accounting principles 10th edition weygandt & kimmel chapter 4 and 5

7/16/2019 Accounting Principles 10th Edition Weygandt & Kimmel Chapter 4 and 5

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FN-580 Financial Statement Analysis

1) Distinguish between a reversing entry and an adjusting entry. Arereversing entries required?Reversing entries are not a mandatory step in accounting cycle; it isonly optional step of bookkeeping. A reversing entry will be made forcertain adjusting entries at the beginning of the next accounting

period. This reversing entry will be exact opposite of the adjustingentry prepared at the time of end of the year.

2) Indicate, in the sequence in which they are made, the three requiredsteps in the three required steps in the accounting cycle that involve journalizing.Steps:- Analyzing the business transaction- Arranging the transactions in chronological order- Preparation of the correct format of the journal- Preparing the journal entries for that transaction

3) Identify, in the sequence in which they are prepared, the three trialbalances that are often used to report financial information about acompany.- Preparation of normal trial balances- Preparation of adjusted trial balances- Preparation of post closing trial balances

4) How do correcting entities differ from adjusting entries?

Adjusting entries essential for accounting cycle, but correcting entriesare unnecessary if the records are error free. Adjusting journal entrieswill be made only at the end of an accounting period, but correctingentries will make whenever they discover and error. Adjusting entrieswill affect at least one income statement account and one balancesheet account but correcting entries may involve any combination of accounts in need of correction, and correcting entries will post beforethe closing entries.

5) What standard classifications are used in preparing a classified balance

sheet?Assets:- Current assets- Long term investments- Property, plant, and equipment- Intangible assetsLiabilities and Stockholder Equity:- Current liabilities

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- Long term liabilities- Stockholder’s equity

6) What is meant by the term “operating cycle?”An operating cycle indicates that average time that it takes topurchase raw materials, sell it on account to customers, and thencollect cash from customers. Usually most of the business this cycle isless than one year, hence they use cutoff for one year. But bigindustries this cycle will take longer time for one year.

7) Define current assets. What basis is used for arranging individual itemswithin the current assets section?Current assets are the assets which convert into cash or use up within

one year or one operating cycle whichever is longer. Current assetswill report in balance sheet in the order in which they expect to convertthem into cash.Companies will report the following order:- Cash and cash equivalents- Short term investments- Accounts receivable- Inventories- Prepaid expenses and other current assets

8) Distinguish between long-term investments and property, plant, andequipment.Long term investment is the investment which a company invests theirfunds in other company’s bonds or stocks. But company invests cashinto purchase of their fixed tangible assets are called Property, plant,equipment. Long term investments are not useful for operating theirbusiness activities. Property, plant and equipment are useful tooperate company’s day to day business activities. Long terminvestments are reported in the section of long term investments of the balance sheet. But these tangible fixed assets (building, land, etc)are reported in property, plant and equipment section of the balance

sheet.

9) (a) What is the term used to describe the owner’s equity section of acorporation? (b) Identify the two owners’ equity accounts in acorporation and indicate the purpose of each.Stockholders are actual company owners, since their equity is reportedin balance sheet under stockholders’ equity section. Usually

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companies will show common stock, retained earnings accounts underthis section, since these are the compulsory accounts of the section.Common stock accounts indicate that total paid up capital, and totaloutstanding shares of the company. Retained earnings account willreport total funds available to stockholders’ collection from the income

statement as net income, and also dividend will be distributed fromthis account only.

10) Using PepsiCo’s annual report, determine the current liabilities atDecember 26, 2009, and December 27, 2008. Were current liabilitieshigher or lower than current assets in these two years?Current Liabilities and Current Assets analysis for PepsiCo for 2009 and2008:Current Liabilities for the two years:

December 26, 2009 December 27, 2008

Amount $ Amount $8,756 8,787

Current Assets for the two years:December 26, 2009 December 27, 2008Amount $ Amount $12,571 10,806

The current liabilities of PepsiCo for both years 2009 and 2008 arelower than its current assets.

