Question FER-5 , I dont understand what the stuff in the income statement vertical analysis shows, Can you please further explain what is going on?

Final Exam Review DISCLAIMER: This review package is intended to test your understanding of SOME of the concepts in the chapters covered by the Final Exam (Chapter 1 to 9). In NO WAY is this package intended as a comprehensive review. This review package DOES NOT cover every concept from every chapter. There are concepts that will be tested which have not been reflected in this review package. This package is intended as additional practice ONLY and students should make no assumptions about the final exam based on the questions included in this Final Exam Review. Students should review the contents of every chapter and the end of chapter Practice Questions for a more comprehensive review of all concepts in the course to date. SOLUTIONS: Solutions to the Final Exam Review package will not be released. Students are expected to attend class in order to check their solutions to this review package. IMPORTANT: Students are encouraged to print off this review package and work on PAPER. That is because the final exam is a PAPER BASED TEST. Typing answers into a computer DOES NOT DUPLICATE final exam conditions. Students are strongly recommended to print off this review package and answer the questions in conditions that are similar to the final exam (such as timing yourself, no aids at all, write in a quiet place, one sitting of 3 hours long). Students should be able to write this review package in approximately 2 hours (since it does not include as many multiple choice questions as the final exam will). The Final Exam will be 3 hours long. Multiple Choice Questions: Q1: Gross profit is calculated as A. B. C. D. E. Sales less cost of goods sold. Sales less operating expenses. Net sales less cost of goods sold. Net sales less operating expenses. Net sales less cost of goods sold and operating expenses. Q2: Cooper Inc. sells inventory to Greene Ltd. For $3,000, credit terms of 2/10, n/30, on May 12, FOB shipping point. The shipping costs are $120, paid in cash by the appropriate party. Greene returns $600 of inventory on May 14 and pays the outstanding balance on May 22. What would be the amount that Greene Ltd. paid Cooper? A. B. C. D. E. $2,469.60 $2,400.00 $3,057.60 $2,352.00 $3,645.60 Q3: What of the following statements is TRUE about the difference between the single step and multiple step income statement? A. B. C. D. E. Sales returns & allowance and sales discounts are only on the multiple step. Cost of goods sold is only on the multiple step. Profit from operations is only on the single step. Gross profit is only on the multiple step. Other revenues and other expenses is only on the single step. Q4: The following information is available for AKDE Inc. Accounts payable Accounts receivable Cash Common shares Dividends paid Income tax expense Misc. Expenses Office equipment Accumulated depreciation Prepaid expense Rent expense Retained earnings, beginning Salaries expense Service revenue Uneared revenue Utilities expense 8,000 14,000 10,000 28,000 6,000 4,500 3,500 36,000 6,000 2,800 3,000 15,000 7,000 28,500 2,000 700 What is the retained earnings that would be reported at the end of the year on the balance sheet? A. B. C. D. E. $18,800 $16,000 $18,000 $24,800 $20,800 Q5: If total assets decreased by $14,000 and total equity increased by $6,000 during the year, then the amount and direction (increase or decrease) of the change in total liabilities would be: A. B. C. D. E. An increase of $8,000 A decrease of $8,000 An increase of $20,000 A decrease of $20,000 None of the above. Q6: Accounting information should be unbiased in order to increase it's A. B. C. D. E. verifiability. understandability. faithfulness. comparability. relevance. Q7: The following information applies to both Q7 and Q8. The following information is available for Juddo Inc., a merchandising business in St. Catherines, Ontario. The business uses the perpetual inventory system and controls their inventory using the FIFO method. Date May 1 May 12 May 22 May 30 Description Number of Units Opening 150 Purchase 50 Sale 158 Purchase 90 Unit Cost Selling Price $4 $5 $12 $6 The value of ending inventory that would be reported on the balance sheet would be? A. B. C. D. E. $850 $210 $750 $640 None of the above. Q8: Of the following businesses which is unlikely to choose specific identification to control their inventory? A. B. C. D. E. Piano store Car dealership Hardware store Antique store Custom made jewellery designer FER-1 Olivita Inc. is a merchandising business that sells to retail stores all over Canada, owned by Olive Vitanni. This is their 4th year of operations and, due