Managerial Accounting Week 1-7

Question 1

What are the advantages to a business being form as a corporation? What are the disadvanatages?

Answer 1

• Advantages of a corporation are limited liability (stockholders not being personally liable for corporate debts), easy transferability of ownership, and ease of raising funds.
• Disadvantages of a corporation are increased taxation and government regulations.

Question 2

Why would a bank want to monitor the dividend Payment practices of the corporations to which it lends money?

Answer 2

When a company pays dividends, it reduces the amount of assets available to pay creditors. Therefore, banks and other creditors monitor dividend payments to ensure they do not put a company’s ability to make debt payments at risk.

Question 3

What is the basic acconting equation?

Answer 3

The basic accounting equation is Assets = Liabilities + Stockholders’ Equity.

Question 4

Define the terms assets, liabilities, an holders’ equity.

Answer 4

• Assets are resources owned by a business.
• Liabilities are amounts owed to creditors. Put more simply, liabilities are existing debts and obligations.
• Stockholders’ equity is the ownership claim on net assets.

Question 5

What items affect stockholders’ equity?

Answer 5

The items that affect stockholders’ equity are common stock, retained earnings, dividends, revenues, and expenses.

Question 6

What’s the purpose of the mangement discussion and analysis section (MD&A)?

Answer 6

The purpose of the management discussion and analysis section is to provide management’s views on its ability to pay short-term obligations, its ability to fund operations and expansion, and its results of operations. The MD&A section is a required part of the annual report.

Question 7

Why is it important for finacial statements to receive an unnqualified opinion of an independent auditor?

Answer 7

An unqualified opinion shows that, in the opinion of an independent auditor, the financial statements have been presented fairly, in conformity with generally accepted accounting principles.
* This gives investors more confidence that they can rely on the figures reported in the financial statements.

Question 8

What types of information are presented in the notes to the finacial statements?

Answer 8

Information included in the notes to the financial statements
* clarifies information presented in the financial statements and
* includes descriptions of accounting policies, explanations of uncertainties and contingencies, and statistics and details too voluminous to be reported in the financial statements.

Question 9

What are meant by the term operating cycle?

Answer 9

A company’s operating cycle is the average time that is required to go from cash to cash in producing revenue

Question 10

Define current assets. What basis is used for ordering individual items within the current assets section?

Answer 10

Current assets are assets that a company expects to convert to cash or use up within one year of the balance sheet date or the company’s operating cycle, whichever is longer. Current assets are listed in the order in which they are expected to be converted into cash.

Question 11

How do current liabilities differ from. long-term liabilities?

Answer 11

• Current liabilities are obligations that will be paid within the coming year or operating cycle, whichever is longer.
• Long-term liabilities are obligations that will be paid after one year.

Question 12

Identify two parts of stockholders’ equity in corporation and indicate the purpose of each.

Answer 12

The two parts of stockholders’ equity and the purpose of each are:
1. (1) Common stock is used to record investments of assets in the business by the owners (stockholders).
2. (2) Retained earnings is used to record net income retained in the business.

Question 13

Tim Sands, founder of Waterboots INC., needs to raise $500,000 to expand his company’s operation. He has been told that raising the money through debt will increase the riskiness of his company much more than issuing stock. He doesn’t understand why this is true. Explain to him.

Answer 13

Debt financing is riskier than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of assets financed by debt, the riskier the company.

Question 14

Holding all factors constant, indicate whether each of the following signals generally are good or bad news about a company.
1. Increase in earnings per share
2. Increase in the current ratio
3. Increase in the debt to assets ratio
4. Decrease in free cash flow

Answer 14

1. The increase in earnigs per share is good news because it means that profitability has improved
2. An increase in current ratio signals are good news because the company. improved its ability to meet maturing short-term obligations.
3. The increase in debt to asset ratio. is bad news as it suggest. the company has increased its obligations to creditors annd lowered its Equity “buffer”.
4. A decrease in free cash flow is bad news because it means that the company has become less solvent. The higher the free cash flow, the more solvent the company.

Question 15

What is the primary objective of finacial reporting?

Answer 15

The primary objective of financial reporting is to provide information useful for decision making.

Question 16

Identify the charcteristics of useful accounting information.

