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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

The balance sheet of Lamont Bros, follows. Assets Liabilities and Stockholders’ Equity Current assets $ 85,000 Current liabilities $ 52,000 Noncurrent assets 315,000 Long-term note payable 35,000
The following are possible transactions that affect stockholders’ equity. 1. A company issues common stock above par value for cash. 2. A company declares a 3-for-l stock split.
A company repurchases 10,000 shares of its own common stock in exchange for cash.
A company declares and issues a stock dividend. Assume that the fair market value of the stock is greater than the par value.
A company reissues 1,000 shares of treasury stock for $75 per share. The stock was acquired for $60 per share.
A company pays a cash dividend that had been declared fifteen days earlier.
A company generates net income of $250,000. REQUIRED: For each transaction above indicate the following:a. The accounts within the stockholders’ equity section that would be affected.b. Whether
Deming Contractors was involved in the following events involving stock during 1997. Prepare entries, if appropriate, for each event, describe how each event affects the basic accounting equation,
On December 30, 1996, Washington and Associates purchased 500 of its 5,000 outstanding common shares at a price of $50 per share. Before the treasury stock purchase, the company’s financial
Twin Lakes incorporated on April 1, 1997, and was authorized to issue 100,000 shares of $5 par value common stock and 10,000 shares of $8, no par preferred stock. During the remain¬ der of 1997 the
The stockholders’ equity section of Rodman Corporation as of December 31, 1996, follows. Common stock $ 80,000 Additional paid-in capital (C/S) 10,000 Retained earnings 60,000 Total
In 1987 Stuart Corporation began operations issuing 100,000 shares of $1 par value common stock for $25 per share. Since that time the company has been very profitable. The stockhold¬ ers’ equity
The condensed balance sheet of Hemmer, Inc., follows. (Book value per share, stock issuances, and treasury stock purchases) Assets $400,000 Liabilities _ Stockholders’ equity Total liabilities and
The information below was taken from the statement of stockholders’ equity of Chinook Furs. (Inferring equity transactionsfrom the 1997 1996 Preferred stock (no par) $ 700 $400 statement of Common
The information below was taken from the statement of stockholders’ equity of Zielow Siding as of December 31, 1997. The par value of the Zielow stock is $5, and as of the beginning of 1997 the
The information below was taken from the statement of stockholders’ equity of Kidd Sports as of December 31, 1997. The par value of Kidd stock is $1, and as of the beginning of 1997 the company
The stockholders’ equity section of Mayberry Corporation, as of the end of 1997, follows. Mayberry began operations in 1993. The 5,000 shares of preferred stock have been outstand¬ ing since 1993.
The stockholders’ equity section of Pioneer Enterprises as of December 31, 1997, follows. Common stock (10,000 shares issued @ $6 par) $ 60,000 Additional paid-in capital (C/S) 100,000 Retained
The December 31, 1994, balances in Retained Earnings and Additional Paid-In Capital for Railway Shippers Company are $135,000 and $50,000, respectively. Five thousand, $10 par value common shares are
Taylor Manufacturing entered into a borrowing arrangement that requires the company to maintain a Retained Earnings balance of $500,000. The company also wishes to finance inter¬ nally a major plant
Lambert Corporation issued 1,000 shares of $100 par value, 8 percent, cumulative, nonpartic¬ ipating preferred stock for $100 each. The stock is preferred to assets, redeemable after five years at a
The balance sheet of Alex Bros, follows. Assets $840,000 Liabilities $300,000 Preferred stock 50,000 Common stock 300,000 Additional paid-in capital (C/S) 100,000 Retained earnings 130,000 _ Less:
Several independent transactions are listed below. Prepare journal entries for each transaction. 1. 10,000 shares of no-par common stock are issued for $50 per share. 2. 10,000 shares of $1 par value
Royal Company is currently considering declaring a dividend to its common shareholders, according to one of the following plans: 1. Declare a cash dividend of $15 per share. 2. Declare a 10 percent
The following information was extracted from the financial records of Maverick Corporation. Preferred stock: 15,000 shares outstanding, 10 percent, $50 par value Common stock: 50,000 shares
The following selected financial information was extracted from the December 31, 1996, financial records of Cotter Company: Debit Credit Cash 25,000 Short-term investments (2,500 shares of Oreton
Stevenson Enterprises is considering the following items: 1. The company may declare a 10 percent stock dividend, issuing an additional share of com¬ mon stock for every 10 shares outstanding; the
The stockholders’ equity section of Rudnicki Corp. contained the following balances as of December 31, 1996. Preferred stock (10%, $10 par value, cumulative) $1,000 Preferred stock (12%, $10 par
The company has not declared a dividend since 1995. (Rudnicki Corp. uses a separate dividend account for each type of stock.) 5. On December 27, the company pays the dividend declared on December 2.
