Oscar Geer, a mid-level product manager for Theresa’s Shoes, thinks his company should switch from LIFO to FIFO. He says, “My bonus is based on net income. If we switch it will increase net income and increase my bonus. The company would be better off and so would I.” Is he correct? Explain.
> How does the average-cost method of inventory costing differ between a perpetual inventory system and a periodic inventory system?
> Hank Cook is confused about the lack of agreement between the cash balance per books and the balance per bank. Explain the causes for the lack of agreement to Hank and give an example of each cause.
> Douglas Corp. has experienced tremendous sales growth this year, but it is always short of cash. What is one explanation for this occurrence?
> Give an example of an industry that would be characterized by (a) a high asset turnover and a low profit margin, and (b) a low asset turnover and a high profit margin.
> What factors affect a company’s gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease?
> What is the LIFO reserve? What are the consequences of ignoring a large LIFO reserve when analyzing a company?
> The use of a bank contributes significantly to good internal control over cash.” Is this true? Why?
> The following are the major balance sheet classifications: Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Common stock (CS) Intangible assets (IA) Retained earnin
> What two ratios measure factors that affect profitability?
> Under what circumstances might inventory turnover be too high—that is, what possible negative consequences might occur?
> What is the essential feature of an electronic funds transfer (EFT) procedure?
> Tilton Company’s balance sheet shows Inventory $162,800. What additional disclosures should be made?
> What was Apple’s largest current asset, largest current liability, and largest item under “Assets” at September 27, 2014?
> What is the economic entity assumption? Give an example of its violation.
> What is meant by a concentration of credit risk?
> What types of businesses are most likely to use a perpetual inventory system.
> Why is it inappropriate for a company to include freight-out expense in the Cost of Goods Sold account?
> What merchandising account(s) will appear in the post-closing trial balance?
> What is meant by the term operating cycle?
> To have maximum effective internal control over cash disbursements, all payments should be made by check.” Is this true? Explain.
> How might a company monitor the risk related to its accounts receivable?
> Wanda Roberts is president of Best Texts. She has no accounting background. Wanda cannot understand why fair value is not used as the basis for all accounting measurement and reporting. Discuss.
> Kathy Malone, a business major, is working on a case problem for one of her classes. In this case problem, the company needs to raise cash to market a new product it developed. Doug Price, an engineering major, takes one look at the company’s balance she
> What cost flow assumption may be used under the lower-of-cost-or-market basis of accounting for inventories?
> Sheen Company reported these income statement data for a 2-year period. Sheen Company uses a periodic inventory system. The inventories at January 1, 2016, and December 31, 2017, are correct. However, the ending inventory at December 31, 2016, is overst
> At Lazlo Wholesale Company, two mail clerks open all mail receipts. How does this strengthen internal control?
> Goodwill has been defined as the value of all favorable attributes that relate to a business enterprise. What types of attributes could result in goodwill?
> What are the steps to good receivables management?
> Your roommate believes that accounting standards are uniform throughout the world. Is your roommate correct? Explain.
> Mrs. Harcross is uncertain about how the historical cost principle applies to plant assets. Explain the principle to Mrs. Harcross.
> What title does Apple use for gross profit? By how much did its total gross profit change, and in what direction, in 2014?
> Jackson Music Center has five TVs on hand at the balance sheet date that cost $400 each. The current replacement cost is $350 per unit. Under the lower- of-cost-or-market basis of accounting for inventories, what value should Jackson report for the TVs o
> Hank Artisan is studying for the next accounting mid- term examination. What should Hank know about: (a) departing from the cost basis of accounting for inventories and (b) the meaning of “market” in the lower-of- cost-or-market method?
> In a recent annual report, Office Depot, Inc. notes that the company entered into an agreement to sell all of its credit card program receivables to financial service companies. Instructions Explain why Office Depot, a financially stable company with po
> Describe the constraint inherent in the presentation of accounting information.
> Why is the normal operating cycle for a merchandising company likely to be longer than for a service company?
> This information relates to Alfie Co. 1. On April 5, purchased merchandise from Bach Company for $27,000, terms 2/10, n/30. 2. On April 6, paid freight costs of $1,200 on merchandise purchased from Bach Company. 3. On April 7, purchased equipment on acco
> What principle(s) of internal control is (are) involved in making daily cash counts of over-the-counter receipts?
> What is the distinction between comparability and consistency?
> Identify the distinguishing features of an income statement for a merchandising company.
> What is the difference between an account receivable and a note receivable?
> In what ways does the format of a statement of financial of position under IFRS often differ from a balance sheet presented under GAAP?
> Discuss the impact the use of LIFO has on taxes paid, cash flows, and the quality of earnings ratio relative to the impact of FIFO when prices are increasing.
