ACC 291 Including Final

ACC 291 Includes WileyPLUS + Final
WEEK 1 JUMP TO PAGE 1

WEEK 1 SUMMARY 1
DISCUSSION QUESTIONS (MULTIPLE OPTIONS) 4
WILEYPLUS ASSIGNMENT 7
WILEYPLUS PRACTICE QUIZ 14
WEEK 2 TEAM REFLECTION 22
WEEK 2 SUMMARY 28
WEEK 3 SUMMARY 54
WEEK 4 SUMMARY 79
RATIO ANALYSIS MEMO 108
PROFITABILITY RATIOS TEAM ASSIGNMENT 111
LIQUIDITY, HORIZONTAL, VERTICAL ANALYSIS PURCHASED SEPARATELY CLICK ON LINK)
INDIVIDUAL PAPER 114
FINAL EXAM JUMP TO PAGE 117

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Week1

ACC 291

University of Phoenix

Weekly Summary (Week 1)

3 Options to Choose From or Mix and Match
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Weekly Summary for Week 1

Response Option 1
This week I learned about different methods that deal with bad debt and the means to log these
debts into journals. There are three main methods of figuring the amount of bad debt, which are
the sales percentage method, receivable method, and the write-off method. When
companies make sales on credit or are payable in later dates of 30 days, 60 days, or 90 days they
estimate some of the debt will be uncollectible. Depending on which method a company comes
up with a percentage of debt that is based on sales or allotment will not be paid and will be
charged to the bad debt expense. GAAP only recognizes the sales percentage and receivable
methods because of the matching principle that is required. Which method that a company uses
depends on the needs of each company. Another factor is if the bad debt is need for tax purposes.
A company may chose to try each method and see which one fits their needs the best.

I personally see that the percentage of sales method to be the best method for the ease of this
method. A company can base bad debt on a percentage of sales. For instance, if a company
reports sales of 1 million dollars in a period then let us say that 5% of sales is deemed
uncollectible then the bad debt expense would be 50,000 dollars. That amount would be debited
into the bad debt entry of the income statement. I believe this method is simpler to use and less
errors would be made in the statement.

Response Option 2
This week was very interesting to me because I had to reread the things that I learned in my
accounting classes that I had before just to bring me up to speed so I would have a better
understanding of what we were learning.

This week what I learned was the different methods that companies could use when it comes to
dealing with their bad debt. There are three different methods that they have to choose from and
those three methods are direct write-off, sales percentage, and receivable method. I also learned
that depending on the company and their needs for dealing with their bad debt is how they would
choose which one of these three methods that they would choose to use. A company would need
to try all three methods to see which one they should use.

One thing that helped me to understand all of this better would be the example of a company
who has sales done by credit cards and they are set up to be payable at later dates like 30, 60, or
even 90 days later, then they will estimate that some of that debt will be non-collectible when the
sale was made.

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I also learned that even though all three methods can be used by business, there are only two of
them recognized by the GAAP. The GAAP only recognizes sales percentage and receivable
method because of the matching principles that are involved. The GAAP does not recognize the
direct write-off methods even though a company can use it when it comes to dealing with their
bad debt.

Response Option 3
During this first week of class I think that the most important thing I learned is that, as with
revenue recognition, the recording of bad debt expense should be tied to the revenue period and
not necessarily the time when the bad debt expense occurred. This is important because both the
revenue and the expenses will impact both the income statement and balance sheet. It is
important to tie the two together so that the statements reflect the most correct picture of the
reporting period. For example if the revenue was recognized in one period and the bad debt
expense in another then the results for both periods would be skewed, the revenue not impacted
by the expense would seem excessive and the expense without the offsetting revenue would also
be a dramatic hit to profitability. For this reason the percentage of sales method would be the
choice to provide the most accurate overall view of the financial health of the company.

In contrast the direct write-off method has the advantage of only writing off the actual bad debt
incurred when it is incurred. The disadvantage is that the bad debt is almost always recorded in a
period other than when the income is recognized. This again skews the financial statements and
can give an inaccurate picture of the health of the company. Both internal and external users of
the information provided in the financial statements depend on them being consistently accurate
over time. In order to make sound managerial, lending and investment decisions users need this
consistency and accuracy over a period of time.

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ACC 291


Week 1 Discussion Questions 1-2

Question 1: How are bad debts accounted for under the direct write-off method? What are the
advantages and disadvantages of this method?

Question 2: Why would you select the percentage of sales method for calculating doubtful
accounts instead of the percentage of receivables method?

Multiple Response Options
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Discussion Question 1:
How are bad debts accounted for under the direct write-off method?
What are the advantages and disadvantages of this method?

Response Option 1
Bad debt expense is incurred when a sum owed to the business and thought to be collectible
becomes uncollectible. Direct write-off method and allowance method are the accounting
methods used to record this phenomenon on the accounting ledger. Direct write-off method is the
simpler, and in a sense, the more reliable method. Direct write-off method is where the business
records bad debt expense at the time when the business determines that the receivable has
become uncollectible.

The most important advantage compared to allowance method is that direct write-off is simpler
and much easier to perform. The second advantage of direct write-off is that its figures are more
reliable than the ones produced through estimation under allowance method. The direct write-off
method is simple and factual, involving no estimates. But it does have certain disadvantages in
reporting the bad debt expense and accounts receivable value, as well as earnings in general.
Since there is usually a significant amount of time between a credit sale and the write off of a
bad account, the bad debt expense will occur in a much later period than the revenue from the
sale. This is a problem under the matching principle.

NOTE: It should be noted that the Internal Revenue Service requires the direct write off method.
They prefer to see the tax deduction for bad debt expense only when an account receivable is
actually written off instead of allowing a deduction for an anticipated potential loss.

Response Option 2
Under the direct write-off method debts are accounted for by charging the loss to the bad debt
expenses. One major disadvantage of using this method is that it makes the income statement and
balance sheet less useful. This occurs because the bad debt is not usually recorded in the same
accounting period as the revenue was. This can cause the accounting period that the debt was
written off in look like the company made hardly anything when in actuality they did. Another
disadvantage of using this method is that it may deter potential investors from investing in that
company. Personally, I would be hesitant on investing in a company if a few financial statements
look good and then the next one looks really bad. I would find myself wondering whether that
company is financially sound and would most likely invest my money elsewhere. The main
advantage that I can think of with this method is that it may make the previous accounting period
look really good because that period could be the one where there was a great deal of sales,
which can make a company look very appealing to potential investors. That is if they invest
before the next accounting period is over and financial statements are prepared.

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Why would you select the percentage of sales method for calculating
doubtful accounts instead of the percentage of receivables method?

Response Option 1
Percentage of receivables and percentage of sales are two accounting allowance methods used to
reconcile customer accounts deemed noncollectable. When allowed by generally accepted
accounting principles (GAAP), these two strategies are preferred over direct write-off of bad
debt expenses. Percentage of receivables and percentage of sales provide a business with the
ability to accurately estimate the expected bad debt losses they will have in each succeeding
fiscal reporting period. Percentage of sales is accounted for on the annual income statement.
Percentage of sales method makes the assumption that a percentage of credit sales for an
accounting period is noncollectable. Using this method, bad debt is computed by multiplying
credit sales by an estimated percentage considered noncollectable. The allowance for bad debt is
posted as an expense subtracted from gross income, reducing net income for the reporting period.
This method is used for bad credit directly provided to a customer by the company, not for credit
card sales. Using percentage of sales and percentage of receivables to account for bad debt
expenses is not allowed for calculation of income tax by the IRS.

I have read so much information on both and it seems that they are both acceptable but by
different parties and for various reasons.

Response Option 2
The decision to use percentage of sales versus percentage of receivable method is management
preference. Both offer pro's and con's. Percentage of sales method for calculating uncollectables
is better coming from an income statement point of view. The percentage of receivables is better
when coming from a balance sheet point of view. POS basis estimates what percentage of credit
card sales will be uncollectable, where POR basis estimates what percentage of receivables will
result in losses from uncollectable accounts. Personally i would prefer to use the percentage of
sales basis over the percentage of receivables basis on numerous accounts. First being that it is
easier from a track sheet stand point to track credit sales rather than receivable
accounts. Another reason i would prefer the percentage of sales basis is time itself. POS is used
to track annual sales and anticipated losses for the entire year. POR is a period tracking and
accounting system. It only partially predicts losses from a sales period aspect.

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Week2

ACC 291

WileyPLUS Week 2 Assignment

Questions 1-6

Exercise E8-3 Exercise BE9-13 Exercise Do It! 9-4 Exercise E9-9
Exercise E9-10 Problem P9-5A



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Question 1

The ledger of Hixson Company at the end of the current year shows Accounts Receivable $120,000,
Sales $840,000, and Sales Returns and Allowances $30,000.

If Hixson uses the direct write-off method to account for uncollectible accounts, journalize the
adjusting entry at December 31, assuming Hixson determines that Fell's $1,400 balance is
uncollectible.

If Allowance for Doubtful Accounts has a credit balance of $2,100 in the trial balance, journalize the
adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2)
10% of accounts receivable.

If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the
adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and
(2) 6% of accounts receivable.

Question 2

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Information related to plant assets, natural resources, and intangibles at the end of 2011 for Spain
Company is as follows: buildings $1,100,000; accumulated depreciation-buildings $650,000; goodwill
$410,000; coal mine $500,000; accumulated depletion-coal mine $108,000. Complete the partial
balance sheet of Spain Company for these items. (List assets with smallest net book value first.
Enter all amounts as positive amounts and subtract where necessary.)

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Question 5

Beka Company owns equipment that cost $50,000 when purchased on January 1, 2008. It has been
depreciated using the straight-line method based on estimated salvage value of $5,000 and an
estimated useful life of 5 years.
Prepare Beka Company's journal entries to record the sale of the equipment in these four independent
situations.

