Friday, June 3, 2016

Financial accounting An introduction to concepts, methods and uses - Solutions for text book questions with case studies and answers to problems. Chapter 2

CHAPTER  2
THE BASICS OF RECORD KEEPING AND
FINANCIAL STATEMENT PREPARATION
Questions, Exercises, and Problems:  Answers and Solutions
2.1           See the text or the glossary at the end of the book.
2.2           Accounting is governed by the balance sheet equation, which shows the equality of assets with liabilities plus shareholders’ equity:
Assets = Liabilities + Shareholders’ Equity.
                 To maintain this equality, it is necessary to report every event and transaction in a dual manner.  If a transaction results in an increase in the left hand side (Assets), dual transactions recording requires that one of the following must occur, to maintain the balance sheet equation:  decrease another asset; increase a liability; increase shareholders equity.  Similarly, if a transaction results in an increase in a Liability account, then one of the following must occur, to maintain the balance sheet equation:  decrease another liability; decrease shareholders equity; increase an asset.
2.3               A T-account is used to record the effects of events and transactions that affect a specific asset, liability, shareholders’ equity, revenue or expense account.  It captures both the increases and decreases in that specific account, without reference to the effects on other accounts.  It also shows the beginning and ending balances of balance sheet accounts.  A journal entry shows all the accounts affected by a single event or transaction; each debit and each credit in a journal entry will affect a specific T-account.  Journal entries provide a record of transactions, and T-accounts summarize the effects of transactions on specific accounts.
2.4               Temporary accounts are for recording revenues and expenses.  These accounts are temporary in the sense that once they have served their purpose of accumulating specific revenue and expense items for an accounting period, they are closed, so that they begin the following accounting period with a zero balance, ready for the revenue and expense entries of the new period.  While it would be possible to record both revenues and expenses directly in the Retained Earnings account, doing so would suppress information about the components of net income.  The temporary revenue and expense accounts accumulate the information that is displayed


2.4 continued.
                 in the line items or rows on the income statement.  This display provides information about the sources and amounts of revenues and the nature and amounts of expenses that net to earnings for the period.
2.5           The distinction is based on time.  Current assets are expected to be converted to cash within a year, for example, Accounts Receivable.  Noncurrent assets are expected to be converted to cash over longer periods.

2.6           The balance sheet and the income statement are linked (that is, they articulate) through the shareholders’ equity account, Retained Earnings.  Retained Earnings measures the cumulative excess of net income over dividends for the life of a firm; all undistributed earnings are aggregated in Retained Earnings.  The following equation describes the articulation of the Retained Earnings:
                 Retained Earnings (beginning) + Net Income – Dividends = Retained Earnings (end).
2.7           The purpose of the income statement is to show the user of the financial statements the components of net income, that is, the causes of net income.  A user of financial statements can calculate net income by analyzing the change in retained earnings, but this analysis does not reveal the specific factors that combine to produce the net income number.
2.8           An adjusting entry is used to record the effects of an event or transaction that was not previously recorded.  Many adjusting entries result from the effects of the passage of time, for example, interest accrues on amounts owed over time.  The accrual of interest at the end of an accounting period is an example of an adjusting entry.  A correcting entry is a special case of an adjusting entry.  A correcting entry is used to record properly the effects of an event or transaction that was improperly recorded during the accounting period.
2.9               Contra accounts provide disaggregated information concerning the net amount of an asset, liability, or shareholders' equity item.  For example, the account, Property, Plant and Equipment net of Accumulated Depreciation, does not indicate separately the acquisition cost of fixed assets and the portion of that acquisition cost written off as depreciation since acquisition.  If the firm used a contra account, it would have such information.  The alternative to using contra accounts is to debit or credit directly the principal account involved (for example, Property, Plant and Equipment).  This alternative procedure, however, does not permit computation of disaggregated information about the net balance in the account.  Note that the use of contra accounts does not affect the total of assets, liabilities, shareholders' equity, revenues, or expenses, but only the balances in various accounts that comprise the totals for these items.