The stockholders’ equity section of Buzytown Industries balance sheet reports the following: 1997 1996 Preferred stock (9%, $100 par value) $ 200,000 $ 110,000 Common stock ($10 par value,
Tracey Corporation reports the following in its December 31, 1996, financial report. 1996 1995 Cumulative preferred stock (10%, $100 par value) Common stock ($10 par value, 11,000 shares $ 400,000 $
Aspen Industries incorporated in the state of Colorado on March 23, 1994. The company was authorized to issue 1,000,000 shares of $6 par value common stock. Since the date of incor¬ poration,
Five shareholders together own 35 percent of the outstanding stock of Edmonds Industries. The remaining 65% is divided among several thousand stockholders. There are 400,000 shares ol Edmonds stock
The balance sheet of Natathon International is provided below. (Bankruptcy and protecting the interests ofthe creditors) Assets Liabilities and Stockholders* Equity Current assets $200,000
Egghead, Inc., is a software chain with over 120 stores nationwide. Until recently, all the com¬ mon shares of the company were held by its founders and employees. Several years ago the company
F.W. Woolworth Co, a major retailer, recently increased its quarterly dividend by 24 percent, from 33 cents to 41 cents per share. The new dividend was declared on April 10, payable June 1 to the
Between 1957 and 1977 Westinghouse Electric Corp. used PCBs in the manufacture of elec¬ trical capacitors at its plant in Bloomington, Indiana. A federal consent-decree has ordered the company to be
On April 26, 1990, Quantum Chemical Corporation declared a 2 percent stock dividend. After the stock dividend, the number of shares outstanding increased to approximately 27.54 million. Assume that
The Wall Street Journal (September 1, 1994) reported that “Philip Morris Cos., in an aggres¬ sive move to boost its stock price, announced a $6 billion stock buy-back plan and raised its quarterly
The following quotes are from The Wall Street Journal. RJR Nabisco Inc. said it plans to buy back as much as 8 percent of its outstanding stock for $52 to $58 dollars per share, or up to $1.2
Forbes (June 3, 1985) points out that companies wishing to protect their credit ratings and unwilling to issue more stock are raising capital by issuing hybrid securities. The article specif¬ ically
The two quotes below were taken from The Wall Street Journal. A month after he staved offfinancial ruin by getting his bankers to lend him $65 million, Donald Trump is about to ask his casino
Business Week (October 2, 1989) notes that Rupert Murdoch’s company, News Corp., is rapidly approaching limits on its ability to borrow, as indicated by covenants imposed by the large group of
In 1991 the Big 3 automakers all slashed dividends in response to weak earnings reports: Ford by 47% (from 75 cents to 40 cents), and both General Motors and Chrysler cut their dividends in half. USA
On February 19, 1992, Walt Disney Co. declared a 4:1 split of its common stock, an announce¬ ment that boosted the entertainment company’s shares up $3.50 to close at a record price of $146.50.
The major roadblock to foreign companies listing their overseas stock on U.S. exchanges has long been the big difference between accounting standards in the United States and abroad. Recently,
Although Japanese investments in large, high technology U.S. businesses have won increasing attention recently, a number of small U.S. manufacturing firms are attracting Japanese capital as well.
Review the annual report of MCI and answer the following questions.a. As of December 31, 1994, how many preferred and common shares was MCI authorized to issue? How was this established?b. MCI had a
1. Why is the amount of income such an important number? Briefly explain how it is used by investors, creditors, and other interested parties.
List the basic assumptions, principles, and exceptions underlying the preparation of finan¬ cial accounting statements. What is the difference between an assumption and a principle, an assumption
If the financial statements of two legally separate companies are combined to produce a set of consolidated financial statements, the entity for accounting purposes is different from the entity for
A given balance sheet contains dollar amounts resulting from transactions that occurred in several different time periods. Accountants add these dollar amounts in the computation of such numbers as
What basic assumption allows the preparation of financial reports on a timely basis? What important trade-off is introduced because this assumption is necessary? In general, which dollar amount is
What is a fiscal year? Why do some companies prepare financial statements on a fiscal year basis?
What basic assumption underlies the definition of an asset and the process of capitalizing and amortizing? Is this assumption realistic?
The principles of accounting measurement determine the valuation bases used on the bal¬ ance sheet. The chapter describes four valuation bases. Name them.
Differentiate an individual company’s input market from its output market. Why are these two markets relevant to financial accounting measurements? Describe each of the four val¬ uation bases in
Name the accounts on the balance sheet, and indicate the valuation base used for each.