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Journalize the above transactions. The company uses straight-line depreciation for buildings and
equipment. The buildings are estimated to have a 50-year life and no salvage value. The equipment is
estimated to have a 10-year useful life and no salvage value. Update depreciation on assets disposed
of at the time of sale or retirement. (For multiple debit/credit entries, list amounts from largest
to smallest eg 10, 5, 3, 2.)

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Complete the plant assets section of Jimenez's balance sheet at December 31, 2012. (List in the
same order as the partial balance sheet presented in the problem. Enter all amounts as
positive amounts and subtract where necessary.)

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ACC 291

WileyPLUS Week 2 Practice

Chapter 9 Practice Quiz 1

Questions 1-16



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Question 3
Micah Bartlett Company purchased equipment on January 1, 2010, at a total invoice cost of $400,000.
The equipment has an estimated salvage value of $10,000 and an estimated useful life of 5 years. The
amount of accumulated depreciation at December 31, 2011, if the straight-line method of depreciation
is used, is:

Question 4
Ann Torbert purchased a truck for $11,000 on January 1, 2010. The truck will have an estimated
salvage value of $1,000 at the end of 5 years. Using the units-of-activity method, the balance in
accumulated depreciation at December 31, 2011, can be computed by the following formula:

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Question 5
Jefferson Company purchased a piece of equipment on January 1, 2011. The equipment cost $60,000
and had an estimated life of 8 years and a salvage value of $8,000. What was the depreciation
expense for the asset for 2012 under the double-declining-balance method?

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Question 7
Able Towing Company purchased a tow truck for $60,000 on January 1, 2011. It was originally
depreciated on a straight-line basis over 10 years with an assumed salvage value of $12,000. On
December 31, 2013, before adjusting entries had been made, the company decided to change the
remaining estimated life to 4 years (including 2013) and the salvage value to $2,000. What was the
depreciation expense for 2013?

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Question 9
Bennie Razor Company has decided to sell one of its old manufacturing machines on June 30, 2011.
The machine was purchased for $80,000 on January 1, 2007, and was depreciated on a straight-line
basis for 10 years assuming no salvage value. If the machine was sold for $26,000, what was the
amount of the gain or loss recorded at the time of the sale?

Question 10
Maggie Sharrer Company expects to extract 20 million tons of coal from a mine that cost $12 million.
If no salvage value is expected, and 2 million tons are mined and sold in the first year, the entry to
record depletion will include a:

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Question 12
Martha Beyerlein Company incurred $150,000 of research and development costs in its laboratory to
develop a patent granted on January 2, 2011. On July 31, 2011, Beyerlein paid $35,000 for legal fees
in a successful defense of the patent. The total amount debited to Patents through July 31, 2011,
should be:

Question 14
Lake Coffee Company reported net sales of $180,000, net income of $54,000, beginning total assets
of $200,000, and ending total assets of $300,000. What was the company's asset turnover ratio?

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Question 15
Schopenhauer Company exchanged an old machine, with a book value of $39,000 and a fair market
value of $35,000, and paid $10,000 cash for a similar new machine. The transaction has commercial
substance. At what amount should the machine acquired in the exchange be recorded on
Schopenhauer's books?

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ACC 291

Learning Team Reflection (Week 2)

Accounting Liabilities



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The percentage of sales method and the percentage of receivables method are two
accounting allowance methods that are used to reconcile customer accounts that are deemed as
non-collectable. The percentage of sales method is the method of estimating cash requirements
by expressing revenues and expenses as percentages of sales and then using those percentages to
construct a balance sheet that has projected the revenue amount the company expects to receive.
Another method of estimating how much account receivables will eventually be non-collectable
is the percentage of receivables method. The percentage of receivables method estimates the
percent of receivables are lost due to non-collectable debts. Both methods are typically preferred
over the direct write off method.
Tangible assets are anything that has a physical existence, meaning it can be seen or felt.
Intangible assets are anything that a company owns that doesnt have a physical existence, such
as information or copyrights. A fixed asset is a physical item; they are listed on balance sheets as
assets, as opposed to being expenses on an income statement. Intangible assets are reported
under the long-term assets section. The three depreciation methods used in accounting are the
Straight-Line, Accelerated, and Declining Balance. The Straight-Line method is the most
commonly used method for calculating depreciation because it is the simplest. This method can
be used for any depreciable property aside from those that are required to use the accelerated
depreciation. The Straight-Line method is used for internal books and the formula for straight-
line depreciation equals the as sets depreciable basis divided by its estimated longevity. The
Accelerated Cost Recovery System is a method for recovering the cost of personal and real

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property that has a shorter useful life. The Declining Balance is the less common form, the IRS
requires it when an assets life is longer than three years. The straight-line method is most
commonly used because it is the easiest, with the implementation of the equation.
When a company acquires plant assets, it records a debit transaction in the land account
and records a credit transaction in the cash account. To record a disposal or retirement of plant
assets, an entry is made for accumulated depreciation and equipment. If the item has fully
depreciated, or it has been fully paid off by the company, then the entire amount of the cost of
the asset is entered as a debit to the accumulated depreciation account and a credit to the
equipment account. This will zero out the equipment account and show that nothing is owing
any longer for it. When the sale of an asset occurs, depreciation must first be accounted for, then
the math can be done to find out if the sale will result in a gain or a loss. If the item has fully
depreciated, or its book value is zero, any sale amount above $0 will result in a gain. To record
this entry, a credit amount is entered for the sale price of the asset. Another credit amount is
recorded to enter the accumulated depreciation. To show the total cost of the equipment, a debit
entry is entered with the cost paid for the equipment. If we add the amount the equipment sold
for to the accumulated depreciation expense and subtract from that sum the cost of the office
furniture, we will arrive at the gain on disposal. This number is then entered as a debit amount.
While revenue and capital expenditures can refer to the same types of assets, they are
different from one another. Revenue expenditures refer to the minor amounts recorded to show
amounts paid for upkeep of assets while capital expenditures refer to expenses paid for the
improvement of assets (Weygandt, Kimmel & Kieso, 2010). Companies record revenue
expenses as debits to the maintenance expense account as they happen. Capital expenses are
recorded as debits to the asset being improved.

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Accounts Payable, Notes Payable, and Accrued Expenses are all expenses that a company
pays or is going to pay. Accounts Payable is recorded for an expense that is going to be paid in a
short period of time and normally paid in full, in a short period of time. Notes Payable is an
expense that normally is paid over a longer period of time and is a more legal expense to pay.
For example, if a company buys a piece of equipment that is going to be paid off over long
period of time. Accrued expenses are expenses that are carried over from one pay period to
another. Salaries would be considered an accrued expense when it is recorded in the previous
month and then paid in the current month.
The journal entry to Issue bonds at face value is a debit to Cash and a credit to Bonds
Payable (to record sale of bonds at face Value. It will appear as follows:
1-Jan Cash 200000
Bonds Payable 200000

(to record sale of Bonds at Face
Value)

To record periodic interest of bonds it is a debit to Bonds Interest Expense and a Credit to Cash
1-Jul Bond Interest Expense 20000
Cash 20000

(to record payment of bond
interest)

At December 31, a company will need to recognize interest expense incurred since July 1 with
the following adjusting entry:

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31-Dec Bond Interest Expense 20000
Bond Interest Payable 20000
(to accrue bond interest)

When Bonds mature and are redeemed the journal entry is a debit to bonds payable and a credit
to cash
1-Jul Bonds Payable 200000
Cash 200000

(to record redemption of bonds at
maturity)

To record Amortization
1-Jul Bond Interest Expense 20500
Discount on Bonds Payable 500
Cash 20000

(to record payment of bond interest and
amortization of Bond discount)

Straight-Line Depreciation
Company A buys a piece of equipment for $100,000, salvage value is $10,000 and useful life of
equipment is 10 yrs.

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Cost Salvage.Value = Depreciable.Cost
100000 10, 000 = 90, 000
Depreciable.Cost Useful.Life = Annual.Depreciation
90000 /10 = 9000

Units of Activity
Depreciation based on the clicks of the new piece of equipment. 100000 clicks on equipment is
life of the equipment, units used in first year were 9000.
Depreciable.Cost Total.Units = Depreciation.Cost
9000 100000 =.09
Depreciable.Cost *Units.of .Year = Annual.Depreciation
.09*9000 =810

Amortization Expenses
Company A has created a new patented good, the patent cost Company A 60,000 for 10 yrs. The
recorded entry every year for the patent would look like:
Amortization Expense 6000
Accumulated Amortization 6000

Reference
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken,
NJ: John Wiley & Sons.

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ACC 291



Quality Work


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Response Option 1
Cost allocation is known as depreciation for plant and equipment, depletion for natural resources,
and amortization for intangibles. The process often is confused with measuring a decline in fair
value of an asset. Since the value of things fluctuates over time, valuations are as of a specific
date e.g., the end of the accounting quarter or year.
Many companies use several methods of depreciation; it is acceptable and necessary in some
cases to use more than one method. It is also common for companies to depreciate its plant assets
by using the straight line method on its financial statements, while using an accelerated
method on its income tax return.

Valuation is the process of determining the current worth of an asset or company. Depreciation is
a method of allocating the cost of a tangible asset over its useful life. Amortization is a deduction
of capital expenses over a specific period of time, usually over the asset's life. Depletion assists
in accurately identifying the value of the assets on the balance sheet.

Unearned revenue is the collection of cash before a good or service is provided to a client. It is
often considered a liability because it is merely an estimate of what a company hopes to make in
the future and has not been taxed. Also, in some instances clients may prepay for a good or
service to receive a sales discount or to meet the terms of a contractual obligation. Any company
that accepts advance payments or deposits for any services or products it may deliver in the
future should report the income as unearned revenue.

Companies issue bonds to finance operations. Most companies can borrow from banks, but view
direct borrowing from a bank as more restrictive and expensive than selling debt on the open
market through a bond issue. Just because youre buying from a discount broker does not mean
youre buying bonds at a discount.