> Information about Mather is presented in E6-4. Additional data regarding the company’s sales of EZslide snowboards are provided below. Assume that Mather uses a perpetual inventory system. Instructions Compute ending inventory at Septem
> In its year-end earnings announcement press re- lease, Ransome Corp. announced that its earnings increased by $15 million relative to the previous year. This represented a 20% increase. Inspection of its income statement reveals that the company reported
> Robbins Inc. owns the following assets at the balance sheet date. Cash in bank—savings account $ 8,000 Cash on hand 1,100 Cash refund due from the IRS 1,000 Checking account balance 12,000 Postdated checks 500 Wha
> What are the similarities and differences between depreciation and amortization?
> Compute the missing amounts for each of the following notes. Annual Total Principal Interest Rate Time Interest (a) $30,000 $60,000 $50,000 60 days 3 years 5 months $ 270 (d) $2,500 $2,750 6% 8% (b) 11% (c)
> Merle Hawkins, the president of Pathway Company, is pleased. Pathway substantially increased its net in- come in 2017 while keeping its unit inventory relatively the same. Jon Dietz, chief accountant, cautions Merle, however. Dietz says that since Pathwa
> Inventory data for Jeters Company are presented in E6-7(given below) Instructions (a) Calculate the cost of the ending inventory and the cost of goods sold for each cost flow assumption, using a perpetual inventory system. Assume a sale of 410 units occ
> Auditors provide a type of certification of corporate financial statements. Certification is used in many other aspects of business as well. For example, it plays a critical role in the sustainability movement. The February 7, 2012, issue of the New York
> Presented below are three receivables transactions. Indicate whether these receivables are reported as accounts receivable, notes receivable, or other receivables on a balance sheet. (a) Advanced $10,000 to an employee. (b) Received a promissory note of
> Lance, Art, and Wayne have joined together to open a law practice but are struggling to manage their cash flow. They haven’t yet built up sufficient clientele and revenues to support their legal practice’s ongoing costs. Initial costs, such as advertisin
> (a) What is the primary objective of financial reporting? (b) Identify the characteristics of useful accounting information.
> What does Apple use as the estimated useful life on its buildings? On its machinery and equipment? (Hint: You will need to find the notes to Apple’s financial statements online. See the directions for finding the notes in Appendix A at the end of the tex
> How may the maturity date of a promissory note be stated?
> Discuss the human resources department’s involvement in internal controls.
> Below is a series of cost of goods sold sections for companies B, M, O, and S. Instructions Fill in the lettered blanks to complete the cost of goods sold sections. B M S Beginning inventory Purchases $ 250 1,500 $ 120 1,080 (d) $ 700 (g) 290 $ Purc
> Mai Company has always provided its customers with payment terms of 1/10, n/30. Members of its sale force have commented that competitors are offering customers 2/10, n/45. Explain what these terms mean, and discuss the implications to Mai of switching i
> Mamosa Corporation has been using the FIFO cost flow method during a prolonged period of inflation. During the same time period, Mamosa has been paying out all of its net income as dividends. What adverse effects may result from this policy?
> Deere & Company is a global manufacturer and distributor of agricultural, construction, and forestry equipment. Suppose it reported the following information in its 2017 annual report. Instructions (a) Compute Deere’s inventory tur
> Caterpillar publishes an annual Sustainability Report to explain its position on sustainability, describe its goals, and report on its achievements. The report can be found at http://www.caterpillar.com/sustainability/sustainability-report. Instructions
> A local bank reported that it lost $150,000 as the result of employee fraud. Ray Fairburn is not clear on what is meant by “employee fraud.” Explain the meaning of fraud to Ray and give an example of fraud that might occur at a bank.
> Lopez Co. had three major business transactions during 2017. (a) Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000. (b) The president of Lopez Co., Victor Lopez, purchased a truck for personal use and charged it to his
> If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Instructions (a) Access the glossary (“Master Glossary”) at the FASB Codification website to answer the foll
> Spahn Company has these cash balances: cash in bank $12,742, payroll bank account $6,000, and plant expansion fund cash $25,000. Explain how each balance should be reported on the balance sheet.
> Presented below are the assumptions and principles discussed in this chapter. 1. Full disclosure principle 2. Going concern assumption 3. Monetary unit assumption 4. Periodicity assumption 5. Historical cost principle 6. Economic entity assumption Instru
> (a) What are generally accepted accounting principles (GAAP)? (b) What body provides authoritative support for GAAP?
> If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. (a) The primary basis for accounting for inventories is cost. How is cost defined in the Codification? (b) W
> In a period of rising prices, the inventory reported in Short Company’s balance sheet is close to the current cost of the inventory, whereas King Company’s inventory is considerably below its current cost. Identify the inventory cost flow method used by
> The following information is available for Zoe’s Activewear Inc. for three recent fiscal years. Instructions (a) Calculate the inventory turnover, days in inventory, and gross profit rate for 2017 and 2016. (b) Based on the ratios calcu
> Suppose the following data were taken from the 2017 and 2016 financial statements of American Eagle Outfitters. (All numbers, including share data, are in thousands.) Instructions Perform each of the following. (a) Calculate the current ratio for each ye
> The bookkeeper for Roger’s Dance Studio made the following errors in journalizing and posting. 1. A credit to Supplies of $600 was omitted. 2. A debit posting of $300 to Accounts Payable was inadvertently debited to Accounts Receivable.
