Financial Accounting Global Edition Robert Libby Patricia Libby 8e - Test Bank

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Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie’s gross profit?

Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie’s income from operations?

Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie’s income before taxes?

Gross profit was $620,000;
Cost of goods sold was $380,000;
Net income was $400,000.

What was Kryton’s gross profit percentage?

Sales were $780,000;
Cost of goods sold was $429,000;
Net income was $195,000.

What was Brimmel’s gross profit percentage?

Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Extraordinary loss was $29,000;
Income tax expense was $199,000.

What was Nellie’s operating income?

Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Extraordinary loss was $29,000;
Income tax expense was $199,000.

What was Nellie’s income before taxes?

Operating expenses were $345,000;
Income from operations was $215,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Discontinued operations loss was $87,000;
Income tax expense was $58,000.

What was Willie’s gross profit?

Operating expenses were $345,000;
Income from operations was $215,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Discontinued operations loss was $87,000;
Income tax expense was $58,000.

What was Willie’s income before taxes?

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000

How much are Huron’s current assets?

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000

How much are Huron’s net noncurrent assets?

Net sales, $480,000
Net income, $24,000
Average total assets, $200,000

What is Marino’s net profit margin ratio?

Net sales, $480,000
Net income, $24,000
Average total assets, $200,000

What is Marino’s asset turnover ratio?

Net sales, $480,000
Net income, $24,000
Average total assets, $200,000

What is Marino’s return on assets ratio?

Based on the above data, calculate the following amounts:

On January 1, 2014, total assets were $2,000,000, total liabilities were $1,200,000 and total stockholders’ equity was $800,000. Calculate Ridgetop’s return on assets.

Required:

Prepare a multiple step income statement for 2014. (Include gross profit, but ignore income taxes.)

Required:

Prepare a classified balance sheet in good form at December 31, 2014. (Ignore income taxes).

Requirements:

A. Compute the gross profit percentage for years 2014 and 2013.
B. Provide at least two potential causes for the change in Anthony’s gross profit percentage.

Compute the following for the 2015:

A. Gross profit percentage
B. Net profit margin
C. Asset turnover
D. Return on assets

Compute the following ratios for 2015:

A. Net profit margin
B. Asset turnover
C. and Return on assets

A: If the transaction results in an increase in the financial statement component or ratio.
B: If the transaction results in a decrease in the financial statement component or ratio.
C. If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company issued common stock at a price in excess of par value.
Revenues_____
Assets_____
Stockholders’ equity_____
Return on assets ratio_____

Transaction 2: A company recorded depreciation expense at year-end.
Net income_____
Assets_____
Stockholders’ equity_____
Asset turnover ratio_____

A: If the transaction results in an increase in the financial statement component or ratio.
B: If the transaction results in a decrease in the financial statement component or ratio.
C. If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company accrued interest expense at year-end.
Net income_____
Assets_____
Stockholders’ equity_____
Asset turnover ratio_____

Transaction 2: A company declared and paid dividends to stockholders.
Net income_____
Assets_____
Stockholders’ equity_____
Return on assets ratio_____

A: If the transaction results in an increase in the financial statement component or ratio.
B: If the transaction results in a decrease in the financial statement component or ratio.
C. If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company paid for research and development costs incurred to develop a patent.
Net income_____
Property, plant, and equipment_____
Stockholders’ equity_____
Net profit margin ratio_____

Transaction 2: Inventory was purchased on account.
Net income_____
Current assets_____
Current liabilities_____
Return on assets ratio_____

A: If the transaction results in an increase in the financial statement component or ratio.
B: If the transaction results in a decrease in the financial statement component or ratio.
C. If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company acquired land by signing a long-term note payable.
Property, plant, and equipment_____
Asset turnover ratio_____
Net profit margin ratio_____
Return on assets ratio_____

Transaction 2: Cash was used to pay a current liability.
Net income_____
Asset turnover ratio_____
Net profit margin ratio_____
Return on assets ratio_____

A: If the transaction results in an increase in the financial statement component or ratio.
B: If the transaction results in a decrease in the financial statement component or ratio.
C. If the transaction does not affect the financial statement component or ratio.