Response Option 2
The objectives for week 2 were to differentiate between accounts payable, notes payable and
accrued expenses. The readings also discussed the types of bonds and showed journal entries to
record issuing of bonds, periodic interest, amortization of bond premiums and discounts, and
retiring bonds. Finally, we went over calculating depreciation expenses using multiple
methods. This was one of the more intensive objectives of the week with the amount of methods
and calculations needed to calculate depreciation and depletion.

Chapter nine discussed the different types of assets reported during the financial cycle. The
assets fall under several categories, from plant assets, natural resources, and intangible

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assets. Plant assets include items like buildings and equipment. Natural resources include items
like coalmines. Finally, intangible assets include copyrights, patents, and goodwill. The cost
allocation used for each type of asset uses a different account. Plant assets use accumulated
depreciation and can be calculated using the straight-line, units-of-activity, and declining balance
methods. Natural resources use depletion and tend to use the units-of-activity method to
calculate cost allocation. Intangible assets amortize the related costs based upon useful
life. These costs also include the expenses uses to defend patents and copyrights. Unearned
income is also a liability until the service is provided to match the income received.

Chapter ten discussed both current and long-term liabilities Current liabilities include payments
due within a year or the end of the accounting cycle, whichever is longer. These liabilities can
include employee salaries, portions or all of accounts payable, and interest payable. Long-term
liabilities include the remainder of the accounts and note payable not due within the year. Bonds
are also another form of long-term liabilities. Bonds are sold to generate capital for future
business needs. These bonds can be sold at discount, face value, or premium. The determining
factor is the market interest and the contractual interest rates.

Most of this weeks reading seemed to focus on journalizing bonds during their life cycle and the
calculation of depreciation and depletion. The amount of methods used makes the information
this week difficult to retain, but also shows the importance of calculating depreciation
correctly. Each method has its own advantages and is used for different types of assets.

Response Option 3
During week 2 we learned about depreciation, depletion, amortization, and valuation. We learned
what each of these means and how a company would use them in their accounting program. We
also learned that must companies will use more than one these methods depending on what they
are doing. Most companies will use what is known as the straight line method when doing their
financial statements while they will use an accelerated method when doing their tax return.

The other topic that we learned about in week 2 was what unearned income is, why it is called a
liability, and which types of companies have unearned income. Not all business have unearned
income but business that receive a down payment for their goods or services which the customer
will receive at a later time then what they down payment was made. We also learned that
unearned income will stay as so until the goods or services was either done or provided.

The next topic that we learned about this week was why companies sell off bonds to help finance
any projects that they may need help paying for. We also learned that when a company is selling
off their bounds they can sell then at either a discount, face value, or at a premium. This is
determined by the market interest and the contractual interest.

The weeks reading was focused on how to calculate depreciation and depletion, also the
journalizing of bounds during their life cycles. Due to the amount of different methods that we
covered this week I would have to say that I had a hard time grasping all of the information.

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ACC 291



Question 1: What are the differences among valuation, depreciation, amortization, and depletion?
Is it appropriate to calculate depreciation using two different methods? Why?

Question 2: What types of industries have unearned revenue? Why is unearned revenue
considered a liability? When is the unearned revenue recognized in the financial statements?

Quality Work


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What are the differences among valuation, depreciation, amortization,
and depletion? Is it appropriate to calculate depreciation using two
different methods? Why?

Response Option 1
Valuation is the process of determining what the value of something such as financial assets or
liabilities. Depreciation is the downside of valuation. The allocation of the cost of is an asset to
expense over its useful life in a rational and systematic manner. It is the decrease in the value of
certain properties such as assets. Amortization stands for the systematic allocation of the
depreciable value of an asset throughout the duration of its useful life. Depletion the allocation of
the cost of a natural resource to expense in a rational and systematic manner over the resource's
useful life. They are different in the means of the way they help maintain accounts of any type.

It is appropriate to calculate depreciation using two different methods. Many companies will use
one method for financial statements while using another to calculate information on tax returns.
Using the straight-line method is commonly used for the financial statement. The reason why
there is different methods available for use is due to different assets such as the three classes of
plant assets: land improvements, buildings, and equipment as well as taxes.

Response Option 2
Cost allocation is known as depreciation for plant and equipment, depletion for natural resources,
and amortization for intangibles. The process often is confused with measuring a decline in fair
value of an asset. For example, let's say our delivery truck purchased for $6,420 can be sold for
$4,000 at the end of one year but we intend to keep it for the full five-year estimated life. It has
experienced a decline in value of $2,420 ($6,420 $4,000). However, depreciation is a process
of cost allocation, not valuation. We would not record depreciation expense of $2,240 for year
one of the truck's life. Instead, we would distribute the cost of the asset, less any anticipated
residual value, over the estimated useful life in a systematic and rational manner that attempts to
match revenues with the use of the asset, not the decline in its value. In finance, valuation
analysis is required for many reasons including tax assessment, wills and estates, divorce
settlements, business analysis, and basic bookkeeping and accounting. Since the value of things
fluctuate over time, valuations are as of a specific date e.g., the end of the accounting quarter or
year.

Many companies use two or more methods of depreciation, from reading yes it is appropriate
and necessary in some cases. It is acceptable and common for companies to depreciate its plant
assets by using the straight-line method on its financial statements, while using an accelerated

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method on its income tax return. A company could also be depreciating its equipment over
ten years for its financial statements, while using seven years for its income tax return. Even the
depreciation for financial statements could consist of some assets being depreciated using the
units of production or units of activity method, while other assets are depreciated using the
straight-line method.

What types of industries have unearned revenue? Why is unearned
revenue considered a liability? When is the unearned revenue recognized
in the financial statements?

Response Option 1
By definition, unearned revenue is the collection of cash before a good or service is provided to a
client. In some instances, clients may prepay for a good or service to receive a sales discount or
to meet the terms of a contractual obligation. Any company that accepts advance payments or
deposits for any services or products it may deliver in the future should report the income as
unearned revenue. For instance, an airline that receives advance payment for tickets should
record the transactions as unearned revenue; some professional service providers such as
accounting and legal firms that accept deposits should record them as unearned revenue. Also
magazine companies offering a subscription fee may record it as unearned revenue and carry it
as a liability. However, when the subscription period is finished, then it may report it as earned
revenue.
Unearned income is often considered a liability because it is merely an estimate of what a
company hopes to make in the future and has not been taxed. If a business starts treating this
number like cash on hand instead of just an estimate, it can project earnings incorrectly and
cause problems for business planning. Unearned revenue on a financial statement allows an
investor to see the amount of money a company has collected without yet providing the goods
and/or services to satisfy the obligation. Companies that have larger

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Response Option 2
Unearned revenue is when a company accepts an advanced payment or deposit for their goods or
services they sell/offer. There are many companies that follow this practice therefore they have
some type of unearned revenue. A dry cleaner would have unearned revenue on items that have
deposits left on them; they offer a service and accept advanced payments or deposits before even
doing the service. The same goes for buying a train ticket in advanced because a person may
buy a ticket in May for June and never use it so that revenue would unearned to the company.

Unearned revenue is a liability because it really is not money earned by the company but an
amount that has been estimated they will or should earned on a product or service sold. This can
be a problem because if it was to be recorded as income earned it would not be true as the
income was never actually earned.

Unearned revenue is recognized once the services or goods have been paid for on the financial
statements.

35

Week3

ACC 291


Questions 1-8

Exercise E9-7 Exercise E10-5 Exercise E10-10 Exercise E10-11
Exercise E10-15 Exercise E10-18 Problem P10-5A Problem P10-9A



36
Question 1
Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011. The truck has an
expected salvage value of $2,000, and is expected to be driven 100,000 miles over its estimated
useful life of 8 years. Actual miles driven were 15,000 in 2011 and 12,000 in 2012.

Compute depreciation expense for 2011 and 2012 using (1) the straight-line method, (2) the units-of-
activity method, and (3) the double-declining balance method. (Round cost per mile to 2 decimal
places, e.g. 10.50. Use rounded amount for future calculations. Round final answers to 0
decimal places, e.g. 125.)

Assume that Brainiac uses the straight-line method. (1) Prepare the journal entry to record 2011
depreciation. (2) Show how the truck would be reported in the December 31, 2011, balance
sheet. (Enter all amounts as positive amounts and subtract where necessary.)

37
Question 2
Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was
$301.63, and his FICA total was $135.73.

What was Walls's net pay for the week? (Round answer to 2 decimal places, e.g. 10.50.)

Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries Payable;
not Cash.) (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5,
3, 2. Round answers to 2 decimal places, e.g. 10.50.)

Record the issuing of the check for Walls's pay in the general journal. (Round answers to 2 decimal
places, e.g. 10.50.)

38
Question 3
On January 1, Neuer Company issued $500,000, 10%, 10-year bonds at par. Interest is payable
semiannually on July 1 and January 1.
Prepare journal entries to record the following.

39
Question 4
On January 1, Flory Company issued $300,000, 8%, 5-year bonds at face value. Interest is payable
semiannually on July 1 and January 1.
Prepare journal entries to record the following events.

40
Question 5
Leoni Co. receives $240,000 when it issues a $240,000, 10%, mortgage note payable to finance the
construction of a building at December 31, 2011. The terms provide for semiannual installment
payments of $20,000 on June 30 and December 31.
Prepare the journal entries to record the mortgage loan and the first two installment payments. (For
multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

41

Question 6
Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for $562,613. This price
resulted in an effective-interest rate of 10% on the bonds. Interest is payable semiannually on July 1
and January 1. Hrabik uses the effective-interest method to amortize bond premium or discount.
Prepare the journal entries to record the following. (Round answers to 0 decimal places, e.g. 125.
Use rounded amounts for future computations.)

The payment of interest and the discount amortization on July 1, 2011, assuming that interest was not
accrued on June 30. (For multiple debit/credit entries, list amounts from largest to smallest
e.g. 10, 5, 3, 2.)

