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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

Explain why ending inventory and cost of sales are the same under either a perpetual or periodic inventory system when FIFO is used.
What is inventory turnover? What does it tell a user of financial statements about how the entity is managing its inventory? What could be some reasons for a decreasing inventory turnover ratio? What
Which cost flow assumption for valuing inventory is best? Explain.
What is inventory that is on consignment? Which entity should report consignment inventory on its balance sheet: the entity that has the inventory and is selling it or the entity that owns the
Ayr Inc. (Ayr) uses a periodic inventory system. During Ayr’s inventory count on December 31, 2004, $100,000 of the inventory was counted twice in error. What effect would the double counting of
(Determine cost of units sold and cost of units remaining in inventory using aver- age cost, FIFO, and LIFO cost flow assumptions, LO 1, 2) The following information is provided for Badger Inc.
(Calculating cost of sales and ending inventory using average cost, FIFO, and LIFO cost flow assumptions, LO 1, 2) Information is provided for Olds Ltd. on page 479.Required:Calculate cost of goods
(Using the retail method, LO 2) Neighbour Inc. (Neighbour) is a small local boutique. Neighbour uses the retail method for determining its ending inventory. The store has an April 30 year end. On May
(Using the retail method, LO 2) The CFO of Hilbre Stores Ltd. (Hilbre Stores)rushes into the accounting office, saying that he needs to know the chain’s gross margin for the year to date
(Classifying different costs as prime, variable overhead, or fixed overhead, LO 4)Whonock Ltd. (Whonock) is a manufacturer of fine wood furniture. For each of the following items, indicate whether
(Classifying different types of inventory, LO 1) Whonock Ltd. (Whonock) is a manufacturer of fine wood furniture. For each of the following items, indicate whether Whonock would classify the costs
(Calculating cost of sales and ending inventory using average cost, FIFO, and LIFO cost flow assumptions when prices are stable, LO 1, 2) The following information is provided for Exlou Ltd.
(Calculating inventory turnover ratio and the average number of days inventory on hand, LO 7) You are provided with the following information about Kepenkeck Inc. (Kepenkeck):Required:a. Calculate
(Lower of cost and market, LO 3) Massawippi Inc. (Massawippi) uses the lower of cost and market rule to value its inventory. Massawippi defines market as net realiz- able value.
(Working with the inventory turnover ratio and the average number of days inventory on hand, LO 7) Use the information provided in each row to calculate the missing values (shaded boxes). Each row is
(Identifying and calculating holding gains and losses, LO 5) For each of the following situations indicate whether the event is a gain or a loss and whether the gain or loss is realized or
(Compute missing information, LO 1) Complete the following table by calculating the missing values (shaded boxes). Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2002 2003 2004 2005 Beginning inventory $100,000
(The effect of different cash flow assumptions on liquidity, LO 2, 7) The balances in the current asset and liability accounts for Feeder Ltd. (Feeder) are provided on page 482. The balances in the
(Effect of transactions and economic events on ratios, LO 3,7) Complete the following table by indicating whether the following transactions or economic events would increase, decrease, or have no
(Recording inventory transactions, LO 1, 2, 3) For each of the following trarisactions and economic events, prepare the necessary journal entries. Provide a brief explanation for each journal entry
(Inventory cost flow assumptions when prices are falling, LO 2, 3) Azilda Inc. (Azilda) operates in a part of the computer industry where the cost of inventory has been falling recently. The cost of
(Inventory cost flow assumptions and taxes, LO 2, 6) Sayabec Ltd.’s (Sayabec) purchases for 2003 were:The beginning balance in inventory on January 1, 2003 was 12,000 units with a cost of $2.50 per
(Lower of cost and market, LO 3, 7) Wolf Ltd. (Wolf) reports its inventory at the lower of cost and market. You obtain the following information about Wolf for its year ended August 31,
In its 2001 statements of cash flow MWW reported cash from operations of$21,140,000. How did MWW use this cash?
Examine Note 1D to the financial statements. What does MWW include in its definition of cash and cash equivalents?