Transaction 1: A company sold inventory for an amount greater than its cost.
Gross profit_____
Current assets_____
Stockholders’ equity_____

Transaction 2: Advertising expense was recorded but has yet to be paid for.
Net income_____
Gross Profit_____
Stockholders’ equity_____

Requirements:

Determine the components of stockholders’ equity as of December 31, 2014.

Requirements:

A. Calculate gross profit percentage.
B. Calculate net profit margin.
C. Calculate earnings per share if there are 200,000 shares of common stock outstanding.

TRUE

Each of the identified decision makers uses accounting information in their decision making process.

FALSE

The mission of the SEC is to protect investors and maintain the integrity of the securities markets.

FALSE

Independent auditors provide an opinion with respect to the overall fairness of the financial statements.

TRUE

The SEC has delegated the responsibility for setting GAAP to the FASB.

FALSE

The Securities & Exchange Commission (SEC) oversees the work of the Public Company Accounting Oversight Board (PCAOB).

TRUE

The Public Company Accounting Oversight Board (PCAOB) is responsible for setting auditing standards for independent auditors.

TRUE

The CEO and the CFO are primarily responsible for the content of the financial statements.

TRUE

The audit committee of the board of directors is responsible for ensuring that processes are in place for maintaining the integrity of the company’s accounting, financial statement preparation, and financial reporting.

FALSE

The Securities & Exchange Commission requires publically traded companies to have their financial statements audited by an independent registered public accounting firm.

TRUE

Financial analysts utilize a company’s financial reports to assist them in making forecasts of earnings, earnings per share, and share prices, as well as buy and sell recommendations.

FALSE

Corporate governance refers to the procedures designed to ensure that the company is managed in the interests of the shareholders.

FALSE

The fraud triangle consists of incentive and opportunity to commit fraud, and rationalization for committing the fraud.

TRUE

The form 10-Q is the quarterly report containing a condensed income statement and balance sheet that publically traded companies must file with the SEC.

TRUE

The form 10-K is the annual report that publically traded companies must file with the SEC.

FALSE

Sales by major product category is a voluntary disclosure.

FALSE

Information that impacts the company financially but is not shown on the financial statements includes information about contractual agreements.

TRUE

Current assets include cash, accounts receivable, inventories, etc.

FALSE

Current assets include cash, accounts receivable, inventories, etc. Intangible assets are reported as noncurrent assets.

TRUE

Intangible assets are reported as noncurrent assets and include patents, trademarks, franchises, copyrights, and goodwill.

FALSE

Comparative financial statements are those of one company’s current year and one or more prior years simultaneously presented.

FALSE

Intangible assets have no physical existence and have a long life.

TRUE

Nonrecurring items are specific items not expected to occur again and are not useful in predicting the future income of the company.

FALSE

Net sales less cost of goods sold is gross profit and is a component of income from continuing operations.

FALSE

Discontinued operations and extraordinary items are reported on the income statement after income from continuing operations.

TRUE

One of the first disclosures is the summary of significant accounting policies.

FALSE

The choice of direct or indirect method is only for the operating activities section.

FALSE

The indirect method begins with net income and adjusts for noncash items to arrive at cash flow from operating activities.

FALSE

The gross profit percentage is calculated by dividing gross profit by net sales.

FALSE

The gross profit percentage is calculated by dividing gross profit by net sales. Operating expenses do not affect either gross profit or net sales.

FALSE

The return on assets ratio is calculated by dividing net income by average total assets.

TRUE

The return on assets ratio calculation may increase when asset turnover (net sales divided by average total assets) increases. This is not the only reason for an increase in the turnover, but it is one possibility.

TRUE

The return on assets ratio is calculated by multiplying the net profit margin ratio times the asset turnover ratio.

The FASB develops generally accepted accounting principles.

The FASB develops generally accepted accounting principles.

The CEO and CFO are primarily responsible for the content of a company’s financial statements.

The external auditors are hired by the board of directors and are responsible for overseeing their own audit.

The CEO and CFO ensure the accuracy and completeness of all reports provided to the Securities & Exchange Commission (SEC).

The external auditors are selected by the board of directors.

The external audit lends credibility to the financial statements and reduces the risk that the financial condition of the reporting entity is misrepresented.

Management’s Discussion and Analysis is an overview of the financial condition and results of operations but is not an opinion of the financial statements.