2.10            The key difference is in the presentation of Cash from Operations.  The direct method displays (lists) cash receipts and disbursements from operating activities.  The indirect method begins with net income and adjusts that amount for noncash items.  Both methods arrive at the same amount for Cash from Operations.  The display of Cash from Investing and Cash from Financing does not differ between the direct method and the indirect method.
2.11         (Fresh Foods Group; dual effects on balance sheet equation.)  (Amounts in Millions)

                                                                                      Shareholders'
  Transaction             Assets        =       Liabilities    +       Equity
             (1)                          + $  678                          + $  678
             (2)                          – $    45                          – $    45
             (3)                          – $  633                          – $  633
2.12         (Cement Plus; dual effects on balance sheet equation.)  (Amounts in Millions)

                                                                                      Shareholders'
  Transaction             Assets        =       Liabilities  +        Equity
             (1)                       + $ 14,300
                                         – $   2,300                       + $12,000

             (2)                       + $   3,000
                                         – $   3,000

             (3)                       – $   6,500                                                         + $   6,500

             (4)                                                                – $ 12,000                 + $ 12,000
2.13            (Braskem S.A.; analyzing changes in accounts receivable.)  (Amounts in Millions)

Accounts Receivable, Beginning of 2007......................................    R$      1,594.9
Plus Sales on Account during 2007................................................             12,134.5
Less Cash Collections during 2007................................................                  (?)     
Accounts Receivable, End of 2007..................................................    R$      1,497.0

Cash collections during 2007 total R$12,232.4 million.
2.14         (Boeing Company; analyzing changes in inventory.)  (Amounts in Millions)

Inventory, Beginning of 2007............................................................       $    8,105
Plus Purchases or Production of Inventory during 2007.............                ?
Less Cost of Goods Sold for 2007........................................................          (45,375)
Inventory, End of 2007........................................................................       $    9,563

Purchases or production of inventory during 2007 total $46,883 million.


2.15         (Ericsson; analyzing changes in inventory and accounts payable.)  (Amounts in Millions)

Inventory, Beginning of 2007......................................................    SEK     21,470
Plus Purchases of Inventory during 2007.................................                    ?
Less Cost of Goods Sold for 2007..................................................              (114,059)
Inventory, End of 2007..................................................................    SEK     22,475

Purchases during 2007 total SEK115,064 million.

Accounts Payable, Beginning of 2007........................................    SEK     18,183
Plus Purchases of Inventory on Account during 2007 from
        above..........................................................................................               115,064
Less Cash Payments to Suppliers during 2007........................                   (?)     
Accounts Payable, End of 2007....................................................    SEK     17,427

Cash payments to suppliers during 2007 total SEK115,820 million.
2.16         (Kajima Corporation; analyzing changes in income taxes payable.)  (Amounts in Millions of Yen)

Income Taxes Payable, Beginning of 2007.....................................    ¥    3,736
Plus Income Tax Expense for 2007 (.43 X ¥73,051).......................        31,412
Less Income Taxes Paid during 2007...............................................             (?)  
Income Taxes Payable, End of 2007.................................................    ¥  14,310

Income taxes paid during 2007 total ¥20,838 million.
2.17         (Eaton Corporation; analyzing changes in retained earnings.)  (Amounts in Millions)

Retained Earnings, Beginning of 2007............................................       $    2,796
Plus Net Income for 2007....................................................................                 ?    
Less Dividends Declared and Paid during 2007.............................                (251)
Retained Earnings, End of 2007........................................................       $    3,257

Net Income for 2007 totals $712 million.
2.18         (Bayer Group; relations between financial statements.)  (Amounts in Millions)

a.    $5,868 + $32,385 – $5,830 = a; a = $32,423.

b.    $109 + b – $763 = $56; b = $710.

c.     $14,723 – c + $2,155 = $12,911; c = $3,967.

d.    $6,782 + $4,711 – d = $10,749; d = $744.


2.19         (Beyond Petroleum; relations between financial statements.)  (Amounts in Millions)

a.    a + $288,951 – $289,623 = $38,020; a = $38,692.

b.    $2,635 + $10,442 – b = $3,282; b = $9,795.

c.     $42,236 + $15,162 + c = $43,152; c = $14,246.

d.    $88,453 + $21,169 – $8,106 = d; d = $101,516.
2.20         (Fujitsu Limited; journal entries for inventories and accounts payable.)  (Amounts in Millions of Yen)

Merchandise Inventories......................................................   1,456,412
     Accounts Payable..............................................................                      1,456,412

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
+1,456,412

+1,456,412




Cost of Goods Sold (¥408,710 + ¥1,456,412 –
.... ¥412,387).............................................................................   1,452,735
         Merchandise Inventories.............................................                      1,452,735

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
–1,452,735



–1,452,735
IncSt à RE

Accounts Payable (¥757,006 + $1,456,412 –
.... ¥824,825)............................................................................. 1,388,593
         Cash.................................................................................                      1,388,593

Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
–1,388,593

–1,388,593



2.21         (Monana Company; journal entries for insurance.)  (Amounts in Millions)

April 30, 2008
Insurance Expense................................................................             12
.... Prepaid Insurance.............................................................                                 12


Assets

=
Liabilities
+
Shareholders' Equity
(Class.)
–12



–12
IncSt à RE

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