What amounts does MWW report in its 2000 and 2001 statements of cash flows for each of the following?a. Cash from operations.b. Cash from investing activities.c. Cash from financing activities.
In its January 27, 2001 financial statements MWW reported net earnings of$8,180,000 but cash flow from operations of $21,140,000. Explain why MWW’s net earnings in 2001 were so different from its
Examine the Supplementary Schedules to Consolidated Statements of Cash Flow that follows MWW’s consolidated statements of cash flows (see page A-48).a. Why do you think the first schedule (schedule
Note II describes how MWW accounts for its store opening costs (see page A-50).a. Explain how capitalizing the store opening costs and amortizing them over three years affects the cash flow statement
Discuss how cash is accounted for in financial statements and recognize the importance of cash management and internal controls over cash.
Explain the concept of the time value of money and its relevance to accounting, and be able to do some basic time value of money calculations.
Describe accounting for receivables and uncollectable amounts.
Explain how managers can use accounting estimates to create hidden reserves to move earnings from one period to another, and recognize the implications of hidden reserves for financial statement
Analyze and interpret information for evaluating the liquidity of an entity.
What is meant by the term “internal control”? Why are strong internal controls important to an entity?
What is a bank reconciliation? Why is it important to prepare a bank reconciliation every month when the bank statement is received from the bank? Why should the bank reconciliation be prepared by
What is meant by the term “segregation of duties”? Why is it important for internal control purposes for people who physically handle an asset to not also be responsible for accounting for the
You are examining the financial statements of a company in which you are interested in investing. The company reports a negative balance in the cash account (the cash account on the balance sheet is
In August 2005 you received a birthday gift of $500 in cash from a generous uncle. Your uncle wanted you to have the money so that you could enjoy yourself as you were beginning your studies at
According to GAAP in Canada, the unit of measure that is used is the nominal dollar. What is a nominal dollar? What real economic costs are ignored by using a nominal dollar as the unit of measure,
What does it mean when cash on an entity’s balance sheet is classified as restricted? What are the implications of restricted cash for users of the financial statements?
Why is a certain amount of cash today more valuable than the same amount of cash in the future?
Which investment would be more attractive: 8% per year compounded annually or 8% per year compounded quarterly? Explain.
What is a “receivable”? How are receivables classified on a balance sheet? What are some of the different types of receivables that can be reported on a balance sheet?
How is the reported liquidity of an entity affected by how it recognizes revenue? Explain. Is the liquidity in an economic rather than an accounting sense affected by how revenue is recognized?
When a customer makes a purchase from MWW using a credit card such as Visa or MasterCard, why does MWW not include the sale as an account receivable?
What are the three methods available for accounting for uncollectable amounts from customers? Explain each of the three methods.
Why is the direct write-off method of accounting for bad debts not appropriate in accrual accounting or GAAP?
Explain why the percentage-of-credit-sales and the percentage-of-receivables methods to not usually give the same bad debt expense or the same balance in the allowance for uncollectable accounts.
Canadian GAAP do not require companies to disclose the amount of the bad debt expense or the balance in the allowance for uncollectable accounts. Would this information be useful to users of
Verlo Ltd. recently made a $100,000 sale to a customer. Terms of the sale agreement permit the customer to pay the $100,000 in two years. The customer will not have to pay any interest. If Verlo Ltd.
