This is “End-of-Chapter Exercises”, section 3.5 from the book Business Accounting (v. 2.0).
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You are the chief executive officer of Fisher Corporation. You are very concerned with presenting the best financial picture possible to the owners so you can get a big bonus at the end of this year. Unfortunately, Fisher has a lawsuit pending that could result in the company having to pay a large sum of money. Lawyers believe the company will win and pay nothing. However, they believe there is a 20 percent chance of a $100,000 loss and a 10 percent chance of a $300,000 loss. What amount should be reported?
Henderson Inc. reports the following: assets of $500,000, liabilities of $350,000 and capital stock of $100,000. What is the balance reported as retained earnings?
Giles Corporation borrowed $675,000 from Midwest Bank during the year. Where is this event be reported on Giles’s statement of cash flows?
You are considering investing in the stock of Mogul Corporation. On which of the following statements would you find information about what the company holds in inventory at the end of the most recent year?
You are considering investing in the stock of the Maintland Corporation. On which of the following statements would you find information about the cost of the merchandise that the company sold to its customers this past year?
The Drexel Company began operations on January 1, Year One. In Year One, the company reported net income of $23,000 and, in Year Two, reported net income of another $31,000. In the current year of Year Three, the company reported net income of $37,000. Drexel paid no dividends in Year One but paid $10,000 in Year Two and $12,000 in Year Three. On the December 31, Year Three, balance sheet, what is reported as retained earnings?
The Shelby Corporation has been in business now for six years. At the end of its latest fiscal year, the company reported $560,000 in assets, $320,000 in liabilities, $100,000 in contributed capital, and $140,000 in retained earnings. What is the total of stockholders’ equity?
The Valdese Corporation operates a restaurant and has sales revenue of $300,000, cost of goods sold of $170,000, other expenses of $50,000, and a gain on the sale of a truck of $14,000. Which of the following statements is true?
Which of the following is true about the usual reporting of income taxes?
A company had a number of cash transactions this year. It paid $22,000 in dividends to its owners, borrowed $100,000 from a bank on a long-term loan, bought a building for $288,000, sold equipment for $23,000, sold inventory for $16,000, and issued capital stock to an investor for $35,000. On a statement of cash flows, what is the net amount to be reported as financing activities?
A company had a number of cash transactions this year. It paid $43,000 in dividends to its owners, borrowed $200,000 from a bank on a long-term loan, bought a building for $312,000, sold equipment for $51,000, sold inventory for $25,000, and issued capital stock to an investor for $85,000. On a statement of cash flows, what is the net amount to be reported as investing activities?
A company reports total assets of $500,000 ($300,000 current and $200,000 noncurrent). The same company reports total liabilities of $350,000 ($75,000 current and $275,000 noncurrent). What is the amount of working capital?
A company is producing financial statements. Which statements should be prepared initially?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own an ice cream shop in a resort community in Florida. They often try to talk with your roommate about their business and use terms such as financial statements, inventory, assets, liabilities, revenue, expenses, contributed capital, and gross profit. The roommate is usually lost in these conversations and feels dumb. One evening on the way to see a movie, your roommate mentions that you are taking a financial accounting course and asks you to explain these terms in some relatively simple fashion. How would you respond?
Your uncle and two friends started a small office supply store three years ago (January 1, Year One). They each invested $20,000 in cash. They then rented a building for $2,000 per month and hired an employee for $3,000 per month. The business buys $9,000 in merchandise per month and sells it for cash of $16,000 in that same month. For convenience, assume that all transactions are for cash. Each owner takes out $4,000 in cash each year as a dividend.
At the end of Year Three, the owners decide to apply for a loan so they can purchase a building that will allow them to expand operations. The bank has asked for several pieces of information, and your uncle recently sent you an e-mail asking that you help him determine the appropriate amounts to report. What figures should be provided for each of the following?
On which financial statement will a decision maker find each of the following account balances?