Answer 16

• The fundamental qualitative characteristics are relevance and faithful representation.
• The enhancing qualities are comparability, consistency, verifiability, timeliness, and understandability.

Question 17

What is the distinction between comparability and consistency?

Answer 17

• Comparability results when different companies use the same accounting principles.
• Consistency means using the same accounting principles and methods from year to year within the same company.

Question 18

Describe the constraint inherent in the presentation of accounting information.

Answer 18

The cost constraint allows accounting standard-setters to weigh the cost that companies will incur to provide information against the benefit that financial statement users will gain from having the information available.

Question 19

Glenda Wine is presedent of Better Books. She has no accounting background. Wine cannot understand why fair value is not used as the basis. for all accounting measurment and reporting. Discuss.

Answer 19

Accounting primarily relies on two measurment principles:
1. Fair Value: sometimes used when market prices informatioon is already availble.
2. Historical costs: in a situation where reliable market price information is not available, accounting relias on historical costs. as its basis.

Question 20

What was Tootsie Roll’s largest current asset, largest current liability, and largest item under “Other Assets” at December 31, 2011?

N/A

Question 21

Describe the accounting informations system.

Answer 21

The system of collecting and processing transaction data and communicating financial information to decision makers is known as the accounting information system.

Question 22

Can a business enter a transaction that only effects the left side of the basic accounting equation? If so so, give an example.

Answer 22

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. E.g., a transaction where an increase in one asset is offset by an decrease in another asset. An increase. in equipment account which is offset by a decrease in cash account is a specific example

Question 23

Is a major stockholder’s death recorded in the accounting records?

Answer 23

It is not an accounting transaction as it does not affect the basic accounting equation.

Question 24

Are supplies purchased on account recorded in the accounting records?

Answer 24

Supplies purchased on account is an accounting transaction as it affects the accounting equation.

Question 25

Is an employees fireing recorded in the accounting records?

Answer 25

No, it is not an accounting transaction as it does not affect the accounting equation

Question 26

When the company pays a cash dividend to its shareholders, will it be recorded in the accounting records?

Answer 26

Yes, paying dividend is an accounting transaction, as it affect the accounting equation.

Question 27

Indicate how the payment in cash for janitorial services affects the basic accounting equation.

Answer 27

Decreases assets and decrese stockholder’s equity

Question 28

Indicate how the payment in cash for equipment affects the basic accounting equation.

Answer 28

Increase in assets and decrese in assets

Question 29

Indicate how an issuing of common sock to investors in exchange for cash affects the basic accounting equation.

Answer 29

Increse is assets and increase in stockholder’s equity

Question 30

Indicate how the paid an account payable in full affects the basic accounting equation.

Answer 30

Decrease in assets and decrease liabilities

Question 31

Why is an account reffered to as a T-account?

Answer 31

An account consits og three parts:
1. the title
2. The left, debit side
3. the right, credit side
Because the alignment of these three parts resembles the letter T, it us referered to as a T-account

Question 32

The terms debit and credit mean “increse” and “decrease”, respectivly. Do you agree? Explain

Answer 32

Disagree. The terms debit and credit are synonymous with left and right, respectivly.

Question 33

Misty, a begining accounting student, belives Debit balances are favourable and Credit balances are unfavourable. Is Misty xorrect? Discuss.

Answer 33

Misty is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversly, a credit balance only means that credit amounts are greater than devit. amounts in an account. Thus, a debit or credit balance. is. neither favourable nor unfavourable.

Question 34

What is normal balance for Accounts receivable?

Answer 34

Accounts Receivable — debit balance

Question 35

What is normal balance for Cash?

Answer 35

Cash — debit balance

Question 36

What is normal balance for Dividens?

Answer 36

Dividens — debit balance

Question 37

What is normal balance for Accounts Payable?

Answer 37

Accounts Payable — credit balance

Question 38

What is normal balance for Service Revenue?

Answer 38

Service Revenue — credit balance

Question 39

What is normal balance for Saleries and Wages Expense?

Answer 39

Saleries and Wages Expense — debit balance

Question 40

What is normal balance for Saleries and Wages Expense?

Answer 40

Saleries and Wages Expense — debit balance

Question 41

What is normal balance for Common Stock?

