Financial Statements

Question 1

Statement of Cash Flows- Indirect Method

Answer 1

Start with Net Income and back out all the accruals.

A decrease on A/R --> Add
A increase on A/R --> Subtract
A decrease on prepaid --> Add
A increase on prepaid --> Subtract
A decrease on A/P --> Subtract
A increase on A/P --> Add

Question 2

Installament method of accounting

Deferred Gross Income

Answer 2

Is the gross profit remaining on the uncollected sales accounted for under the installment method.

The gross profit percentage = (total installment sales - cost of installment sales)/total installment sales

Uncollected installment sales = total installment sales - collections

Deferred Gross Profit: Gross Profit percentage * uncollected installment sales.

Question 3

Installment Method of Revenue Recognition

Answer 3

Is used when the realizability criterion of revenue recognition is not met.

There is Significant uncertainty that the receivable will be collected. Until cash is collected (realizability is therefore assured for the amount collected), no gross profit is recognize.

Question 4

Property Taxes

Accounting Principles

Answer 4

The Tax-Paying firm accrues the property taxes monthly as expense over the fiscal year of the taxing authority because the expense should be recognized in the same period the firm benefits from the services provided by the governmental unit (taxing authority)