11) Sanchez Company prepares reversing entries. If the adjusting entryfor interest payable is reversed, what type of an account balance, if any, will there be in Interest Payable and Interest Expense after thereversing entry is posted? The normal entry for an Interest Payable amount is:

Date Account Title andExplanation

Ref. Debit$

Credit$

Interest Expense xxx

Interest Payable xxx

(To record interest

expenses payable)

In case the above entry is reversed:Date Account Title and

ExplanationRef. Debit

$Credit$

Interest Payable xxx

Interest Expense xxx

(To record reversing entry

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for interest expensespayable)

After the reversing of the entry, the amount would be nullified or if there is any balance left then Interest Expense will have a credit ledgerbalance while Interest Payable will nullify.

12) At December 31, accrued salaries payable totaled $3,500. On January10, total salaries of $8,000 are paid. (a) Assume that reversing entriesare made at January 1. Give the January 10 entry, and indicate thatSalaries and Wages Expense account balance after the entry is posted.(b) Repeat part (a) assuming reversing entries are not made.

(a) Assuming that Reversing entries are made at Jan 1

Date Account Title and

Explanation

Ref. Debit

$

Credit

$Dec31

Salaries and WageExpenses

Salaries and WagePayable

(AccruedSalaries)

J3 3,500

3.500

Jan 1 Salaries and Wage PayableSalaries and Wage

Expenses(Reversing of Dec 31

entry)

J3 3,500

3,500

Jan10

Salaries and WageExpense

Cash(Total Salaries

paid)

J3 8,000

8,000


Ref. Debit$

Credit $Balance$

Dec

31

Salaries and Wage

Payable

J3 3,500 3,500

Dec31

Salaries and WagePayable

J3 3,500 -

Dec31

Cash J3 8,000 8,000

(b) Assuming when reversing entries are not made

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Ref. Debit$

Credit$

Dec31

Salaries and WageExpenses

Salaries and Wage

Payable(Accrued Salaries)

J3 3,500

3,500

Jan10

Salaries and WageExpense

Cash(Total Salaries paid)

J3 8,000

8,000

Date Explanation Ref. Debit$

Credit$

Balance$

Dec31

Salaries and WagesPayable

J3 3,500

Jan10 Cash J3 11,500

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Chapter 5 page 238-239

1) (a) “The steps in the accounting cycle for a merchandising companyare different from the accounting cycle for a service company.” Doyou agree or disagree? (b) Is there measurement of net income for amerchandising company conceptually the same as for a servicecompany? Explain.(a) Disagree, since each of the required steps in the accounting cycle

for a service company applies to a merchandising company(b) Measurement of net income:

The measurement of net income is conceptually same. In bothtypes of companies, net Income (or loss) results from the matchingof expenses with revenues.

2) Why is the normal operating cycle for a merchandising company likelyto be longer than for a service company? The normal operating cycle for a merchandising company is likely to belonger than in a service company. The purchase of merchandiseinventory and its eventual sale followed by the credit sales lengthenthe operating cycle. In case of servicing company all these things willnot be there, they receive cash for the service provided or record asreceivable on the service provided.

3) (a) How do the components of revenues and expenses differ betweenmerchandising and service companies? (b) Explain the income

measurements process in a merchandising company.(a)Particulars Merchansiding ServiceRevenuesExpenses

SalesCost of Goods Sold,andOperating

Fee, Rent, chargeetc.Operating (only)

(b)SalesReven

ue

(-)Less

Costof

GoodsSold

=Equal

s

GrossProfit

(-)Less

Operating

Expenses

=Equal

s

NetIncom

e

4) How does income measurement differ between a merchandising and aservice company?Income measurement for a merchandising company differs from aservice company as follows:

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a) Sales are the primary source of revenue in the merchandisingcompany while fee, rent and service charges are the sources of revenue in the service companies.

b) Expenses is divided into two main categories: cost of goods soldand operating expenses in merchandising companies while the

expenses are mainly operating in service companies.c) Cost of goods should be considered in calculating the income formerchandising company while operating expenses are the majorexpenses and there will not be any cost of goods sold or inventory.

5) When is cost of goods sold determined in a perpetual inventorysystem?In a perpetual inventory system, cost of goods sold is determined eachtime when a sale occurs. As the name suggests it is an updated recordfor the cost of goods sold. When in periodic inventory system the cost

of goods sold is determined at the end of each period.