> Bank employees use a system known as the “maker-checker” system. An employee will record an entry in the appropriate journal, and then a supervisor will verify and approve the entry. These days, as all of a bank’s accounts are computerized, the employee
> The following selected accounts from the Blue Door Corporation’s general ledger are presented below for the year ended December 31, 2017: Instructions Prepare a multiple-step income statement. $ 55,000 250,000 1,085,000 125,000 150
> Which assumed inventory cost flow method: (a) usually parallels the actual physical flow of merchandise? (b) divides cost of goods available for sale by total units available for sale to determine a unit cost? (c) assumes that the latest units purchased
> Suppose this information is available for PepsiCo, Inc. for 2015, 2016, and 2017. Instructions (a) Calculate the inventory turnover for 2015, 2016, and 2017. (Round to one decimal place.) (b) Calculate the days in inventory for 2015, 2016, and 2017. (c
> Some of the largest business frauds ever perpetrated have involved the misstatement of inventory. Two classics were at Leslie Fay and McKesson Corporation. Instructions There is considerable information regarding inventory frauds available on the Interne
> Fennick Company reports net income of $92,000 in 2017. However, ending inventory was understated by $7,000. What is the correct net income for 2017? What effect, if any, will this error have on total assets as reported in the balance sheet at December 31
> Goods costing $1,900 are purchased on account on July 15 with 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
> Which ratio or ratios from this chapter do you think should be of greatest interest to: (a) a pension fund considering investing in a corporation’s 20-year bonds? (b) a bank contemplating a short-term loan? (c) an investor in common stock?
> At one time, Boeing closed a giant deal to acquire another manufacturer, McDonnell Douglas. Boeing paid for the acquisition by issuing shares of its own stock to the stockholders of McDonnell Douglas. In order for the deal not to be revoked, the value of
> What internal control objectives are met by physical controls?
> The full disclosure principle dictates that: (a) financial statements should disclose all assets at their cost. (b) financial statements should disclose only those events that can be measured in dollars. (c) financial statements should disclose all event
> In the fourth year of an asset’s 5-year useful life, the company decides that the asset will have a 6-year service life. How should the revision of depreciation be recorded? Why?
> Pamper Me Salon Inc.’s general ledger at April 30, 2017, included the following: Cash $5,000, Supplies $500, Equipment $24,000, Accounts Payable $2,100, Notes Payable $10,000, Unearned Service Revenue (from gift certificates) $1,000, Common Stock $5,000
> If your school has a subscription to the FASB Codification, go to http://aaahg.org/ascLogin.cfm to log in and prepare responses to the following. (a) Access the glossary (“Master Glossary”) to answer the following. (1) What is the definition provided for
> If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Instructions Access the glossary (“Master Glossary”) to answer the following. (a) What is the definition of
> “The selection of an inventory cost flow method is a decision made by accountants.” Do you agree? Explain. Once a method has been selected, what accounting requirement applies?
> Nixon Wholesale Corp. uses the LIFO cost flow method. In the current year, profit at Nixon is running unusually high. The corporate tax rate is also high this year, but it is scheduled to decline significantly next year. In an effort to lower the current
> Loggins Department Store uses a perpetual inventory system. Data for product E2-D2 include the following purchases. On June 1, Loggins sold 25 units, and on August 27, 30 more units. Compute the cost of goods sold using (a) FIFO, (b) LIFO, and (c) avera
> To encourage bookstores to buy a broader range of book titles and to discourage price discounting, the publishing industry allows bookstores to return unsold books to the publisher. This results in very significant returns each year. To ensure proper rec
> Holding all other factors constant, indicate whether each of the following signals generally good or bad news about a company. (a) Increase in earnings per share. (b) Increase in the current ratio. (c) Increase in the debt to assets ratio. (d) Decrease i
> The chief financial officer (CFO) of Myeneke Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2017, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements
> The financial statements for Apple Inc. appear in Appendix A at the end of this textbook. Instructions Answer these questions using the Consolidated Income Statement. (a) What was the percentage change in total revenue and in net income from 2013 to 2014
> B. P. Palmer is the chief executive officer of Future Products. Palmer is an expert engineer but a novice in accounting. Instructions Write a letter to B. P. Palmer that explains (a) the three main types of ratios; (b) examples of each, how they are calc
> Using the data in BE7-8(given below), indicate (a) the items that will result in an adjustment to the depositor’s records and (b) why the other items do not require adjustment. Data from BE7-8: The following reconciling items are applicable to the bank r
> Here are some qualitative characteristics of useful accounting information: 1. Predictive value 2. Neutral 3. Verifiable 4. Timely Match each qualitative characteristic to one of the following statements. ______ (a) Accounting information should help pro
> Contrast the effects of the three depreciation methods on annual depreciation expense.
> On July 31, 2017, the general ledger of Hills Legal Services Inc. showed the following balances: Cash $4,000, Accounts Receivable $1,500, Supplies $500, Equipment $5,000, Accounts Payable $4,100, Common Stock $3,500, and Retained Earnings $3,400. During
