000 Delivery expense 29,000 Depreciation
=+b. Prepare a retained earnings statement for the year ended December 31, 2010.
=+assume that the average number of common shares outstanding was 120,000 and preferred dividends were $162,000. (Round earnings per share to the nearest cent.)
=+a. Prepare a multiple-step income statement for the year ended December 31, 2010, concluding with earnings per share. In computing earnings per share, 704 Chapter 15 Investments and Fair Value
=+2. After all of the transactions for the year ended December 31, 2010, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data below and on the
=+1. Journalize the selected transactions.
=+s. The fair value for Avocado Corp. stock was $28.50 per share on December 31, 2010.The investment is adjusted to fair value using a valuation allowance account.Assume the Valuation Allowance for
=+r. Amigo Co. recorded total earnings of $478,000. Jordan Products recorded equity earnings for its share of Amigo Co. net income.
=+q. Accrued interest for three months on the Game Gear Inc. bonds purchased in (l).
=+p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization was determined using the straight-line method.
=+o. Sold 2,000 shares of Avocado Corp. at $32.80, including commission.
=+n. Received a dividend of $1.45 per share from the Avacodo Corp. investment in (f).
=+m. Sold, at $59.50 per share, 3,800 shares of treasury common stock purchased in (g).
=+l. Purchased $86,000 of Game Gear Inc. 10-year, 6% bonds, directly from the issuing company at par value, plus accrued interest of $950. The bonds are classifed as a held-to-maturity long-term
=+k. Received $272,000 dividend from Amigo Co. investment in (h).
=+j. Issued the stock certificates for the stock dividends declared in (h) and paid the cash dividends to the preferred stockholders.
=+i. Declared a 2% stock dividend on common stock and a $1.80 cash dividend per share on preferred stock. On the date of declaration, the market value of the common stock was $55 per share. On the
=+h. Purchased 340,000 shares of Amigo Co. stock directly from the founders for $21 per share. Amigo has 1,000,000 shares issued and outstanding. Jordan Products Inc.treated the investment as an
=+g. Purchased 9,500 shares of treasury common stock at $52 per share.
=+no treasury shares were held, and 22,500 shares of preferred stock were outstanding.e. Paid the cash dividends declared in (d).f. Purchased 12,000 shares of Avocado Corp. at $31 per share, plus a
=+d. Declared a dividend of $0.65 per share on common stock and $1.80 per share on preferred stock. On the date of record, 120,000 shares of common stock were outstanding,

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