6) Distinguish between FOB shipping point and FOB destination. Identifythe freight terms that will result in a debit to Inventory by the buyerand a debit to Freight-out by the seller.FOB Shipping Point: The letters FOB means, “Free on Board”. FOB shipping point meansthat goods are placed on board of the carrier for free by the seller. Thebuyer then pays the freight and debits Merchandise Inventory.FOB Destination:

FOB destination means that the goods are placed free on board to thebuyer’s place of business. Thus, the seller pays the freight and debitsFreight-out.

7) Explain the meaning of the credit terms 2/10, n/30.Meaning of 2/10:Credit terms of 2/10 means a 2% cash discount will be given if payment is made within 10 days of the invoice date.Meaning of n/30:If the payee fails to pay within the credit term period then he has to

pay the invoice price, less any returns, within 30 days from the invoicedate.

8) Goods costing $2,000 are purchased on account on July 15 with creditterms of 2/10, n/30. On July 18, a $200 credit memo is received fromthe supplier for damaged goods. Give the journal entry on July 24 to

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record payment of the balance due within the discount period using aperpetual inventory system.

Purchase of inventory on account:

Date Account Title Debit$ Credit $

15-Jul Inventory 2,000Accounts payable 2,000

To record purchase of inventory onaccount.

Return of goods:Date Account Title Debit

$Credit $

18-Jul Accounts payable 200

Inventory 200To record return of goods purchased.

Payment of balance due:Date Account Title Debit

$Credit $

24-Jul Accounts payable ($2,000-$200) 1,800Cash 1,764Inventory 36

To record payment within discount period.

($1,800 – ($1,800*2%))

Note:Calculation of amount paidPurchase on credit $2,000Less-Purchase return ($200)Balance $1800Less-Cash discount ($1800*2%) (36)Amount paid $1,764

9) Joan Roland believes revenues from credit sales may be earned beforethey are collected in cash. Do you agree? Explain. Yes, the statement is correct. On accrual basis, the revenue isconsidered to be earned before it is collected in cash, once the legaltitle to the goods “that is the risks and rewards of ownership” istransferred to the buyer.

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10) (a) What is the primary source document for recording (1) cash sales,(2) credit sales. (b) Using XXs for amounts, give the journal entry foreach of the transactions in part (a).(a) The primary source documents:

The primary source documents for the cash sales and credit sale are

as follows;1) Cash sale: Cash register tapes are the sources for cash sales.2) Credit sales: Sales invoices are the sources for credit sales.

(b) Journal entries:For cash sales:

Date

Particulars L/F Dr$ Cr$

Cash xxxSales xxx

(Entry to record the cash sales)

Cost of goods sold xxxMerchandise inventory xxx

(Entry to record the cost of goodssold)

For credit sales:Date

Particulars L/F Dr$ Cr$

Accounts receivables xxxSales xxx

(Entry to record the credit sales)

Cost of goods sold xxxMerchandise inventory xxx

(Entry to record the cost of goodssold)

11) A credit sale is made on July 10 for $900, terms 2/10, n/30. On July12, $100 of goods are returned for credit. Give the journal entry on July 19 to record the receipt of the balance due within the discount

period.Date Account title Debit$

Credit $

10-Jul Accounts receivable 900Sales revenue 900

To record sales on account.

Date Account title Debit Credit $

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$

10-Jul Cost of goods sold 900Inventory 900

To record cost of goods sold.

Date Account title Debit$

Credit $

12-Jul Sales returns 100Accounts receivable 100

To record sale returns.


Credit $

12-Jul Inventory 100Cost of goods sold 100

To record fair value of goods

returned.


Credit $

19-Jul Cash 784Sales discounts 16

Accounts receivable($900-$100)

800

To record collection of accountsreceivable within the discount period.

($800-(800*2%))

Notes:Cash receivedCredit sales $900Less-sales return ($100)Net sales $800Less-discount ($800*2%) ($16)Cash receipt $784

12) Explain why the Inventory account will usually require adjustment atyear-end.Adjustments are required for the inventory account at the year-end.Since the perpetual inventory records for merchandise inventory may

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be incorrect due to a variety of causes such as recording errors, theftor waste etc.

13) Prepare the closing entries for the Sales Revenue account, assuming a

balance of $200,000 and the Cost of Goods Sold account with a$145,000 balance.Date Account title Debit

$Credit $

31-Dec Sales revenue 200,000

Income summary 200,000To record closing of sales revenueaccount to the income summary account.