What is the quick or acid test ratio? How does the quick or acid test ratio differ from the current ratio? What would be a better measure of liquidity for a jewellery store, the quick ratio or the
(Classifying cash on the balance sheet, LO 1) For each of the following items, explain whether the amount described should be included in “Cash and Cash Equivalents” on Jelly Inc’’s (Jelly)
(Calculating future values, LO 2) Calculate the future value in each of the following situations:a. A senior citizen purchases a Canada Savings Bond for $1,000 that pays 5%interest per year for eight
(Calculating present values, LO 2) Answer the following questions:a. A customer purchases $10,000 of goods. The goods will be paid for in cash in two years. How much revenue should be recorded on the
(Calculating the present value of annuities, LO 2) Answer the following questions:a. A contest promotes that the winner wins $1,000,000. The $1,000,000 prize is paid in equal installments over 20
(Preparing a bank reconciliation, LO 1) On December 31, 2004 the accounting records of Ivujivik Inc. (Ivujivik) showed a cash balance of $21,550.15. The balance reported in Ivujivik’s December 31,
(Preparing a bank reconciliation, LO 1) On March 31, 2006 the accounting records of Nenagh Ltd. (Nenagh) showed a cash balance of $1,925.72. The balance reported in Nenagh’s March 31, 2006 bank
(Understanding the bank reconciliation, LO 1) A new accounting clerk for Everell Ltd. (Everell) has been asked to prepare a preliminary bank reconciliation for the current month. The clerk is having
(Basic journal entries, LO 3) Prepare the journal entries necessary to record the following transactions and economic events for Sahali Ltd. (Sahali):a. During 2005 Sahali had cash sales of $175,000
(Writing off an account receivable, LO 3) Malagash Ltd. (Malagash) recently learned that a major customer would be permanently shutting down its operations within 30 days. The reason for the
In answering, consider accounting principles and the objectives of accounting.(Accounting for long-term receivables, LO 2, 3) On May 31, 2005 Namaka Ltd. (Namaka) sold an office building to Audy Inc.
(Calculating accounts receivable, LO 3) Use an accounting equation spreadsheet and the following information to calculate accounts receivable on December 31, 2004: Accounts receivable Allowance for
(Calculating the bad debt expense and the allowance for uncollectable accounts, LO 3) You are provided with the following information about Nyanza Corp.:i. Accounts Receivable on December 31, 2005 =
(The effect of errors on net income, LO 3) Capstick Ltd. (Capstick) uses the percentage-of-credit-sales method of estimating the bad debt expense. Since 2000 Capstick has used too low a percentage in
(Comparing the percentage-of-receivables and percentage-of-credit-sales methods, LO 3) The following information has been obtained about Elzevir Inc. (Elzevir)for 2004. The information was obtained
(Using an aging schedule to calculate the bad debt expense, LO 3) Pipestone Ltd.(Pipestone) uses an aging schedule to estimate the amount of receivables that will not be collected. Pipestone allows
(Compute the accounts receivable turnover ratio and the average collection period for accounts receivable, LO 5) The following information was obtained from Acamac Corp.’s (Acamac) 2004 financial
(Correcting the balance in Allowance for Uncollectable Accounts, LO 3) Trilby Inc.(Trilby) uses the percentage-of-credit-sales method for estimating its bad debt expense. The percentage that Trilby
(Identifying quick assets, LO 5) Which of the following assets would you classify as quick assets for purposes of calculating the quick ratio? Explain your reasoning.. Accounts receivable. Prepaid
(Compute current and quick ratios, LO 5) Following are the balance sheets for the years ended June 30, 2005 and 2006 for Seahorse Inc.:Required:a. Calculate the current ratio and the quick ratio on
(Working with the accounts receivable turnover ratio, LO 5) During 2004 Oderin Inc. (Oderin) reported revenue of $2,356,000. Oderin’s accounts receivable turnover ratio for 2004 was 5.18. What was
(Thinking about internal controls, LO 1) For the following two scenarios, describe what you think are the weaknesses in the internal controls and explain the implications of the weaknesses:a. The
(Thinking about internal controls, LO 1) For the following two scenarios, describe what you think are the weaknesses in the internal controls and explain the implications of the weaknesses:a. A
(Time value of money calculations, LO 2) For each of the following situations, do the calculations necessary to make a decision:a. An entity purchases equipment for $50,000. The entity pays $10,000