to their rapid expansion, Olive is concerned about her accounts receivable balance at year end. In order to grow the business all customers have been offered credit terms 3/10, n/45, which Olive believes results in faster payment of the outstanding accounts receivable. She also believes that it creates higher sales because only her business is offering such favourable (good) credit terms. At December 31, 2016, the current year end, Olive has the following information about the activities during 2016: Total gross credit sales during 2016 (there were no cash sales) Cost of goods sold during 2016 Write offs during 2016 Allowance for doubtful accounts at year end, after all write offs but before the adjustment for uncollectible accounts Sales returns (sales & cost of goods sold respectively) Sales discounts Accounts receivable balance at year end $984,750 $541,620 $18,460 $+2,500 $17,200, $9,460 $17,085 $139,530 What was the opening balance in the Allowance for Doubtful Account? Opening AFDA, January 1, 2016: Calculations: For the past 3 years Olive has been using 12% of accounts receivable in order to estimate her ending accounts receivable. Given this information calculate Olive's opening balance in accounts receivable. Opening A/R, January 1, 2016: Calculations: FER-1, continued Given the information, above, what were the cash collections during 2016? Cash collections during 2016: Calculations: Do all the required entries for 2016 EXCEPT the estimate for the uncollectable accounts. (The chart is provided on the next page.) If Olive used the same 12% of total accounts receivable what would her estimated uncollectible accounts be? Estimated Uncollectible accounts: Calculations: Explain to Olive what the aging of accounts receivable is and why she might want to use that method to estimate the uncollectible accounts receivable instead of 12% of accounts receivable. Olive has provided you with the following aging of accounts receivable and the percentages that she feels apply given the last few years of write offs and what she expects in the future re: the economy. Continued on the next page. FER-1, continued Amount Estimated Percentage Uncollectable Current 80,000 1% 1 - 30 days overdue 31,370 15% 31 - 60 days overdue 15,440 25% Over 61 days overdue 12,720 65% Category Total $139,530 Calculate Olive's estimated uncollectible accounts (round each number to the nearest dollar) and record the entry on the chart provided. Estimated Uncollectible accounts: Calculations: Calculate all the ending balances for the chart after you make the entry for the estimated uncollectible accounts. Provide the multiple step income statement down to the gross profit line. Inventory Accounts payable Owner's Capital Retained Earnings Opening balances N/A N/A N/A N/A N/A Totals: N/A N/A N/A N/A N/A Bad debt expense Cost of goods sold Sales Discounts Liabilities Owner's Capital Sales returns and allowances Sales Revenue Allowance for doubtful accounts Accounts Receivable Cash Assets Equity Retained Earnings Profit Revenue Expenses FER-2 The following transactions related to equipment purchased by Olive for Olivita Inc. in 2015. The business's year end is December 31. Date June 1 June 3 June 6 July 1 July 1 Description Purchased equipment for $30,000, paying $22,000 cash and the remainder as accounts payable, due in 45 days. Paid shipping charges on the equipment of $500 Paid installation and testing costs of $950 Paid for a 1 year insurance policy, $1,800. Began using the equipment. The estimated residual value is $1,450 and the useful life is 5 years. Paid off the outstanding accounts payable related to the equipment. July 30 Mar. 31, 2018 The business sells the equipment for $17,000 cash. Olivita Inc. only record depreciation at the end of every year. Record all the entries to July 30, 2015, in the expanded accounting equation. Opening N/A N/A Continued on the next page. Accounts payable Cash Equipment Asset N/A N/A Misc. Expense Equity Retained Earnings Liabilities Owners' Profit Capital Revenue Expenses N/A N/A N/A N/A FER-2, continued Complete the chart, below, for December 31, 2015, 2016, 2017, and 2018. Date Depreciation Accumulated Expense Depreciation Book Value Dec. 31, 2015 Dec. 31, 2016 Dec. 31, 2017 Mar. 31, 2018 Record all the entries for each yearend, starting from December 31, 2015, and ending on March 31, 2018. Be sure to record ALL the entries! Balances Loss on sale Depreciation Expense Gain on Sale Accumulated Depreciation Equipment Cash Asset Accounts payable Equity Retained Earnings Liabilities Owners' Profit Capital Revenue Expenses FER-3 You run a merchandising business and this is your 3rd year of operations. A few of the transactions for the year are provided below. Oct 1 Oct 31 Nov 1 Nov 