Answer 41

Common stock — credit balance

Question 42

Indicate whether the account is an asset, liability, or stockoholders’ equity account, and whether it would have a normal debit or credit balance.
Accoounts Receivable

Answer 42

Accounts Receivable—asset—debit balance

Question 43

Indicate whether the account is an asset, liability, or stockoholders’ equity account, and whether it would have a normal debit or credit balance.
Accounts Payable

Answer 43

Accounts Payable—Liability—credit balance

Question 44

Indicate whether the account is an asset, liability, or stockoholders’ equity account, and whether it would have a normal debit or credit balance.
Equipment

Answer 44

Equipment—asset—debit balance

Question 45

Indicate whether the account is an asset, liability, or stockoholders’ equity account, and whether it would have a normal debit or credit balance.
Dividens

Answer 45

Dividens—stockholder’s equity–debit balance

Question 46

Indicate whether the account is an asset, liability, or stockoholders’ equity account, and whether it would have a normal debit or credit balance.
Supplies

Answer 46

Supplies—asset—debit balance

Question 47

Indicate the account debited and the account credited.
Supplies are purchased on account

Answer 47

Debit Supplies and credit Accounts Payable

Question 48

Indicate the account debited and the account credited.
Cash received on signing a note payable

Answer 48

Debit Cash, and Credit Notes Payable

Question 49

Indicate the account debited and the account credited.
Employees. are paid saleries in cash

Answer 49

Debit Saleries and Wages Expenses, and Credit Cash

Question 50

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Issued Common Stock to investors in exchange foor cash received from investors

Answer 50

Increase in assets and increase stockholders’ equity

Question 51

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Paid monthly rent

Answer 51

Decrese in assets and decrease in stockholders’ equity

Question 52

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Received cash from customers when service was performed

Answer 52

Increse in assets and increase in stockholders’ equity

Question 53

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Billed customers for service performed

Answer 53

Increase in assets and increase in stockholders’ equity

Question 54

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Paid dividend to stockholders

Answer 54

Decrease in assets and decreas in stockholders’ equity

Question 55

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Incurred advertising expense on account

Answer 55

increase in liablities and decrease in stockholders’ equity

Question 56

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Received cash from a customer previously billed for services performed

Answer 56

Increase in assets and decrease in assets

Question 57

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Purchased additional equipment for cash

Answer 57

Increase in assets and decrease in assets

Question 58

Describe the effect of the transaction on assets, liabilities, and stockholders’ equity.
Purchased equipment on account

Answer 58

Increase in assets and increase in liabilities

Question 59

How dooes the periodicity assumption affect an accountants’s analysis of accounting tranasctions?

Answer 59

Under the periodicity assumption, an accountant is required to determaine accounting transaction on a specific accounting period

Question 60

Explain the term fiscal year

Answer 60

An accounting time period that is one year in length is referred to as a fiscal year

Question 61

Milner, A lawyer, accepts a legal engagment in March, performs the work in April, and is paid in May. If Milner’s law firm prepares. monthly finacial statements, when should it recognise revennue from this engagment? Why?

Answer 61

The law firm should recognise revenue in April. The revenue recognition prinnciple states that revennue should be recognised in the accounting period in which the performance obligation is satisfied.

Question 62

In compleating an engagement in April, Milner’s Law firm pay no cost in March, $2,500 in April, and $2,200 in may (incurred in April). How much expense should the firm deduct from revenue? Why

Answer 62

Expenses of $4,700 should be deducted froom revenue in April. Under the expense recoognition principle; efforts (expenses) shoould be matched. with results (revenues).

Question 63

What type of accounts does a company debit and credit in prepaid expense adjusting entry?

Answer 63

In a prepaid adjusting entry, expenses are debited. and assets are credited.

Question 64

Explain the differences between depreciation expense and accumulated depreciation.

Answer 64

Depreciation expense is an expense account whose normal balance is a debit this account shows the cost that has expired during the current accounting period. Accumulated depreciatioon is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognised from the date of acquiisition to the balance sheet date.

Question 65

Remington Company purchased equipment for $15,000. By the current balance sheet date, the company had depreciated $7,000. indicate the balance sheet presentation of the data.

