Midterm Review Flashcards
Rigby Outfitters is a retailer of sports equipment. The company prepares quarterly financial statements using the accrual basis of accounting and has a fiscal year-end of December 31. Assume that the following events occur during the fourth quarter of 2015:
October 5: Rigby Outfitters places an order with Mountain Hardware, Inc. for winter jackets (merchandise inventory) to be sold in the Ribgy Outfitters’ stores during the fall and winter shopping seasons. The order’s cost to Rigby Outfitters will be $300,000. The terms of this purchase agreement require Rigby Outfitters to pay Mountain Hardware for the jackets in three equal installments. The first installment payment is due on December 10, with the remainder due in 2016.
What journal entry, if any, would be required on October 5?
No entry would be required.
Rigby Outfitters is a retailer of sports equipment. The company prepares quarterly financial statements using the accrual basis of accounting and has a fiscal year-end of December 31. Assume that the following events occur during the fourth quarter of 2015:
October 20: Rigby Outfitters receives the winter jackets (see above) along with an invoice for $300,000
What journal entry, if any, would be required on October 20?
Inventory (+A) 300,000 Accounts Payable (+L) 300,000
Rigby Outfitters is a retailer of sports equipment. The company prepares quarterly financial statements using the accrual basis of accounting and has a fiscal year-end of December 31. Assume that the following events occur during the fourth quarter of 2015
October 28: The Bend Whitewater Rafting Club places a special order for 15 embroidered jackets. Rigby Outfitters provides embroidering services free of charge for orders of this size, but requires that customers pay a 20% deposit at the time of the order with the balance due upon delivery. The unit sales price of the jackets is $200. Thus, the club pays Rigby $600 when placing the order. The inventory cost to Rigby Outfitters for the 15 jackets, including embroidering, is $1,800.
What journal entry, if any, would be required on October 28?
Cash (+A) 600 Unearned Revenue (+L) 600
Rigby Outfitters is a retailer of sports equipment. The company prepares quarterly financial statements using the accrual basis of accounting and has a fiscal year-end of December 31. Assume that the following events occur during the fourth quarter of 2015
November 8: Rigby Outfitters delivers the 15 special-order jackets to the Bend Whitewater Rafting Club, receiving a payment for the balance due
What journal entry, if any, would be required on November 8 to fully account for the delivery of the jackets?
Cash (+A) 2,400
Unearned Revenue (−L) 600
Sales Revenue (+R,+SE) 3,000
Cost of Goods Sold (+E,−SE) 1,800
Inventory (−A) 1,800
Vargas Mining is based in Santiago, Chile and closes its books quarterly. Its fourth quarter and fiscal year both end on December 31st. Each of the transactions below affected Vargas Mining’s financial statements for the fourth quarter of 2014. Compute the effects of the transactions on the indicated income statement and balance sheet accounts that were found in Vargas’s fourth quarter financial statements.
On June 1st, 2014, Vargas Mining paid 50 million Chilean pesos (CLP) as the first premium on a fire insurance policy for one of its smelting facilities (50 million/120 million). The entire policy covered the twelve-month period beginning on June 1st, 2014. A second premium of CLP 40 million was paid on November 1st (40 million/120 million), while a third premium of CLP 30 million was paid on March 1, 2015 (30 million/120 million). Assume for simplicity that this was the company’s only insurance policy in force during 2014.
he balance in the prepaid insurance account at the beginning of the fourth quarter of 2014:
$10 Million CLP
Vargas Mining is based in Santiago, Chile and closes its books quarterly. Its fourth quarter and fiscal year both end on December 31st. Each of the transactions below affected Vargas Mining’s financial statements for the fourth quarter of 2014. Compute the effects of the transactions on the indicated income statement and balance sheet accounts that were found in Vargas’s fourth quarter financial statements.
On June 1st, 2014, Vargas Mining paid 50 million Chilean pesos (CLP) as the first premium on a fire insurance policy for one of its smelting facilities (50 million/120 million). The entire policy covered the twelve-month period beginning on June 1st, 2014. A second premium of CLP 40 million was paid on November 1st (40 million/120 million), while a third premium of CLP 30 million was paid on March 1, 2015 (30 million/120 million). Assume for simplicity that this was the company’s only insurance policy in force during 2014.
- Insurance expense for the fourth quarter of 2014:
$30 Million CLP
Vargas Mining is based in Santiago, Chile and closes its books quarterly. Its fourth quarter and fiscal year both end on December 31st. Each of the transactions below affected Vargas Mining’s financial statements for the fourth quarter of 2014. Compute the effects of the transactions on the indicated income statement and balance sheet accounts that were found in Vargas’s fourth quarter financial statements.