The accrual of interest and the discount amortization on December 31, 2011. (For multiple
debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

42

Question 7
Fordyce Electronics issues a $400,000, 8%, 10-year mortgage note on December 31, 2010. The
proceeds from the note are to be used in financing a new research laboratory. The terms of the note
provide for semiannual installment payments, exclusive of real estate taxes and insurance, of
$29,433. Payments are due June 30 and December 31.

Complete the installment payments schedule for the first 2 years. (Round answers to 0 decimal
places, e.g. 125. Use rounded amounts for future calculations.)

Prepare the entries for (1) the loan and (2) the first two installment payments. (For multiple
debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2. Round answer to
0 decimal places, e.g. 125.)

Show how the total mortgage liability should be reported on the balance sheet at December 31,
2011. (Round answer to 0 decimal places, e.g. 125.)

43

Question 8
Elkins Company sold $2,500,000, 8%, 10-year bonds on July 1, 2011. The bonds were dated July 1,
2011, and pay interest July 1 and January 1. Elkins Company uses the straight-line method to
amortize bond premium or discount. Assume no interest is accrued on June 30.

Prepare all the necessary journal entries to record the issuance of the bonds and bond interest
expense for 2011, assuming that the bonds sold at 104. (For multiple debit/credit entries, list
amounts from largest to smallest e.g. 10, 5, 3, 2.)

Prepare journal entries as in the previous part of the question assuming that the bonds sold at
98. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

Show balance sheet presentation for each bond issue at December 31, 2011. (Enter all amounts as
positive amounts and subtract where necessary.)

44

ACC 291



Questions 1-18


45


Question 1
The time period for classifying a liability as current is one year or the operating cycle, whichever is:

Question 2
To be classified as a current liability, a debt must be expected to be paid:

Question 3
Maggie Sharrer Company borrows $88,500 on September 1, 2011, from Sandwich State Bank by
signing an $88,500, 12%, one-year note. What is the accrued interest at December 31, 2011?

46

Question 4
Becky Sherrick Company has total proceeds from sales of $4,515. If the proceeds include sales taxes
of 5%, the amount to be credited to Sales is:

Question 5
Employer payroll taxes do not include:

Question 6

47
Sensible Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1.
What amount should Sensible report as a current liability for Unearned Insurance Premiums at
December 31?

Question 7
The term used for bonds that are unsecured is:

Question 8
Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a
premium, this indicates that:

Question 9

48
Gester Corporation retires its $100,000 face value bonds at 105 on January 1, following the payment
of semiannual interest. The carrying value of the bonds at the redemption date is $103,745. The entry
to record the redemption will include a:

Question 10
Colson Inc. converts $600,000 of bonds sold at face value into 10,000 shares of common stock, par
value $1. Both the bonds and the stock have a market value of $760,000. What amount should be
credited to Paid-in Capital in Excess of Par as a result of the conversion?

Question 11
Andrews Inc. issues a $497,000, 10% 3-year mortgage note on January 1. The note will be paid in
three annual installments of $200,000, each payable at the end of the year. What is the amount of
interest expense that should be recognized by Andrews Inc. in the second year?

Question 12

49
Howard Corporation issued a 20-year mortgage note payable on January 1, 2011. At December 31,
2011, the unpaid principal balance will be reported as:

Question 13
For 2011, Corn Flake Corporation reported net income of $300,000. Interest expense was $40,000
and income taxes were $100,000. The times interest earned ratio was:

Question 14
The market price of a bond is dependent on:

Question 15
On January 1, Besalius Inc. issued $1,000,000, 9% bonds for $939,000. The market rate of interest
for these bonds is 10%. Interest is payable annually on December 31. Besalius uses the effective-

50
interest method of amortizing bond discount. At the end of the first year, Besalius should report
unamortized bond discount of:

Question 16
On January 1, Dias Corporation issued $1,000,000, 10%, 5-year bonds with interest payable on July 1
and January 1. The bonds sold for $1,081,105. The market rate of interest for these bonds was 8%.
On the first interest date, using the effective-interest method, the debit entry to Bond Interest
Expense is for (rounded up to the nearest whole dollar):

Question 17
On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on
July 1 and January 1. The entry on July 1 to record payment of bond interest and the amortization of
bond discount using the straight-line method will include a:

Question 18
On January 1, Hurley Corporation issues $500,000, 5-year, 12% bonds at 96 with interest payable on
July 1 and January 1. What is the carrying value of the bonds at the end of the third interest period?

51

ACC 291



52


Corporations were reviewed in great detail this week, as well as the limited liability of
stockholders, transferable ownership rights, corporation management, and government
regulations. Privately and publically held corporations vary greatly from the stock issued to the
stockholders. Publically held corporations trade stock regularly to the public and may have
thousands of stockholders. Whereas privately held corporation do not sell stock to the general
public and only has a few stockholders.
Authorized stock is the maximum number of shares that a corporation is permitted by law
to issue. This number is established in the companys articles of incorporation. Par stock, or Par-
Value Stock is also known as face-Value stock. Par Stock is not affected by market value and
a corporation will not issue the same class type of stock under par value. The value of No-Par
stock is not designated by the corporate charter and does not display a face value. Its value is
designated by the amount the market buyers are willing to pay for it. When a company purchases
stock back, reducing the amount of issued stock in the open market, it is considered Treasury
Stock. Companies will do this if their stock is undervalued. Sometimes they will used the
treasury stock to issue to employees for benefits or compensation. Common Stock is stock that is
purchased by an individual, entitling them to equal portions of ownership. Common stock gives
the shareholder voting rights on corporate policies and officers on the board of directors.
Preferred stock carries the same rights as common stock, but will receive fixed dividends over

53
common stock that receives a variable dividend.
Treasury stock is defined as the difference between the number of shares issued and the
number of shares outstanding (Accountingcoach.com, n.d.). A debit balance exists in the
Treasury Stock account in the general ledger when a corporation holds treasury stock. The two
methods of recording treasury stock are: the cost method and the par value method. The
underlying assumption of the cost method is that the repurchased shares will be resold. Under the
cost method, the cost of the shares acquired is debited to the Treasury Stock account. If the
corporation were to instead sell some of the treasury stock, the payment would be debited to cash
and the cost of the shares sold is credited to the stockholder's equity account Treasury Stock and
the difference would go to another stockholder's equity account. The par value method is used
when the repurchased shares are retired permanently. The par value and issuing price of the
shares are used to record the transactions (Basu, 2012).
The economy today has made some companies change how they distribute their profits.
Benefits like profit sharing, company stock options, and 401k matching have been looked at to
reduced or eliminate totally. The company I am with has now decided to eliminate the profit
sharing and company stock options; they still match contributions to the employee retirement
funds. This is a much less burden on companies to distribute their profits and gives them the
ability to reinvest the profits that they do make. My hope is that once the economy gets back to
where it once was, the extra company profit benefits will be reinstated.

Works Cited

54
Accountingcoach.com. (n.d.). Treasury Stock, accumulated other comprehensive income.
Retrieved from http://www.accountingcoach.com/online-accounting-course/17Xpg04.html
Basu, C. (n.d.). Accounting method for treasury stock. Retrieved from
http://www.ehow.com/info_8408798_accounting-methods-treasury-stock.html

ACC 291



Quality Work

55



Response Option 1
This week we learned about the financial aspects of being a corporation. We covered many
different areas, which they use in order to do their financials. We learned about the different
things like dividends, stock transactions, investments, and about their retained earnings. Some of
the things that we also learned this week were; depending on which state the corporation is
incorporated in determines which laws they need to follow because even though a corporation is
created by law but the continued existence depends of the statutes of each state.

We also learned that a corporation is spate and distinct from their owners and also by being
under its own name and not the name of its stockholders. By a corporation being separate it will
limit the liability of the stockholders there for they cannot be held liable for any of the
corporations debt.

We also learned about how a corporation uses their stocks to help bring in new investments and
they can also use their stocks to reward the investors that they already have. What we learned
about dividends is that a corporation can use them. We also covered the different types of
dividends and those types are cash, property, scrip, and stocks.

Response Option 2
Becoming corporate will allow smaller businesses to take advantage of benefits designed for
larger companies. Some individuals feel that if they form an LLC or S-corp., there will be total
relief that they will have no liabilities carry over from the business's assets to personal assets.
LLC's and S-corps protect the owners and shareholders from some legal matters up to a certain
point but if the plaintiff chooses to sue a company and its owner(s) as defendants in a civil case
nothing can be done. Naming a company is easy but it should be something eye catching and
when you're dealing with investors it had better be good. You should never underestimate how
many choices consumers have, the name of your company should always stand out.

56

So many people question the Whistle Blowing Act, mainly whether or not it is an ethical
decision. Some acts are only done to protect the individual that blows the whistle when they are
just as guilty as the other criminals they actually reported. The Act can violate the confidentiality
of the employee to their employer when the whistle-blower reports an issue outside the company.
The motivating factor is an ethical decision to right a wrong rather than receive an award or
avoid penalties and jail time.

Dividends are a way for a company to reward you for investing money into the business. There
are several types of dividends: cash, property, script and liquidating dividends. Many companies
pay dividends in stock so you can avoid paying any taxes until the stock is actually sold. In most
cases you will receive a specific number of extra shares in the company based on the amount you
already own.

Response Option 3
This week I learned that corporations are created as special legal entities that give the
corporation many of the rights associated with people. A company may choose this form of
business in order to raise capital, protect shareholders from individual liability and create certain
tax advantages. Submitting an application to the Secretary of the state where the corporation is to
be formed forms a corporation. The application contains the name and purpose of the
corporation, shares of stock to be issued and the names of those forming the corporation and
beginning ownership shares. Some of the advantages of a corporation are the fact that the
corporation is a separate legal entity, liability is limited to the amount invested, the ability to
acquire capital, continuous life and professional management. Some of the disadvantages are the
separation of ownership and management, government regulations and additional tax liability.