1 Nov 20 Nov 30 Dec 1 Dec. 31 Dec. 31 Dec. 31 Dec. 31 You borrow $50,000 from the bank at an interest rate of 6% for 4 years. Accrue interest on the loan. Pay interest on the loan. A customer of yours pays you $6,000 in advance for 6 months of services, to be provided evenly over the next 6 months. Services start immediately. Your accountant tells you that you owe Revenue Canada $8,550 on the income from the business. You have not paid any income taxes yet this year. Accrue interest on the loan. Pay interest on the loan. You pay Revenue Canada for the taxes owing. Accrue additional income tax for the income earned in November and December, $1,280. Accrue interest on the loan. Recognize the revenue earned from the client who paid you on November 1. Record all the necessary transactions into the expanded accounting equation using account names. The expanded accounting equation is on the next page. FER-3, continued Oct. 1 Oct. 31 Nov. 1 Nov. 1 Nov. 20 Nov. 30 Dec. 1 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Income tax expense Interest Expense Service Revenue Loan Payable Income Tax Payable Unearned Revenue Interest Payable Liabilities Equipment Cash Asset Equity Retained Earnings Owners' Profit Capital Revenue Expenses FER-4 Recently Olive, the owner of Olivita Inc., hired an employee. The employee is paid on the last day of every month for the services provided during the month. Olive hired the employee on November 1, 2016. The following are the transactions with regards to the employee for the month of November: Nov. 1 Hired Adam Ali. He started November1. Adam works 5 days a week, Monday to Friday, for 7.5 hours every day. He is paid $15 per hour. The following amounts were withheld at source: CPP of $21.40, EI of $7.69, and EIT of $219. Olive pays Adam Ali and records the appropriate amount of employee benefits. Olive paid the amounts owed the government. Nov. 30 Dec. 12 Record all the necessary transactions into the expanded accounting equation using account names. Assets Liabilities Equity Employee Benefits Expense Salary Expense Employee Income Taxes Payable EI Payable CPP Payable Cash Date Owner's Retained Earnings Capital Revenue Expenses FER-5 Below is the comparative income statement for Bleaue Inc. for 2016 and 2015. Prepare a vertical analysis for each year and comment on the results. Vertical 2016 Net sales Cost of goods sold Gross profit Operating expenses Profit before income tax Income tax expense Profit Analysis 800,000 480,000 320,000 192,000 128,000 32,000 96,000 Vertical 2015 Analysis 600,000 330,000 270,000 162,000 108,000 27,000 81,000 Comments: FER-6 Bleaue Inc. has also provided the following selected accounts from the comparative balance sheet. Complete a horizontal analysis and comment on the results. Accounts receivable Inventory Total assets Comments: December 31, 2016 1,040,000 1,360,000 8,800,000 December 31, 2015. 900,000 1,300,000 8,000,000 Horizontal Analysis FER-7 Provided below is the statement of cash flows for Bleaue Inc. for December 31, 2016. Bleaue is a merchandising business that has decided to start selling to customers in USA and they are planning for the increased inventory they will have to carry in order to meet the orders from new US customers. This year the business's profit (net income) was $138,000. Analyze the statement of cash flows given the information above and on the statement of cash flows. Do you feel that the business is doing well? Are there any areas of concern that you see based on the information provided? Bleaue Inc. Statement of Cash Flows Year Ended December 31, 2016 Operating activities Cash receipts from customers $766,000 Cash payments: To suppliers $606,000 For operating expenses 48,000 For interest expense 8,000 For income tax 10,000 Net cash provided by operating activities 94,000 Investing activities Sale of equipment 12,000 Purchase of equipment -119,000 Net cash provided by investing activities -107,000 Financing activities Repayment of mortgage -24,000 Issue of common shares 15,000 Payment of cash dividend -14,000 Net cash used by financing activities -23,000 Net increase in cash -36,000 Cash, January 1 128,450 Cash, December 31 $92,450 Comments about the cash flow from operations: Comments about the cash flow from investing activities: Comments about the cash flow from financing activities: Any additional comments: End of the review package!! Remember that studying for the final exam ONLY from the questions in this package is not recommended. Be sure to study from each chapter, both from the Check your Understanding questions, In Class Demo Questions, and Practice Questions. We will not wish you good luck because, as Thomas Edison noted, the harder you work the more luck you will have!! So, work hard