The statement of comprehensive income reports Net income, Other comprehensive income items, and Comprehensive income.

Goodwill is an intangible asset; it is not a current asset.

Information disclosed in the balance sheet about common stock is the number of shares that are authorized, issued, and outstanding.

Stockholders’ equity includes common stock and retained earnings.

Extraordinary items occur infrequently and are unusual in nature.

Retained earnings on December 31, 2014 = $260,000 = $200,000 + $140,000 – $80,000.

Retained earnings on December 31, 2014 = $160,000 = $100,000 + $70,000 – $10,000.

Gross profit equals net sales minus cost of goods sold.

Income from operations equals net sales minus cost of goods sold and operating expenses.

Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie’s gross profit?

Gross profit ($564,000) equals net sales ($940,000) minus cost of goods sold ($376,000).

Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie’s income from operations?

Income from operations ($333,000) equals net sales ($940,000) minus cost of goods sold ($376,000) and minus operating expenses ($231,000).

Operating expenses were $231,000;
Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.

What was Callie’s income before taxes?

Income before taxes ($377,000) equals net sales ($940,000) minus cost of goods sold ($376,000), minus operating expenses ($231,000), minus interest expense ($32,000), plus gain on sale ($76,000).

Gross profit was $620,000;
Cost of goods sold was $380,000;
Net income was $400,000.

What was Kryton’s gross profit percentage?

Gross profit ($620,000) equals sales (X) minus cost of goods sold ($380,000).
Therefore, Sales = Gross profit ($620,000) plus Cost of goods sold ($380,000).
Sales = $1,000,000.
Gross profit percentage = Gross profit divided by Sales = $620,000 ÷ $1,000,000 = 62%.

Sales were $780,000;
Cost of goods sold was $429,000;
Net income was $195,000.

What was Brimmel’s gross profit percentage?

Gross profit equals sales ($780,000) minus cost of goods sold ($429,000).
Therefore, Gross profit = $780,000 – $429,000 = $351,000.
Gross profit percentage = Gross profit divided by Sales = $351,000 ÷ $780,000 = 45%.

Interest expense is a deduction from income from continuing operations.

Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Extraordinary loss was $29,000;
Income tax expense was $199,000.

What was Nellie’s operating income?

Operating income ($514,000) equals gross profit ($629,000) minus operating expenses ($115,000).

Operating expenses were $115,000;
Gross profit was $629,000;
Cost of goods sold was $470,000;
Interest expense was $17,000;
Extraordinary loss was $29,000;
Income tax expense was $199,000.

What was Nellie’s income before taxes?

Income before taxes ($497,000) equals gross profit ($629,000) minus operating expenses ($115,000) and interest expense ($17,000).

Operating expenses were $345,000;
Income from operations was $215,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Discontinued operations loss was $87,000;
Income tax expense was $58,000.

What was Willie’s gross profit?

Working backward: Gross profit ($560,000) equals operating expenses ($345,000) plus income from operations ($215,000).

Operating expenses were $345,000;
Income from operations was $215,000;
Net sales were $1,100,000;
Interest expense was $71,000;
Discontinued operations loss was $87,000;
Income tax expense was $58,000.

What was Willie’s income before taxes?

Income before taxes ($144,000) equals income from operations ($215,000) minus interest expense ($71,000).

Interest income is reported as non-operating revenue.

Extraordinary losses reduce net income, and net income is in the numerator of the earnings per share calculation.

The net income earned for the reporting period is included in the financial statements.

Nonoperating items are revenues, expenses, gains, and losses that do not relate to the company’s primary operations. Examples include interest expense, gain on sale of equipment, and loss on sale of investments.

Financing activities include dividend payments to stockholders.

Notes to the financial statements include a summary of significant accounting policies, additional detail supporting reported numbers, and relevant financial information not disclosed in the financial statements. Names of executive officers and their salaries are not included in these topics. Executive officers and their compensation are included in the Form 10-K but not in the financial statement section of the 10-K.

Financing cash flows include the sale of common stock in exchange for cash.

Financing cash flows include the acquisition of previously issued stock.

Net sales will increase $1,200.

Gross profit ($600) is the difference between net sales ($1,500) and cost of goods sold ($900).

Gross profit ($600) is the difference between net sales ($1,500) and cost of goods sold ($900).