The following relate to the Farr Corporation for the month of April:
|Gain on the Sale of Land||$20,000|
|Loss on Lawsuit||$24,000|
|Cost of Goods Sold||$82,000|
The Maverick Company has the following account balances at the end of December. Show that Maverick’s balance sheet does balance using the accounting equation.
The Ramond Company has hired you to prepare financial statements for the year ending December 31 of the current year. On your first day of work, your assistant uncovers several items that could be classified as expenses or could be classified as assets. The assistant has asked for your help. Determine whether the following items should be recorded as an expense or an asset within the financial statements currently being prepared.
For each of the following, determine the missing balance.
|Cost of Goods Sold||$459,030|
|Gain on Sale of Equipment||$5,000|
|Income Tax Expense||$50,000|
|Retained Earnings, 12/31||$16,200|
|Retained Earnings, 1/1||?|
Rescue Records needs rescuing. The downloading of songs over the Internet is killing its business. The owners of Rescue want to know if they made a net income or a net loss during the current year that ended on December 31, Year One. Given the following account balances, prepare an income statement for Rescue similar to the example shown in Figure 3.1 "Income Statement".
|Cost of Goods Sold||$109,000|
|Income Tax Expense||$3,800|
|Loss on Sale of Land||$12,090|
Your lawn care business, A Cut Above, has grown beyond your wildest dreams—to the point where you would like to buy some new equipment and hire some people to help you. Unfortunately, you don’t have that kind of money sitting around, so you are applying for a loan. The bank has requested financial statements, including, of course, a balance sheet. The following are the balances you have on December 31, Year One. Prepare a classified balance sheet to submit to the bank.
|Note Payable Due Two Years from Now (Loan from Mom)||$5,000|
|Capital Stock (Money You Invested to Start Business)||$2,000|
|Retained Earnings, 12/31||$600|
Maria Sanchez, an accountant by trade, earns extra cash by working in the evenings as a personal trainer at the local gymnasium. Maria is curious about her cash inflows and outflows from this extra work. The following is the information that she gathered for the month of February. Prepare a statement of cash flows for Maria.
|Cash Paid for Supplies Inventory||$500|
|Cash Paid for Advertising||$400|
|Cash Paid for Equipment||$900|
|Cash Received from Bank Loan||$1,000|
|Cash Paid for Insurance||$700|
|Cash Received from Customers||$2,200|
|Cash Paid for Taxes||$400|
|Cash Balance, Beginning of February||$500|
The Eli Company started business on January 1, Year One. In Year One, the company made a net income of $100,000 and paid cash dividends of $30,000. At the end of Year Two, the company has the following accounts and their appropriate balances:
|Cost of Goods Sold||$170,000|
|Dividends Paid in Year Two||$80,000|
|Land and Equipment||$300,000|
|Contributed Capital (Capital Stock)||$120,000|
|Notes Payable (Due in Year Six)||$210,000|
|Loss on Sale of Equipment||$10,000|
|Income Tax Expense||$30,000|
Retained earnings at the beginning of Year Two can be computed from the information provided at the beginning of the problem.
Go to http://www.hersheys.com/. At The Hershey Company Web site, click on “Corporate Information” at the bottom of the page. Click on “Investors” on the top of the next screen. Then, click on “Financial Reports” on the left side of the screen. You should see a drop-down menu. Click on “Annual & Quarterly Reports.” Finally, click on “2010 Annual Report to Stockholders/Form 10-K” to download the form. The Form 10-K is the document that many businesses must file with the U.S. government each year. Because it requires that financial statements be included, some companies like Hershey also use it as the annual report for their stockholders.
Using The Hershey Company’s Form 10-K, answer the following questions:
On page 54 of the 2010 financial statements for The Hershey Company, an income statement is presented. For 2008 and also for 2010, determine the following balances. Has this company’s income picture improved from 2008 to 2010?
On page 55 of the 2010 financial statements, a balance sheet is presented. Determine the following balances as of December 31, 2009, and also December 31, 2010.