Credit $

31-Dec Income summary 145,000

Cost of goods sold 145,000To record closing of cost of goodssold account to the incomesummary account.

Note:Expenses and revenues will be transferred to the income statement.

14) What merchandising account(s) will appear in the post-closing trialbalance?Of the merchandising accounts, only Merchandise Inventory will appearin the post-closing trial balance.

15) Reese Co. has sales revenue of $105,000, cost of goods sold of $70,000, and operating expenses of $20,000. What are its gross profitand its gross profit rate?

Gross profit is the difference between the sales revenue and cost of goods sold.Gross profit = Sales revenue – Cost of goods sold

= $105,000-$70,000

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= $35,000 Therefore the gross profit=$35,000

Gross profit rate is ratio of gross profit to net sales.Gross profit rate = Gross profit

Net sales= $35,000$105,000

= 33.33% Therefore the gross profit rate=33.33%

16) Ann Fort Company reports net sales of $800,000, gross profit of $370,000, and net income of $240,000. What are its operatingexpenses?

Operating expenses are the difference between the gross profit andnet income.Operating expenses = Gross profit-Net profit

= $370,000-$240,000= $130,000

Therefore the operating expenses=$130,000

17) Identify the distinguishing features of an income statement for a

merchandising company. There are three distinguishing features of an income statement for amerchandising company:- Sales revenues section- Cost of goods sold section- Gross profit

18) Identify the sections of a multiple-step income statement that relate to(a) operating activities, and (b) non-operating activities.(a) The operating activities section of the multi-step income statement

has three parts:- Sales revenues- Cost of goods sold- Operating expenses

(b) The non-operating activities section of the multi-step incomestatement consists of two parts:

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- Other revenues and gains- Other expenses and losses

19) How does the single-step form of income statement differ from the

multiple-step form? The single step income statement differs from the multiple stepincome statement as follows:1- Total data is the be classified into two categories: revenues and

expenses2- Only one step, subtracting total expenses from total revenues, is

required in determining net income (or net loss).3- Where in multi step income statement several parts to be

calculated to determine the net income.

20) Determine PepsiCo’s gross profit rate for 2009 and 2008. Indicatewhether it increased or decreased from 2008-2009.Gross profit rate = Gross profit x100

Net sales

Particulars2009 2008

Amount inmillions $

Amount inmillions $

Net revenue (a) 43,232 43,251Less: Cost of sales (b) 20,099 20,351

Gross Profit ( c) = (a) –(b)

23,133 22,900

Gross Profit rate (c )\ (a)

53.51% 52.95%

Gross profit rate 2009=53.51%2008=52.95%

The gross profit rate has increased marginally in 2009 by 0.56%(53.51%-52.95%) when compared to 2008.

21) Identify the accounts that are added to or deducted from Purchases to

determine the cost of goods purchased. For each account, indicatewhether it is added or deducted.Cost of good purchased:Accounts that are added to or deducted from the purchase todetermine the cost of goods purchased are as follows:- Accounts to be deducted:

- Purchase returns and allowances- Purchase discounts

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- Accounts to be added:- Freight-in

22) Goods costing $3,000 are purchased on account on July 15 with creditterms of 2/10, n/30. On July 18, a $200 credit was received from the

supplier for damaged goods. Give the journal entry on July 24 torecord payment of the balance due within the discount period,assuming a periodic inventory system.


Credit$

24-Jul Accounts payable ($3,000-$200) 2,800Cash ($2,800 –

($2,800*2%))2,744

Purchase discounts($2,800*2%)

56

To record payment of accounts payable within the discount period.

Note:Calculation of amount paidPurchase on credit $3,000Less-Purchase returns ($200)Balance $2,800Less-cash discount ($2,800*2%) ($56)Amount paid $2,744

23) Indicate the columns of the worksheet in which (a) inventory and (b)cost of goods sold will be shown.(a) Merchandise inventory:- Trial balance-Debit side- Adjusted trial balance-Debit side- Balance sheet-Assets side(b) Cost of Goods Sold:- Trial Balance-Debit side- Adjusted Trial Balance-Debit side- Income Statement-Debit side

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accounting principles 10th edition weygandt & kimmel chapter 4 and 5

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