Answer 65

Equipment $15,000
Less: Accumulated depreciation-equipment 7,000… $8,000

Question 66

What types of accounts are debited and credited in an unearned revenue adjusting entry?

Answer 66

In an unearned revenue adjusting entry, liabillities are debited and revenues are credited.

Question 67

A company faills to recognise revenue for services performed but not yet received. Which of the following types of account. are invoolved in the adjusting entry: (a) asset, (b) liability, (c) revenue, or (d) expense? For. the acounts selected, indicate wheter they woulld be debited or credited in the entry.

Answer 67

An asset is debited and a revenue is credited.

Question 68

A company faills to recognise an expense incurred but not paid. Indicate which of the following accounts is debited and which is credited in adjusting the entry: (a) asset, (b)liabilites, (c) revenue, or (d) expense.

Answer 68

an expense is debited and liabilitties is credited

Question 69

What information do accrual-basis finacial statements provide that cash-basis statements do not?

Answer 69

Information presented on an accrual basis is useful because it revelles important information about the relationship between efforts and results. The information is useful in predicting future results. Trends in revenues and expenses are thus more meaningful.

Question 70

What information do cash-basis financial statements provide that accrual-basis statement do not?

Answer 70

Information presented n cash-basis is useful in predicting future availability of cash. Cash basis financial statements aproovide useful information about a company’s sources and uses of cash.

Question 71

Identify the accounting concept that describes the situation.
… is the rationale for why plant asset are not reported at liquidation value. (do not use historical cost principle.)

Answer 71

Going conncern assumption

Question 72

Identify the accounting concept that describes the situation.
…Indicates that personal and business. record-keeping should be separatley maintained.

Answer 72

Economic entity assumption.

Question 73

Identify the accounting concept that describes the situation.
… ensures that relevant financial information is reported

Answer 73

Full disclosure principle

Question 74

Identify the accounting concept that describes the situation.
… Assumes the dollar is the “measuring stick” used to report financial performance.

Answer 74

Monetary unit assumption

Question 75

Identify the accounting concept that describes the situation.
… Requires accounting standards be followed for all items of significant size.

Answer 75

Materiality

Question 76

Seperate financial information into time periods for reporting purposes

Answer 76

Periodicity assumption

Question 77

Requires recognnition of expenses in the same period as related revenues.

Answer 77

Expennse recognition principle

Question 78

Indicates that fair value changes subsequent to purchase are not recorded in the accounts

Answer 78

Historical cost principle

Question 79

In its first year of operation, Ramirez Company. recognised $28,000 in service revenue, $6,000 of which was on account and still. outstanding at year-end. The remaing $22,000 was received in cash from customers.
The. company incurred operating expenses of $15,800. Of these expenses, $12,000 were paind in cash; $3,800 was still owed on accounnt at year-end. In addition, Ramirez prepaid $2,400 for insurance coverage that. would not. be used until the second year of operation.
(a) Calculate the first year’s net earnings under the cash basis of accounting, and calculate the first year’s net eranings under the accrual basis of accounting.
(b) Which basis of accounting (cash or accrual) provides more useful information for decisiion-makers?

Answer 79

(a)
(b) The accrual basis of accounting provides more useful innformation for decions-makers because it recognise revenues. when the performance obligatin is satisfied and expenses when incurred.

Question 80

Angie MIlner belives revenues from credit sales may be recorded before they are collected in cash. Do you agree? Explain

Answer 80

Agree. In acordance with the revenue recognision principle, sales revenues are generally connsidered to be recognised when the goods are transfered. from the seller to the buyer; that is, when the exchange transaction occurs. The recognition of revenue is not dependent on the collectio of credit sales

Question 81

What is the. primary source for recording (1) cash sales and (2) credit sales?

Answer 81

The primary. source. documents are (1) cash sales—cash register tapes and (2) credit sales—sales invoices

Question 82

A credit sale is made on July 10 for $900, terms 1/15, n/30. On July 12, the purchaser returnes $100 of goods for credit. Give the Journal entry on July 19 to record the recipt of the balance due within the discount period.