I also learned about dividends and that, in most cases they are issued in cash and much less
frequently, in stock. In order to issue dividends there must be sufficient retained earnings,
adequate cash and a declaration of dividends, which must be approved by the board of directors.
Companies issue dividends to provide investors with return on their investment. Many investors
use the dividend history of a corporation as an indication of the desirability of the company as an
investment opportunity. Most corporations issue dividends in cash.

This week we also discussed corporate ethics and the effect that ethics training might have on the
employees of a given corporation in a work environment separate from a persons upbringing or
innate ethical behavior. The first general consensus was that it would be difficult to train an un-
ethical person to behave in an ethical fashion without sufficient oversight and consequences for
un-ethical behavior. Training would be most effective for those persons that would behave in an
ethical manner if they understood the rules and guidelines. The most glaring cases of un-ethical
behavior have involved those people, generally at the highest levels of management that consider
themselves to be above, or exempt from the rules.

57
I believe that ethical behavior within an organization must begin at the top. Many of the scandals
referenced above involved those at the highest levels of the companies involved. That being said,
ethical standards and practices established and integrated into the organization culture through
education and training can help that organization to avoid some of the pitfalls that lead to
dishonesty and abuse.

ACC 291



Question 1: Why does a company choose to form as a corporation? What are the steps required
to become a corporation? What are the advantages and disadvantages of the corporate form of
doing business?

Question 2: What are the different types of dividends corporations may issue? When should a
corporation pay dividends? Do you prefer a stock dividend or a cash dividend? Why?

Question 3: Why do corporations buy back their own stock? What does it tell you about the
corporation? What effect does the purchase have on the price of a companys stock?

Quality Work

58


Why does a company choose to form as a corporation? What are the
steps required to become a corporation? What are the advantages and
disadvantages of the corporate form of doing business?

Response Option 1
Becoming a corporate business allows home-based businesses to take advantage of benefits
originally designed for larger companies. Even small businesses, such as those that produce
incomes around $50,000 can benefit from incorporation. Incorporation can build legitimacy for a
business and its services, the sole proprietor business, incorporation also provides benefits by
reducing personal liability or income taxes. The reduction of personal liability or taxes is
achieved by incorporating as a limited liability company (LLC) or as an S-corporation (S-
corp). When the main contributor to a small business is unable to perform his or her duties, these
businesses ultimately fail. Sole proprietorships tend to underscore this risk and impede a
business's reputation as an ongoing entity. Corporate entities can apply to and receive
funding more easily than sole proprietors.

Some drawbacks are that states put conditions on corporate structure, in some cases requiring the
LLC to dissolve once all members have withdrawn. These problems can be avoided by
incorporating in another state. S-corporations are more difficult to form and maintain because
they require the same governance structure as a regular corporation. Articles of incorporation
must be filed with the state, bylaws need to be developed and stock has to be issued.
Corporations must have their own financial accounts and file the names of all officers with the
state. Like corporations, a board of directors is established and it is this board that makes
managerial decisions.

The steps to form a corporation are as follows:

1. Choose an available business name that complies with your state's corporation rules.
2. Appoint the initial directors of your corporation.
3. File formal paperwork, usually called "articles of incorporation," and pay a filing fee that
ranges from $100 to $800, depending on the state where you incorporate.

59
4. Create corporate "bylaws," which lay out the operating rules for your corporation.
5. Hold the first meeting of the board of directors.
6. Issue stock certificates to the initial owners (shareholders) of the corporation.
7. Obtain any licenses and permits that are required for your business.

Response Option 2
In this week's reading we discover that Chief Justice John Marshall defined a corporation as an
artificial being, invisible, intangible, and existing only in contemplation of law. The text
continues to explain that, "This definition is the foundation for the prevailing legal interpretation
that a corporation is an entity separate and distinct from its owners" (Weygandt, 2012). One
reason a company will choose to form a corporation is to separate personal assets and liabilities
from that of the company's. It limits the liability of the shareholders to that of their financial
investments. They will also form a corporation for the purpose of making a profit, or to become
non-profit.

To become a corporation desiring parties must first file an application with the Secretary of State
in the desired state it wishes to operate in. Once they are approved, they may receive an
approved copy of the application, known as a charter. Once the organization receives its
charter, founders will create and organize by-laws explaining the structure the corporation will
operate under.

A corporation may gain advantage of more funding by selling stock to
shareholders. Shareholders will have the ability to vote on major decisions regarding the
corporations. In return, shareholders receive dividends on corporate earnings. Another
advantage is that operation of the business does not cease if an owner dies.
Corporations may hire skilled and qualified individuals to manage the daily operations of the
business and compensate them based on business performance or profitability. The disadvantage
of doing this that the hired individuals may not be totally honest on their reporting in order to
gain a higher compensation.

It can either be an advantage or disadvantage, but state and federal laws and regulations control a
corporation more than a privately owned company. They may regulate the number of shares
allowed as well as require additional taxes.

Reference: Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th
ed.). Hoboken, NJ: John Wiley & Sons.

60

What are the different types of dividends corporations may issue? When
should a corporation pay dividends? Do you prefer a stock dividend or a
cash dividend? Why?

Response Option 1
Dividends are a way for a company to reward you for investing money into the business. Cash
dividends are paid for each share of stock you own in a company. Many companies will issue a
cash dividend to indicate the firm is performing well and to attract new investors. Many
companies pay dividends in stock so you can avoid paying any taxes until the stock is actually
sold. In most cases you will receive a specific number of extra shares in the company based on
the amount you already own. Property dividends are generally issued by companies that are
having financial troubles but still wish to reward shareholders for their investment. A firm
experiencing difficulty raising cash may issue a scrip dividend instead of paying money to
shareholders. Companies that are not meeting expectations and are viewed by its officials as
failing will issue liquidating dividends to shareholders as a way of paying them back for their
investment

I'd prefer the cash dividends because stock dividends tend to cause the price of the company
stock to decline since more shares are being issued to people already holding shares.

Response Option 2
There are four different types of dividends a corporation may issue. The four different types are
the following:

1. Cash dividend, which is a method for a company to pay the stockholders for their shares with
cash
2. Property dividend, which is an alternative to cash or stock paid to stockholders in the form of
assets from the issuing corporation

61
3. Scrip dividend, which is a legal note ensuring stock in the payment of cash.
4. Stock dividend which is a method for a company to pay the stockholders for their shares in
stock

Companies have the right to decide on a predate as to when to pay out the dividends. They may
predate when they are going to pay out their dividends for a number of reasons such as: to
increase the value of stock, to receive the initial money invested, or to finance a project.

I would personally prefer a cash dividend since receiving a stock dividend may cause the market
value of the stock to decrease.

Why do corporations buy back their own stock? What does it tell you
about the corporation? What effect does the purchase have on the price
of a companys stock?

Response Option 1
A stock buyback which is also known as a "share repurchase", is a company's buying back its
shares from the marketplace. You can think of a buyback as a company investing in itself, or
using its cash to buy its own shares. The idea is simple: because a company can't act as its own
shareholder, the company absorbs repurchased shares, and the number of outstanding shares on
the market is reduced. When this happens, the relative ownership stake of each investor increases
because there are fewer shares, or claims, on the earnings of the company. If there is no news
forthcoming and the share price is falling, the company doesn't have a way to increase demand.
However, a stock buyback allows the company to decrease the supply. The result is the same;
the share price increases. By buying back shares of a company, management may be showing it
is preparing to purchase another company or trying to protect itself against a takeover from
another company. If a company owns more shares of itself it can offer more in a buyout deal.

There are various reasons for a buyback; I am assuming the motive would justify the reason. You
would have to play close attention to recognize some reasons for buyback's because most
companies usually will not let their employees know. Most employees will get so excited about
the cash they will ignore the reasons.

62

Response Option 2
Corporations buy back their own stock for a number of reasons such as:

1. To keep control away from investors or to eliminate a hostile share holds
2. To reduce the number of shares outstanding and to increase the earnings per share.
3. To enhance its market value

The Corporation buying back its own stock may reveal that the corporation is defending itself
against a takeover by ensuring that they are the primary shareholder. The company may also be
trying to increase the value of their corporation or be preparing to purchase another company.

63

Week4

ACC 291


Questions 1-5

Exercise Do It! 11-1 Exercise E11-15 Exercise E11-16 Problem P11-6A
Problem P11-8A


64


Question 1
Indicate whether each of the following statements is true or false.

Question 2
On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000
and retained earnings $900,000. Omar is considering the following two courses of action: (1)
declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-
for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Complete the tabular summary of the effects of the alternative actions on the components of
stockholders' equity and outstanding shares. (If answer is zero, please enter 0. Do not leave any
fields blank.)

65

Question 3
Before preparing financial statements for the current year, the chief accountant for Springer Company
discovered the following errors in the accounts.
1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest
Expense $50,000 and a credit to Cash $50,000.
2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the
market value per share was $16. The only entry made was: Retained Earnings (Dr.) $10,000
and Dividend Payable (Cr.) $10,000. The shares have not been issued.
3. A 4-for-1 stock split involving the issue of 400,000 shares of $5 par value common stock for
100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings
$2,000,000 and a credit to Common Stock $2,000,000.
Prepare the correcting entries at December 31. (For multiple debit/credit entries, list amounts
from largest to smallest e.g. 10, 5, 3, 2.)

66

Question 4
Arnold Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative
preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated
value to the common stock. At December 31, 2011, the ledger contained the following balances
pertaining to stockholders' equity.
Preferred Stock $240,000
Paid-in Capital in Excess of Par Value-Preferred 56,000
Common Stock 2,000,000
Paid-in Capital in Excess of Stated Value-Common 5,700,000
Treasury Stock-Common (1,000 shares) 22,000
Paid-in Capital from Treasury Stock 3,000
Retained Earnings 560,000
The preferred stock was issued for land having a fair market value of $296,000. All common stock
issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at
a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No
dividends were declared in 2011.