Which principle of accounting measurement is the most pervasive? Define it and describe how it determines which valuation bases are used for which balance sheet accounts.
Which valuation base is considered to reflect economic value? Why is this base not used to value all assets and liabilities? Under what circumstances is it used?
In what two ways are market values limited as valuation bases for assets and liabilities?
What basic principle underlies the measure of performance? State this principle, and explain how it is applied to the methods used to account for inventories and fixed assets.
What principle triggers the matching process? That is, what principle must be applied before the matching principle can be implemented?
What criteria must be met before revenue can be recognized, and how does revenue recog¬ nition, in general, relate to the matching principle? As an example, explain how invento¬ ries are accounted
What basic principle of financial accounting measurement favors the use of historical costs on the balance sheet?
Consider a piece of machinery that was purchased two years ago for $3,000, can be replaced for $4,500, and can be sold for $5,000. If the machinery is kept in operation, it will produce 500 widgets
Critique the following statement: “The financial statements are prepared on the basis of historical costs.”
Differentiate uniformity from consistency. Which is a principle of financial accounting measurement? Why?
What is materiality? Why is it considered a departure from the principles of financial accounting measurement? Is there an economic reason that explains why it is followed? What factors are important
What is conservatism? Why is it considered a departure from the principles of financial accounting measurement? Explain how the legal liability faced by managers and auditors might encourage
From the valuation bases used on the balance sheet, provide an example of conservatism.
Briefly characterize the accounting systems used in countries from the Continental group. What role does conservatism play in these systems, and how is that role different from that in the United
(Appendix 4A) Briefly explain why a dollar received today is worth more than a dollar received in the future? What two factors determine the size of the time value of money?
(Appendix 4A) In the real world interest rates are set to reflect two factors. Describe these two factors and how they are treated in the financial statements.
(Appendix 4A) What is the difference between simple and compound interest?
(Appendix 4A) Would you rather receive a 10-year ordinary annuity or a 10-year annuity due? Why? Which form of payment is more common in business? Provide several exam¬ ples.
(Appendix 4A) What role does simple interest play in the formula for present value?
(Appendix 4A) What is the difference between future and present value? Explain the con¬ cept of equivalent value.
(Appendix 4A) An individual recently won a $10 million lottery where the prize involved receiving $1 million each year for 10 years. Do you believe that the lottery winnings were actually worth $10
(Appendix 4A) When computing the present value of a series of future cash inflows, how is the risk that the cash payments may not be received treated? Discuss.
(Appendix 4A) Why are fixed assets on the balance sheet not valued at present value?
(Appendix 4A) The concept of present value plays what two roles in financial accounting? Provide several examples. Why would a manager need to know how present value is used in financial
(Appendix 6A) Two basic methods are used to account for notes receivable. Compare the two methods in terms of the net values of the assets related to the note (i.e., Notes Receivable and Interest
The statement of cash flows is divided into three sections. Name these sections, and explain how such a division is useful.
How is cash defined with respect to the statement of cash flows? Why is this definition used?
Define cash provided (used) by operating activities, and differentiate this dollar amount from net income, which appears on the income statement.
Cash can be generated by selling inventory or services, selling long-term assets like invest¬ ments and equipment, and borrowing or issuing equity. How are these various forms of gen¬ erating cash
Of what use is the statement of cash flows to investors, creditors, and others interested in the financial situation of a company?
How does the statement of cash flows complement the other financial statements? What kind of information does it provide that the others do not?
What is a capital transaction, and how can it be differentiated from an operating transaction?
What is financial flexibility, and how does the statement of cash flows provide information about it?
What is involved in cash management, and why is it important that a company manage its cash correctly?
What is solvency, and of what use is the statement of cash flows in evaluating the solvency position of a company?
In what ways can the statement of cash flows be used to evaluate a company’s ability to generate cash and its cash management policies?
Why do managers have incentives to manipulate the dollar amounts on the statement of cash flows? Provide several examples of how managers might window dress the statement of cash flows. What has the
Why is manipulating information on the statement of cash flows often not in the best inter¬ est of management?
Describe the differences between the income statement and the operating section ofthe state¬ ment of cash flows. Do both operating statements provide the same kind of information? If not, how do
Provide several examples of important financing and investment transactions that would not appear on the statement of cash flows. What does the FASB require with respect to such transactions?
Explain how one could infer the existence of operating transactions that do not affect the Cash account. For example, how could a reader of a company’s financial statements be able to determine if
Differentiate the direct method from the indirect method in preparing the statement of cash flows. Which method is more straightforward, and why? Which method provides more disclosure?

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