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000

How much are Huron’s current assets?

Huron’s current assets ($74,900) include cash ($25,000), accounts receivable ($9,300), prepaid insurance ($3,600), and inventory ($37,000).

Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Trademarks, $12,600
Goodwill, $11,000

How much are Huron’s net noncurrent assets?

Huron’s net noncurrent assets ($120,200) include patents ($7,900), property, plant, and equipment ($98,700), accumulated depreciation (-$10,000), trademarks ($12,600), and goodwill ($11,000).

Accumulated depreciation is a balance sheet account.

Discontinued operations include the component’s income or loss from operations from before its disposal.

Both extraordinary items and discontinued operations are reported on the income statement after income from continuing operations.

The last-in first-out inventory method is prohibited under IFRS.

Current assets increase because the increase in either cash or accounts receivable is greater than the decrease in inventory.

Development costs are capitalized under IFRS.

The cash paid to legalize a patent would be an investing activities cash flow.

Under the indirect method, the operating activities section begins with net income, then adds back depreciation expense, and adjusts for certain current assets and liabilities to reconcile net income to net cash from operating activities, but cash paid for income taxes is not a specific item in this section. Cash paid for income taxes is in a separate disclosure note.

Current liabilities are debts expected to be paid within the next year and expected to consume current assets.

Gross profit is helpful to managers, analysts, and creditors for assessing a company by itself as well as for comparing companies in the same industry.

Stockholders’ equity on December 31, 2014 = $1,210,000 = $500,000 + $600,000 + $100,000 – $15,000 + $25,000.

Return on assets is net income divided by average total assets. Total assets increase by land purchased and the return on assets ratio therefore decreases.

Return on assets is net income divided by average total assets or net profit margin ratio times asset turnover ratio. An increase in the net profit margin ratio therefore increases return on assets.

Net sales, $480,000
Net income, $24,000
Average total assets, $200,000

What is Marino’s net profit margin ratio?

The net profit margin ratio (5%) is net income ($24,000) divided by net sales ($480,000).

Net sales, $480,000
Net income, $24,000
Average total assets, $200,000

What is Marino’s asset turnover ratio?

The asset turnover ratio (2.4) is net sales ($480,000) divided by average total assets ($200,000).

Net sales, $480,000
Net income, $24,000
Average total assets, $200,000

What is Marino’s return on assets ratio?

Return on assets (12%) equals net income ($24,000) divided by average total assets ($200,000). Return on assets (12%) can also be calculated by multiplying the net profit margin ratio (5%) times the asset turnover ratio (2.4).

The denominator in both ratios is average total assets. Purchasing land increases average total assets and therefore decreases both ratios.

The asset turnover ratio and net profit margin ratio are not directly related to each other.

The numerator for both ratios is net income. Therefore an increase in net income results in an increase in both ratios.

An increase in the unit selling price will increase net income by a greater amount proportionately relative to the increase in net sales.

The cash payment decreases average total assets, which increases the asset turnover ratio.

The accrual of interest revenue increases both total assets and net income, which are the two components of return on assets.

Based on the above data, calculate the following amounts:

A. $140,000 + $420,000 + $70,000 = $630,000.
B. $210,000 – $80,000 = $130,000.
C. $420,000 – $120,000 = $300,000.
D. $210,000 + $420,000 = $630,000.

On January 1, 2014, total assets were $2,000,000, total liabilities were $1,200,000 and total stockholders’ equity was $800,000. Calculate Ridgetop’s return on assets.

$100,000 ÷ ($2,000,000 + $2,700,000*/2) = 4.26%.
*($1,800,000 + $900,000)

A. $40,000. ($90,000 Total Assets (F) – $35,000 Book Value of Building – $15,000 Cash)
B. $25,000. ($60,000 Building – $35,000 Book Value)
C. $90,000. (Must equal to F.)
D. $2,000. ($25,000 Current liabilities – $11,000 Accounts Payable – $12,000 Notes payable)
E. $40,000. ($25,000 Common stock + $15,000 Retained earnings)
F. $90,000. ($50,000 Total Liabilities + $40,000 Total Stockholders’ Equity)

Required:

Prepare a multiple step income statement for 2014. (Include gross profit, but ignore income taxes.)