Prepare the journal entries for the: (For multiple debit/credit entries, list amounts from largest
to smallest e.g. 10, 5, 3, 2.)
1. Issuance of preferred stock for land.
2. Issuance of common stock for cash.
3. Purchase of common treasury stock for cash.
4. Sale of treasury stock for cash.

67

Complete the stockholders' equity section at December 31, 2011. (Order multiple accounts in the
standard format used in the text. Enter all amounts as positive amounts and subtract where
necessary.)

68

Question 5
The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath
Corporation at December 31, 2011.
Common Stock ($10 stated value) $1,500,000
Paid-in Capital from Treasury Stock 6,000
Paid-in Capital in Excess of Stated Value-Common Stock 690,000
Paid-in Capital in Excess of Par Value-Preferred Stock 288,400

69
Preferred Stock (8%, $100 par, noncumulative) 400,000
Retained Earnings 776,000
Treasury Stock-Common (8,000 shares) 88,000
Complete the stockholders' equity section at December 31, 2011. (List entries by the format used
in the text. Enter all amounts as positive amounts and subtract where necessary.)

Compute the book value per share of the common stock, assuming the preferred stock has a call price
of $110 per share. (Round answer to 2 decimal places, e.g. 10.50.)

70

ACC 291



Questions 1-17



Question 1
Which of the following is not an advantage of a corporation?

71

Question 2
Which of the following is a disadvantage of a corporation

Question 3
Which of the following statements is false?

Question 4
ABC Corporation issues 1,000 shares of $10 par value common stock at $12 per share. In recording
the transaction, credits are made to:

72

Question 5
XYZ, Inc. sells 100 shares of $5 par value treasury stock at $13 per share. If the cost of acquiring the
shares was $10 per share, the entry for the sale should include credits to:

Question 6
In the stockholders' equity section, the cost of treasury stock is deducted from:

Question 7
Preferred stock may have priority over common stock except in:

73

Question 8
M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding
at December 31, 2011. No dividends were declared in 2009 or 2010. If M-Bot wants to pay $375,000
of dividends in 2011, common stockholders will receive:

Question 9
Entries for cash dividends are required on the:

Question 10
Which of the following statements about small stock dividends is true?

74

Question 11
All but one of the following is reported in a retained earnings statement. The exception is:

Question 12
A prior period adjustment is:

Question 13
In the stockholders' equity section of the balance sheet, common stock:

75

Question 14
Which of the following is not reported under additional paid-in capital?

Question 15
Katie Inc. reported net income of $186,000 during 2011 and paid dividends of $26,000 on
commonstock. It also has 10,000 shares of 6%, $100 par value, noncumulative preferred stock
outstanding. Common stockholders' equity was $1,200,000 on January 1, 2011, and $1,600,000 on
December 31, 2011. The company's return on common stockholders' equity for 2011 is:

Question 16
When a stockholders' equity statement is presented, it is not necessary to prepare a(an):

76

Question 17
The ledger of JFK, Inc. shows common stock, common treasury stock, and no preferred stock. For this
company, the formula for computing book value per share is:

77

ACC 291




There are three sections of Statement of Cash Flows: operating, investing, and financing.
Operating activities involve the cash effects of transactions that enter net income, such as

78
services and cash payments to suppliers of inventory and cash receipts from sales of goods and
services. Investing activities involve long term assets and include making and collecting loans,
acquiring and disposing of investments. Financing activities involve liability and stockholders
equity as well as receiving cash from creditors and repaying borrowed loans as well as interest.
One of the most important parts of analyzing a companys financial performance is being
able to understand the quality of their earnings. A company that has a high quality of earnings
provides full and transparent information that will not confuse or mislead users of the financial
statements (Weygandt, 2012). Although this is a very short section in the weekly reading
assignment, the discussion of ethics in regards to financial recording in the workplace is the
result of this topic. With discussion in the media and current events surrounding unethical
practices, businesses must be aware of factors that may confuse those that review their financial
records.
Ethics is not always the factor that would hamper the quality of earnings. The application
of different generally accepted accounting practices by companies in the same industry may
result in financial statements that will confuse reviewers if they compare the two. This is known
as alternative accounting methods. Managers that receive high pressure to increase revenue may
find themselves channel stuffing or creating incentives to increase revenues in one reporting
period but will have a hard time meeting future expectations. This practice is known as improper
recognition. Companies may also practice improper capitalization of operating expenses by
under-stating liabilities. Some transactions are so transparent that it is hard for reviewers to tell
just how the company is doing financially.
The cash flow statement is one of the most fundamental financial statements. The cash
flow statement gives a detailed record of a company's earnings and expenses. The cash flow

79
statement also usually separates cash flow activities into three categories: operating, financing,
and investing (Weygandt, Kimmel, and Kieso, 2012). The cash flow statement can be prepared
using either the direct or indirect method and while both methods deliver the same results they
use different procedures to determine cash flow from operating finances.
The statement of cash flows prepared with the indirect method starts with net income and
then adds or subtracts items to arrive at net cash provided by operating activities. There are three
types of required adjustments: 1) noncash charges such as depreciation, amortization, and
depletion, 2) gains and losses on the sale of plant assets, 3) changes in noncash current asset and
current liability accounts. Many companies choose to prepare their cash flow statements using
the indirect method because accrual accounting provides a better measure of how the company
functions. The indirect method also tends to be less complex (Saint-Leger, n.d.).

References
Saint-Leger. (n.d.). The Advantages of Preparing a Cash Flow Statement Using the Direct
Method. Retrieved from http://smallbusiness.chron.com/advantages-preparing-cash-flow-
statement- using-direct-method-23694.html

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting (7th ed.). Hoboken,
NJ: John Wiley & Sons.

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ACC 291



Quality Work



81

Response Option 1
This week I learned a lot about cash flow statements. I learned what they are for and when is the
best time to use them. The best time to use a cash flow statement is all the time. This is one of
the most important items you will use in your business. A cash flow statement records all of the
money coming in and out of the company. The best way a company can keep track of all of this
information is to use the three different sections of a cash flow. This will help to make sure that
your cash flow is organized. The three sections are investing, operations, and financing.
Cash from financing and cash from operations is where all of your money comes in from.
Investing is where all of your goes too. When you keep your cash flow organized into these
sections you are sure to make your business work.

I also learned about vertical and horizontal analysis. Vertical analysis is the best way for
cooperate managers and investors to look into a companys finances. The vertical analysis also
allows investors to look at each period to make sure that it is consistent enough to invest in. A
vertical analysis is the easiest form of cash flow to use but it is not the most accurate so we have
to use it with caution. Vertical analysis uses a benchmark but you must use before you compare
all assets. Horizontal analysis is the best suited for setting up a company for a five year plan. The
horizontal analysis uses a benchmark as well, but it sets it at once usually right in the beginning
of the year.

Response Option 2
The statement of cash flows is critical to a company because it shows the inflow and outflow of
all cash. It allows investors to see if a company is able to pay for its operations and growth in the
upcoming years. Not many companies can survive without generating positive cash flow per
share for their shareholders. Income from tax sheltered retirement plans are not to be included
because the funds might be reinvested and not normally available for reuse. Certain cash inflows,
such as one-time bonus incentives, should not be included in a personal cash flow statement.

Some companies use a sort of combination vertical and horizontal analysis combined. Those type
reports contain financial data from more than one period, with a vertical analysis applied to each
one. This is a bit easier because it allows a person to glance how statement components have
changed in their proportions from one period to the next, without any extra math.

A stock buyback is also called a share repurchase which simply means that a company is buying
back its shares from the marketplace. In other words its a company investing in itself, or using
its cash to buy its own shares. There are various reasons for a buyback; we are assuming the
motive would justify the reason. You would have to play close attention to recognize some
reasons for buyback's because most companies usually will not let their employees know. Most
employees get so excited about the cash they ignore the actual reason for the buyback of shares.

82

Response Option 3
This week we learned about statement of cash flows that specifically track the sources of cash
within a company as well as the uses of cash. This is important because the flow of cash within a
company is very much the life blood of that company. The statement of cash flows is broken
down into three areas that highlight the cash transactions within three main financial activities
within the company. These sections are: Operating activities, those related to operations that
produce revenues and consume expenses, Investing activities, the acquisition and disposal of
investments and also lending and collection activities and financing activities, captures activities
such as obtaining cash from issuing debt and repayment of debt and obtaining cash from
stockholders, repurchasing shares and declaring dividends.

We also learned about two forms of financial statement analysis. The two forms are the
horizontal and vertical. Horizontal or trend analysis compares data from one time period to the
next and can be expressed in dollar amounts or percentages of increase of decrease. This form of
analysis is a good management tool, as it allows for comparison of items in the financial
statements from one period to the next.

In vertical or common-size analysis data are expressed as a percentage of a base amount, gross
profit as a percent of net sales for example. Vertical analysis can be used for a more in-depth
look at items within the financial statements and can also be used to compare companies of
different sizes. This method is a good way to pick out a companys financial strengths and
weaknesses relative to previous periods or similar companies.

83

ACC 291



Question 1: Why are companies required to prepare a statement of cash flows? Why is the
statement of cash flows divided into three sections? What does each section tell you about the
operations of a company?

Question 2: Two popular methods of financial statement analysis are horizontal analysis and
vertical analysis. What are the differences between these two methods?

Quality Work



84
Why are companies required to prepare a statement of cash flows? Why
is the statement of cash flows divided into three sections? What does
each section tell you about the operations of a company?

Response Option 1
Because it shows how much actual cash a company has generated, the statement of cash flows is
critical to understanding a company's fundamentals. It shows how the company is able to pay for
its operations and future growth. Just because a company shows a profit on the income statement
doesn't mean it cannot get into trouble later because of insufficient cash flows. Some industries
are more cash intensive than others but regardless no business can survive in the long run
without generating positive cash flow per share for its shareholders. A company's long-term cash
inflows should always exceed its long-term cash outflows. Companies produce and consume
cash in different ways, so the cash flow statement is divided into three sections: cash flows from
operations, financing and investing. Basically, the sections on operations and financing show
how the company gets its cash, while the investing section shows how the company spends its
cash.