On June 1st, 2014, Vargas Mining paid 50 million Chilean pesos (CLP) as the first premium on a fire insurance policy for one of its smelting facilities (50 million/120 million). The entire policy covered the twelve-month period beginning on June 1st, 2014. A second premium of CLP 40 million was paid on November 1st (40 million/120 million), while a third premium of CLP 30 million was paid on March 1, 2015 (30 million/120 million). Assume for simplicity that this was the company’s only insurance policy in force during 2014.
- The balance in the prepaid insurance account at the end of the fourth quarter of 2014:
$20 Million CLP
The Gap, Inc. operates specialty retail businesses under the Gap, Old Navy, Banana Republic, Piperline and Athleta brands. The company has stores in many countries around the world, plus franchise agreements to operate Gap and Banana Republic stores in many more. Use the company’s attached comparative balance sheets and income statements to answer the questions below. All dollar amounts are in millions.
Calculate the return on shareholders’ equity (ROE) for fiscal year 2012.
ROE = Net income/ average shareholders’ equity
= $833/([$4,080 + $2,755]/2) = 24.4%
The Gap, Inc. operates specialty retail businesses under the Gap, Old Navy, Banana Republic, Piperline and Athleta brands. The company has stores in many countries around the world, plus franchise agreements to operate Gap and Banana Republic stores in many more. Use the company’s attached comparative balance sheets and income statements to answer the questions below. All dollar amounts are in millions.
b) Calculate the return on assets (ROA) for fiscal year 2011. Assume a tax rate of 35%.
ROA = (Net income + (1-.035)*Interest expense)/Average assets
= ($833 + 0.65 * 74)/([$7,065 + 7,422]/2) = 12.2%
The Gap, Inc. operates specialty retail businesses under the Gap, Old Navy, Banana Republic, Piperline and Athleta brands. The company has stores in many countries around the world, plus franchise agreements to operate Gap and Banana Republic stores in many more. Use the company’s attached comparative balance sheets and income statements to answer the questions below. All dollar amounts are in millions.
c) The Gap’s return on assets declined by 23% from 2010 to 2011, but its return on shareholders’ equity declined by only 9%. Briefly explain what factor(s) could account for this difference? Please note that you are not required to do any calculations to answer this question. You need only to identify and explain factor(s) that could cause ROE to change by a percentage amount that is not the same as the change in ROA
The difference is caused by the increase in liabilities, relative to a decrease in shareholders’ equity from 2010 to 2011. That is, liabilities increased and shareholders’ equity decreased.
Oracle is the world’s largest supplier of database software. Its balance sheet included the following presentation:
March 31 (in millions)
2013: 7,280
2014: 6807
Trade receivables, net of allowance for doubtful accounts of #477 of March 31, 2014 and $339 as of March 31, 2013
During the year ended March 31, 2014, Oracle reported revenues of $37,413 million. Assume all sales are made on account. Assume that Oracle collected $37,491 million in cash from its customers during the year ended March 31, 2014.
Required: Determine the bad debts expense recognized by Oracle for the year ended March 31, 2014? (Hint: Total cash collected would equal both cash sales and cash collected from its trade receivables.)
Answer: Bad debts expense recognized during the year was $395 million. All answers are in $millions.
There are two approaches to this problem, both giving the correct answer.
Approach 1: Deal with A/R gross and the Allowance separately. Step 1 is to analyze A/R gross to determine write-offs; Step 2 is to analyze the Allowance to determine Bad Debt Expense.
Trade receivables: Beginning balance, gross $7,619 (= $7,280 net + allowance $339) + revenues for the year ended March 31, 2014 $37,413 –– ending balance $7,284 (=$6,807 net + $477 ending balance in allowance) - $37,491 cash collections during the year ended March 31, 2014= write-offs $257
Allowance account: $257 write-offs during the year + Ending balance $477 - Beginning balance $339 = Additions during the year $395 and this is bad debt expense.
Approach 2: Because write-offs have no effect on A/R, net, you can also get the answer by looking at that account directly.
Beginning balance (7,280) + sales revenue (37,413) – cash collected (37,491) – ending balance (6807) = bad debt expense (395)
How would an investor determine the “book value” of a company?
Identify “Total Shareholders’ Equity” on the company’s Balance Sheet.
What distinguishes current assets from long-term assets
Current assets are assets that the company expects to use up in the current period (e.g., within one year).
What is the relationship between the Income Statement and the Balance Sheet?
“Net Income” Is the result of all “Revenues”, less all “Expenses” for the current period, and is closed out to “Retained Earnings” on the Balance Sheet at the end of the period.
Pfizer reports the following balances in its retained earnings.
Retained Earnings
2016: 17,952
2015: 16,953
During 2016, Pfizer declared dividends of $1,411. Assume that the only changes that affected retained earnings were net income and dividends. What amount of Net Income did Pfizer report in 2016?
$2,410
