comm 320 - F

Question 1

Journal Entry for Long Term Loan Payable

Answer 1

(d) Long Term Loan Payable
(c) Current portion of long-term debt

Question 2

Liability for Gift Cards

Answer 2

• journal entry: use “deferred revenue” because the seller has not performed its obligations
• calculating deferred revenue:
  expected to not be redeemed x (already redeemed / expected to be redeemed)

Question 3

Liability for Loyalty Programs

Answer 3

• reporting the liability:
  allocated liability - actual # of points redeemed

Question 4

Liabilities for Warranties

Answer 4

• assurance warranty: use estimated price
  
  • report the whole price
  • when claimed: use “warranty provision” for journal entry
• service warranty: use stand-alone price (because its not included)
  
  • report price per year
  • when clamed: use “warranty expense” for journal entry

Question 5

Liabilities for Payroll

Answer 5

• include employee entry, employer entry and remittance entry
  *employer entry does not need to include employee’s wages

Question 6

Ratios for Current Liabilities

Answer 6

• A/P Turnover Ratio: credit purchases / average accounts payable
  
  • to calculate credit purchases = COGS - beginning inventory + ending inventory
• A/P Payment Period: 365 / Turnover Ratio
  
  • number of days taken to pay for A/P

Question 7

Retained Earnings

Answer 7

Opening Retained Earnings + Net Income - Dividends Declared = Closing Retained Earnings

Question 8

Stocks

Answer 8

• journal entry for common share dividends
  (d) Dividends Declared
  (c) Dividends Issuance (v. Dividends Payable for normal ones)
  (d) Dividends Issuance
  (c) Common Shares
• stock split
  
  • does not require journal entry
  • # of shares increase, but company value does not change
  • prices drop: more accessible to investors

Question 9

Ratios for Shareholders’ Equity

Answer 9

• Price-Earnings Ratio: Market Price per share / Earnings per share
  
  • higher ratio = market places higher value on the share
  • shows company has higher earning potential / lower risk in debt repayment / higher future competition
• Dividend Payout Ratio: Dividend per share / Earnings per share
  
  • % of how much money are given out as dividends (v. reinvested)
• Dividend Yield: Dividend per share / Market Price per share
  
  • % of how much is returned to shareholders
• Return on Equity Ratio: Net Income - Preferred Dividends / Avg. Common Shareholder Equity
  
  • shows rate of return for common share owners (how well company is using equity to generate returns to shareholders)

Question 10

Cash Flow - Indirect Method

Answer 10

• Operating Activities
  
  • State Net Income [s of i]
  • Add: non-cash purchases [s of i]
  • Add/Subtract: equipment sales / purchases [s of i]
  • Add/Subtract: net change of assets and liabilities
    
    • exclude cash and dividend accounts
    • add if asset decreased (net +)
    • add if liabilities increased (net -)
• Investing Activities
  
  • Sale / Purchase of Equipment
  • Sale / Purchase of other investments
• Financing Activities
  
  • Dividends Paid (find # using retained earnings and net income values)
  • Loans / Payback
  • Cash from shares
• Hints:
  
  • read notes to get information
  • use T to get values for investing and financing activities
  • use statement of income only for first 3 bullets of operating activities
  • get all other values from statement of financial position

Question 11

Cash Flow - Direct Method

Answer 11

• present operating activities in categories
  
  • start from statement of income > make adjustments with statement of financial position
• categories:
  
  • receipts from customers
  • payments to suppliers
  • payments to employees
  • payments of interest
  • payments of income tax

Question 12

Cash Flow Profiles

Answer 12

• most common are:
  
  • (+) (-) (+)
  • (+) (-) (-)
• (+ o): successful
• (- o): struggling
• (- i): growing and replacing PPE
• (+ f): attracting new debt, investors creditors, shareholders
  (- f): repaying debt, repaying dividends

Question 13

Ratios

Answer 13

• accounts receivable turnover:
  
  • credit sales: if not found, use revenue
• debt to equity ratio:
  
  • for debt: debt A + debt B + debt C - cash
  • not included as debt: deferred revenue, non-interest bearing liabilities (i.e. accounts payable)
• net free cash flow ratio:
  
  • for capital expenditure: long-term investing activities (i.e. PPE, investment in intangible assets)