Response Option 2
Companies use a statement of cash flows because it shows where cash came from and how it was
used. The other main financial reports only provide a limited insight into the cash transactions of
the company. While the other main reports utilize the accrual accounting basis, the statement of
cash flows changes the accrual basis using the direct or indirect method. The indirect method is
primarily used, however both are acceptable under generally accepted accounting
principles. The statement of cash flows is divided into three sections and shown in the report in
the following order. Operating activities is reported first, followed by investing activities, and
finally financing activities. Operating activities deals with each transaction that involves both
revenues and expenses. This category is considered important because operating activities are the
best predictor of a companys ability to generate future cash. This obviously is important
information for investors as well as creditors when evaluating a companys ability to grow and
move forward. Investors can make educated guesses regarding the future cash flows based on
the statement of cash flows better than viewing the other financial reports that utilize the accrual
accounting basis. Investing activities include the transactions to purchase, sell, or dispose of
company property. Loans and debt collection are also included in the investing activities with
company plant and equipment. Investors can view the statement of cash flows to see if the
company has sufficient cash on hand to pay stockholder dividends and meet future
demands. Finally, financing activities includes receiving cash from stockholders, buying back
company stock, and paying dividends.


85
Two popular methods of financial statement analysis are horizontal
analysis and vertical analysis. What are the differences between these
two methods?

Response Option 1
Vertical analysis enables investors and corporate management to take a deep look at a company's
finances, with a special emphasis on how financial statement items vary over a period of time.
This type of review requires accounting detailed orientation. Vertical analysis requires the
selection of a benchmark, such as revenues, before comparing various financial items ---
expenses and net income, for example. One of the most important things I noticed when reading
was that vertical financial statement analysis offers valuable information in an easily accessible
format. Easily accessible format really caught my eye, easier doesn't necessarily mean better but
I'd try of course. It also computes an item as a percentage of a total amount, which helps
investors and managers easily evaluate two or more companies operating in similar or different
industries.

Horizontal analysis helps a firm appraise its economic evolution from one period to another.
Unlike vertical analysis, a horizontal review sets the benchmark at a given date, such as the
beginning of the year. For example, horizontal analysis may help investors gauge a company's
cash balance over a five-year period.

Response Option 2
Horizontal analysis, otherwise known as 'trend analysis', is used for evaluating a series of
financial statement data over a specific span of time. For instance, horizontal analysis can
measure net income from year to year, or quarter to quarter. Once the same parameters of data
are evaluated over time, it can determine trends such as an increase or decrease in sales,
expenses, or investments. The changes can be expressed in percentages, dollars, or both. Most
of the time, the data is simple and straight forward. Creditors, investors, and management can
monitor increases and decreases in assets, liabilities, and investments by tracking the analysis
and determining trends in growth or shrinkage in particular areas of concern.

Vertical analysis is used to measure financial statement data by comparing or expressing each
item as a percentage of a base amount. For example, when using the balance sheet, current
assets can be expressed as a percentage of all assets. Each line on the balance sheet will have its
own percentage and when compared to the balance sheet of a different period, the two
percentages can be compared and show how each percentage changed from period to
period. This information is useful in determining how particular lines on the balance sheet
changes. If current liabilities were 40% of all liabilities in one period, then display 30% the next
period, then it can show that a company is remaining current on paying liabilities and not
accruing additional liabilities.

Vertical analysis can also be used to compare companies of different size. This can be useful for
a corporation with several divisions or stores that operate on separate general ledgers.

86

Week5

ACC 291


Questions 1-6

Exercise E13-1; Exercise E13-8; Exercise E14-1; Problem P13-9A;
Problem P13-10A; Problem P14-2A



Exercise E13-1 Question 1

87
Pioneer Corporation had the transactions below during 2011.
Analyze the transactions and indicate whether each transaction resulted in a cash flow from operating
activities, investing activities, financing activities, or noncash investing and financing activities.


88
Here are comparative balance sheets for Taguchi Company.

Additional information:
1. Net income for 2011 was $103,000.
2. Cash dividends of $45,000 were declared and paid.
3. Bonds payable amounting to $50,000 were redeemed for cash $50,000.
4. Common stock was issued for $42,000 cash.
5. No equipment was sold during 2011, but land was sold at cost.

Complete the statement of cash flows for 2011 using the indirect method. (List amounts from
largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14,

89
10, -17, -5, -1. If amount decreases cash flow, use either a negative sign preceding the
number e.g. -45 or parentheses e.g. (45).)


90
Financial information for Blevins Inc. is presented below.

Complete the schedule showing a horizontal analysis for 2012 using 2011 as the base year. (If
amount is a decrease, use either a negative sign preceding the number eg -45 or
parentheses eg (45). Round percentages to 1 decimal place, e.g. 10.5. List items in the
order given in the question.)

Problem P13-9A Question 4
Condensed financial data of Arma Inc. follow.

91

1. New plant assets costing $85,000 were purchased for cash during the year.
2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash.
3. Bonds matured and were paid off at face value for cash.
4. A cash dividend of $40,350 was declared and paid during the year.

92
Complete the statement of cash flows using the indirect method. (List amounts from largest
positive to smallest positive followed by most negative to least negative, e.g. 15, 14, 10,
-17, -5, -1. If amount decreases cash flow, use either a negative sign preceding the
number e.g. -45 or parentheses e.g. (45).)

93
Condensed financial data of Arma Inc. follow

94
1. New plant assets costing $85,000 were purchased for cash during the year.
2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash.
3. Bonds matured and were paid off at face value for cash.
4. A cash dividend of $40,350 was declared and paid during the year.
Further analysis reveals that accounts payable pertain to merchandise creditors.
Complete the statement of cash flows for Arma Inc. using the direct method. (List amounts from
largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14,
10, -17, -5, -1. If amount decreases cash flow for financing and investing activities, use
either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). List all other
amounts as positive.)

95

The comparative statements of Villa Tool Company are presented below.

96

Compute the following ratios for 2012. (Weighted average common shares in 2012 were 57,000, and
all sales were on account.) (Round earnings per share, current ratio and acid-test ratio to 2
decimal places, e.g. 10.50. Round other answers to 1 decimal place, e.g. 10.5.)

97

ACC 291



Questions 1-19



98
Question 1
Which of the following is incorrect about the statement of cash flows?

Question 2
Which of the following will not be reported in the statement of cash flows?

Question 3
The statement of cash flows classifies cash receipts and cash payments by these activities:

99

Question 4
Which is an example of a cash flow from an operating activity?

Question 5
Which is an example of a cash flow from an investing activity?

Question 6
Cash dividends paid to stockholders are classified on the statement of cash flows as:

100

Question 7
Which is an example of a cash flow from a financing activity?

Question 8
Which of the following is incorrect about the statement of cash flows?

Question 9
Net income is $132,000, accounts payable increased $10,000 during the year, inventory decreased
$6,000 during the year, and accounts receivable increased $12,000 during the year. Under the
indirect method, what is net cash provided by operations?

101
Question 10
Items that are added back to net income in determining cash provided by operating activities under
the indirect method do not include:

Question 11
The following data are available for Allen Clapp Corporation.

102
Question 12
The following data are available for Orange Peels Corporation.

Question 13
The following data are available for Meter Company.

103
Question 14
The statement of cash flows should not be used to evaluate an entity's ability to:

Question 15
Free cash flow provides an indication of a company's ability to:

Question 16
In a worksheet for the statement of cash flows, a decrease in accounts receivable is entered in the
reconciling columns as a credit to Accounts Receivable and a debit in the:

104
Question 17
In a worksheet for the statement of cash flows, a worksheet entry that includes a credit to
accumulated depreciation will also include a:

Question 18
The beginning balance in accounts receivable is $44,000, the ending balance is $42,000, and sales
during the period are $129,000. What are cash receipts from customers?

Question 19
Which of the following items is reported on a cash flow statement prepared by the direct method?

105

ACC 291




106
One of the biggest negative impacts on a corporation is the practice of unethical behavior.
When someone practices accounting unethically, the entire corporation suffers, ranging from the
immediate employees to investors and stakeholders. Unfortunately, there are multiple reasons
why a person might be tempted to behave unethically (Jacobsen, n.d.). The first is simply the
nature of the person. A person's own self-greed may be the cause for he/she to behave
unethically. The person may be attempting to increase their own financial gain, or if the
corporation happens to be their own, the person may be trying to make the corporation appear as
if it is doing better than it actually is. Another reason why a person may behave unethically is
due to corporate pressure. For example, a person may be pressured to alter financial statements
by a client or similarly a CFO may be tempted to alter statements to please board members or
investors. A third and most common reason why a person may behave unethically is simply
because of laziness and a willingness to take shortcuts. Some fail to properly conduct their job
duties which results in improper preparation of financial information. All of the three reasons
listed are situations that lead to unethical accounting practices.
Unethical behavior effects nearly everyone associated with the corporation in question. In
regards to employees, if the person behaving unethically goes without punishment it creates an
environment of mistrust and low morale (Bramble, n.d.). The company's reputation as a whole
also suffers when employees behave unethically not only resulting in the company's value
diminishing, but also making it difficult to hire future employees (Higginbotham, 2010). Finally,
unethical behavior affects stakeholders (Garger, 2010). Stockholders financially benefit when a
corporation runs ethically, likewise, stockholders can take a hit when the corporation behaves
unethically.

107
The Sarbanes- Oxley Act is a United States federal law that was enacted on July 30,
2002. The act governs the accounting practices of all publicly held United State companies
(Nikolas, n.d.). The Sarbanes-Oxley Act implemented many changes. The first being an increase
in corporate responsibility for financial reports. The act required that several certifications were
authorized for financial reports resulting in greater responsibility for the person conducting the
reports. Because the Sarbanes-Oxley Act holds those in practicing accounting to criminal
penalties for any unethical behavior or violations, those preparing financial statements take more
care to compose financial statements accurately. Overall, the Sarbanes-Oxley Act affected
financial statements by ensuring they are prepared as accurately as possible with the threat of
criminal activity if they are not.