(Analyzing changes to credit policy, LO 3, 5) Magundy Inc. (Magundy) imports high-end merchandise from Europe and distributes it to retailers across eastern Canada. Magundy has tended to be very
(Comparing the effects of different methods of accounting for bad debts, LO 3)You have obtained the following information about Eskasoni Inc. (Eskasoni) from the company’s 2005 annual
(Comparing the effects of different methods of accounting for bad debts, LO 3) You have obtained the following information about Dogwood Inc. Hogwood) from the company’s 2005 annual
(Observing the effect of errors in estimating the bad debt expense and the allowance of uncollectable accounts on the financial statements, LO 3, 4) Since 2002 Kyuquot Inc. (Kyuquot) has estimated
(The effect of transactions on ratios, LO 1, 3, 5) Complete the following table by indicating whether each transaction results in an increase, a decrease, or has no effect on the financial ratios
(Determine missing information, LO 5) Use the information provided to determine the values for the missing information (indicated by screened boxes):Current assets on December 31, 2004 = $925,000
(Determine missing information, LO 5) Use the information provided to determine the values for the missing information (indicated by screened boxes):weiter SERA Current assets on December 31, 2005 =
(The effect of transactions on ratios, LO 3, 5) For the year ended December 31, 2004 Alpena Inc. (Alpena) had revenues (all on credit) of $2,456,000. Its average col- lection period of accounts
(Accounting for long-term receivables, LO 2, 3) On July 31, 2005 Romanace Ltd.(Romanace) agreed to sell Youbou Inc. (Youbou) $1,500,000 of specialized equipment for use at its newly developed mine
(Using an aging schedule to calculate the bad debt expense, LO 3) Examine the following information about Weyakwin Inc. (Weyakwin):i. Ending balance in Allowance for Uncollectable Accounts on April
(Correcting the balance in Allowance for Uncollectable Accounts, LO 3) Trilby Inc.(Trilby) uses the percentage-of-credit-sales method for estimating its bad debt expense. The percentage that Trilby
(Managing accounts receivable, LO 5) A financial analyst is comparing the credit management of two companies, Zealand Inc. (Zealand) and Manotick Ltd.(Manotick). The two companies are in the same
(Creating hidden reserves, LO 4) The president of Remo Ltd. (Remo) wants to use hidden reserves to “save” income for a year when the company is not performing very well. To accomplish this
What amount of Cash and Cash Equivalents did MWW report on its January 27, 2001 and January 29, 2000 balance sheets?
By how much did accounts receivable decrease from the end of fiscal 2000 to the end of fiscal 2001? Is this decrease in accounts receivable surprising? Explain. What are some possible explanations
What would be considered quick assets on MWW’s balance sheet? Explain your answer. What amount of quick assets did MWW report on its January 29, 2000 and January 27, 2001 balance sheets? Calculate
Read Note 4 to MWW’s financial statements (page A-52).a. How much of MWW’s accounts receivable are due to business account sales on January 27, 2001?b. How many business customers owe MWW money
Provide the following information for January 27, 2001 and January 29, 2000:a. Amount of accounts receivable reported on the balance sheet.b. Allowance for doubtful accounts.c. Gross amount of
Note 9 to MWW’s financial statements (page A-54) shows that MWW has up to$75,000,000 available to it in the form of a “revolving operating facility” (which is a line of credit that can be used
Why do you think MWW is not owed money by retail customers? Why do MWW’s franchise stores. owe it money? What explanation does MWW give for its allowance for doubtful accounts?
(Examining relevance and reliability, LO 3) You are a corporate loan officer at a major bank. Itivia Inc. (Itivia) has applied to your bank for a $1,000,000 line of credit to finance operations. You
(Examining relevance and reliability, LO 3) You are a prospective investor contemplating purchasing shares in Whyac Ltd. (Whyac), a publicly traded Canadian corporation. In the course of your
(Considering comparability, LO 3) Thoburn Ltd. (Thoburn) and Nitro Inc. (Nitro)are two companies in the same industry. The net incomes for the year ended October 31, 2005 for the companies are shown
(Considering comparability, LO 3) Donjek Ltd. (Donjek) and Quigley Inc. (Quigley) are two companies in the same industry. The net incomes for the compa- nies for the year ended May 31, 2006 are shown
(Applying accounting assumptions, qualitative characteristics, and measurement conventions, LO 2, 3, 4) For each of the following items pertaining to Dollarton Ltd.(Dollarton), indicate which

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