Answer 82

July 19
Cash($800-$8)…$792
Sales Discounts ($800 x 1%)…$8
Acounts Receivable ($900-$100)…$800

Question 83

Goods costin $1,900 are purchased on account July 15 wiith credit terms of 2/10, n/30. On July 18, the purchaser receives a $300 credit from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discunt period.

Answer 83

July 24
Accounts payable ($1,900-$300)…$1,600
Cash ($1,600-$32)…$1,568
Inventory ($1,600 x 2%)…$32

Question 84

Mrs. Betancourt is uncertain about how the historical cost principle applies to plant assets. Explain the principle to Mrs. Betancourt.

Answer 84

For plant assets, the historical cost principle states that plant assets are recorded at cost, which consists of all expenditures necessary to acquire the asset and make it ready for its intended use.

Question 85

How is the plant assets measured in a cash transaction? In a non cash transaction?

Answer 85

In a cash transaction, cost is equal to the cash paid

Question 86

Malon Inc. needs to upgrade its diagnostic. equipment. At the time of purchase, Malor had expected the equipment to last 8 years. unfortunately, it was obsolete after only 4 years. Ronald Nolan, CFO of Malor IInc., is considering leasing new equipment rather than buying it. What are the potential benefiits of leasing.

Answer 86

The potential benefits of leasing are (1) reduced risk of obsolence (an obvious concern to Roland), (2) little or no required down payment, (3) shared tax advantages, (4) assets and liabilites may not be reported on the balance sheet.

Question 87

Contrast the streight-line method and the units-of-actiity method in relation to (a) useful life and (b) the pattern of periodic depreciation over useful life

Answer 87

(a) usefull life is expressed in years under the straight-line method and in units of actiity under the units-of-activity method.
(b) The pattern of periodic depreciation expense over an asset’s useful life is constant under the straight-line method and variable under units-of-activity method

Question 88

Lakeland Corporation owns a machine that is fully depreciated but still being used. How should Lakeland account for this asset and report it in the financial statements?

Answer 88

The plant and related accumulated depreciatioon should coontinue to be reported on the balance sheet without further depreciation or adjutment until the asset is retired.
Reporting the asset and related accumulated depreciation on the Balance sheet informs. the reader of the financial statements that assets is still being used by the company.
Once an asset is fully depreciated, even if it is still being used, no additional depreciatioin should be taken on this asset. In no situation can the depreciatioin on the plant asset exceed the cost of the plant asset.

Question 89

Under what conditions is goodwill recorded? What is the propper accounting treatment for amortising goodwill?

Answer 89

Goodwill is recorded only when there is an exchange transaction that iinvolved the purchase of an entire business. Goodwill is the excess of cost over the fair value of the net assets (assets less liabilities) aquired. The recognition of goodwill without an exchange transaction would lead to subjective valuatiions whiich would reduce the reliablity of financial statements.

Goodwill is not amortised because it has an indefinite life. It remains at its orginal value as an intagible asset unless it is considered to be impaired. If it is imparied, it is written down.

Question 90

Often R&D costs provide companies with benefits that last a number of years. For example , these costs can lead to development of patent that will increase the company’s income for many years. However, generally accepted accounting principles require that such costs be recorded as an expense when incurred. Why?

Answer 90

R&D costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefiits. As a result, R&D costs are usually recorded as an expense when incurred.

Question 91

You are comparing two companies in the same industry. You have determined that Leslie Corp. depreciates its plants assets over a 40-year life, whereas Camby Corp. depreciates its plants assets over a 20-year life. Discuss the implications this has for compariing the results of the two companies.

Answer 91

By selecting a higher estimated useful life, Leslie Corp. is spreading the plant assets’ cost over a longer period of time. The deprciiation expense reported in each period iis lower and net income hiigher. Camby Corp’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income.

Question 92

Gooden Corp. and Perron Corp. operate in the same industry. Gooden uses straight-line method to account for depreciation, wheras Perron uses accelrated method for depreciation. Explain what complicatioons might arise in trying to compare the results of these two companies.

Answer 92

Since Gooden uses the straight-line depreciation method, its depreciation expense will be lower in the early years of an asset’s useful life as compared to using an accelrated method. Perron’s depreciation expense in the early years of an asset’s useful life will be higher as compared to the straight-line method. Gooden’s net income will be higher than Perron’s in the first few years of the asset’s useful life.