Work Cited
Bramble, L. (n.d.). Unethical behavior & employee morale. Retrieved from
http://www.ehow.com/about_6466822_unethical-behavior-employee-morale.html
Garger, J. (2010 , September 25). Business ethics and the bottom line for stockholders. Retrieved
from http://www.brighthub.com/office/finance/articles/18540.aspx
Higginbotham, T. (2010, October 3). Unethical behaviors and their effect on small business.
Retrieved from http://voices.yahoo.com/unethical-behaviors-their-effect-small-business-
6904236.html
Jacobsen , R. (n.d.). Unethical behavior in the workplace. Retrieved from
http://ezinearticles.com/?Unethical-Behavior-In-The-Workplace&id=954264
Nikolas, D. (n.d.). Effects of the sarbanes-oxley act. Retrieved from
http://www.ehow.com/list_6733914_effects-sarbanes_oxley-act.html

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ACC 291

Ratio Analysis Memo (Week 5)

Berrys Bug Blasters



109
After analysis of Berrys Bug Blasters, the liquidity, profitability and solvency ratios
were examined. Our analysis is attached and we will offer our discovery about the companys
financial position, which may benefit from our analysis, and what our data will reveal about the
companys performance and position in this memo to the CEO.
After using the horizontal and vertical analysis Berrys Bug Busters was able to see how
their assets and debts are handled in relation to profits. Liquidity within a business is the ability
to pay current liabilities using current assets. Liquidity ratios are important to a company as well
as employees, creditors and banks.
As of 2008, Berrys Bug Blasters holds a 15.88% debt to total assets ratio. Solvency is
the long-term financial practicality of a business including its ability to pay off long-term
obligations. Key solvency ratios are debt to equity ratio, debt to capital ratio, debt to assets ratio,
times interest earned ration, and fixed charge coverage ratio.
Profitability is the ability of a business to earn profit for its owners. Profitability ratios are
determined through the analysis of asset turnover, profit margin, return on assets, and return on
common stockholders equity. In 2008 every dollar of asset owned Berrys Bug Blasters sold
$1.68 of goods and services. The profit margin is 6.58%; the return on assets showed the
company received $25.52 profit off every $100 in assets, and stockholders equity showed a
3.7%. The collected data shows what kind of financial place the company is at. These ratios are
important for investors and lenders to see how the company is operating and handling their
assets. The ability to pay back debts and bills shows how financially healthy a company works.
All of the ratios show how healthy the company is or not in each specified area.
Overall, the company has made improvements in the past few years, but the last year saw
a slight downward trend as shown in the attached horizontal and vertical analysis. This

110
downward trend is not something yet to be concerned about. The analysis that we have done
shows us where we can make the improvements. In 2008, the collection of accounts receivable
was down compared to previous years. Being able to collect on these accounts will increase net
income. We lost money the third year of operation, but we made money this past year.
Berrys Bug Blasters can still make improvements and still continue to increase net
income in the future by controlling the expenses, especially the indirect expenses. The direct
expenses will increase or decrease with the amount of sales that we do, but the indirect expenses
is where the company can make a difference in being profitable or not.

Reference
Weygandt, J.J. Kimmel, P.D., & Kieso, D.E. (2010). Financial accounting (7
th
ed.).
Hoboken, NJ: John Wiley and Sons.

111

ACC 291
Profitability Ratios Berrys Bug Blasters (Week 5)


112

Profitability ratios are one of the most frequently used in the financial ration analysis.
We will use profitability ratios to determine Berrys Bug Blasters bottom line, efficiency, and
performance. This is done through analyzing asset turnovers, profit margin, Return on Assets,
and Return on common stockholders equity.
Asset Ratio: determined by dividing sales revenue by total assets. In 2008, for every
dollar of assets owned by Berrys Bug Blasters, they sold $1.68 worth of goods and services.
Profit margin: By dividing net income by sales revenue we can determined that the profit
margin for Berrys Bug Blasters is 6.58%
Return on Assets: Asset ratio multiplied by Profit Margin. ROA can help us determine
how profitable Berrys Bug Blasters is compared to total assets. To analyze ROA, divide Net
Income by Total Assets. Berrys Bug Blasters had a 25.52% Return on assets. This means they
were able to receive $25.52 profit on every $100 in assets.
Return on Common Stockholders Equity: Determines corporate profitability. Investors
can measure how Berrys is using the money they invested. To calculate ROE divide Net Profit
after Taxes by Stockholders Equity. The calculation determined in 2008 that Berrys Bug
Blasters had a 3.7% return on Stockholders equity.

113
Calculations
Asset Turnovers:
Asset turnovers= sales revenue/total assets
Asset turnovers= 3,249,580.53/1,932,041.17
Asset Turnovers= 1.68

Profit Margin:
= Profitability (net income)/revenue.
=493,139.75/ 3,249,580.53
= 6.58%
Return on Assets:
ROA= Net Income/Total Assets
ROA= 493.139.75/1,932,041.17
ROA= 25.52%

ROE = Net Profit After Taxes / Stockholders' Equity
ROE= 431,811.49/1,625,235.46
ROE= 3.7%

114

ACC 291

Effect of Unethical Behavior Article Analysis (Week 5)



115
One of the biggest negative impacts on a corporation is the practice of unethical behavior.
When someone practices accounting unethically, the entire corporation suffers, ranging from the
immediate employees to investors and stakeholders. Unfortunately, there are multiple reasons
why a person might be tempted to behave unethically (Jacobsen, n.d.). The first is simply the
nature of the person. A person's own self-greed may be the cause for he/she to behave
unethically. The person may be attempting to increase their own financial gain, or if the
corporation happens to be their own, the person may be trying to make the corporation appear as
if it is doing better than it actually is. Another reason why a person may behave unethically is
due to corporate pressure. For example, a person may be pressured to alter financial statements
by a client or similarly a CFO may be tempted to alter statements to please board members or
investors. A third and most common reason why a person may behave unethically is simply
because of laziness and a willingness to take shortcuts. Some fail to properly conduct their job
duties, which results in improper preparation of financial information. All of the three reasons
listed are situations that lead to unethical accounting practices.
After a wave of scandals in the corporate accounting world over the past decade, most
notably Enron, congress passed an important act that held those practicing accounting more
liable for their actions and worked to ensure a decrease of accounting scandals. The Sarbanes-
Oxley Act is a United States federal law that was enacted on July 30, 2002. The act governs the
accounting practices of all publicly held United State companies (Nikolas, n.d.). The Sarbanes-
Oxley Act implemented many changes, such as increasing corporate responsibility for financial
reports. The act required that several certifications were authorized for financial reports resulting
in greater responsibility for the person conducting the reports. Because the Sarbanes-Oxley Act
holds those practicing accounting to criminal penalties for any unethical behavior or violations,

116
those preparing financial statements take more care to compose financial statements accurately.
Overall, the Sarbanes-Oxley Act affected financial statements by ensuring they are prepared as
accurately as possible with the threat of criminal activity if they are not.

Work Cited
Jacobsen , R. (n.d.). Unethical behavior in the workplace. Retrieved from
http://ezinearticles.com/?Unethical-Behavior-In-The-Workplace&id=954264
Nikolas, D. (n.d.). Effects of the sarbanes-oxley act. Retrieved from
http://www.ehow.com/list_6733914_effects-sarbanes_oxley-act.html

117

FINAL EXAM

ACC 291
FINAL EXAM

1) Intangible assets are the rights and privileges that result from ownership of long-lived
assets that
A. must be generated internally
B. are non-renewable natural resources
C. do not have physical substance
D. have been exchanged at a gain
2) Gains on an exchange of plant assets that has commercial substance are
A. deducted from the cost of the new asset acquired
B. deferred
C. not possible
D. recognized immediately
3) Using the percentage of receivables method for recording bad debts expense, estimated
uncollectible accounts are $15,000. If the balance of the Allowance for Doubtful Accounts is
$3,000 credit before adjustment, what is the amount of bad debts expense for that period?
A. $15,000
B. $12,000
C. $18,000
D. $8,000

118
4) When an interest-bearing note matures, the balance in the Notes Payable account is
A. less than the total amount repaid by the borrower
B. the difference between the maturity value of the note and the face value of the note
C. equal to the total amount repaid by the owner
D. greater than the total amount repaid by the owner
5) Costs incurred to increase the operating efficiency or useful life of a plant asset are
referred to as
A. capital expenditures
B. expense expenditures
C. ordinary repairs
D. revenue expenditures
6) Hilton Company issued a four-year interest-bearing note payable for $300,000 on
January 1, 2011. Each January the company is required to pay $75,000 on the note. How
will this note be reported on the December 31, 2012 balance sheet?
A. Long-term debt, $300,000.
B. Long-term debt, $225,000.
C. Long-term debt, $150,000; Long-term debt due within one year, $75,000.
D. Long-term debt, $225,000; Long-term debt due within one year, $75,000.
7) When the effective-interest method of bond discount amortization is used
A. the applicable interest rate used to compute interest expense is the prevailing market interest
rate on the date of each interest payment date
B. the carrying value of the bonds will decrease each period
C. interest expense will not be a constant dollar amount over the life of the bond
D. interest paid to bondholders will be a function of the effective-interest rate on the date
the bonds were issued
8) Capital stock to which the charter has assigned a value per share is called
A. par value stock
B. no-par value stock
C. stated value stock
D. assigned value stock

119
9) Manner, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and
20,000 shares of $1 par value common stock outstanding at December 31, 2011. There were
no dividends declared in 2010. The board of directors declares and pays a $45,000 dividend
in 2011. What is the amount of dividends received by the common stockholders in 2011?
A. $0
B. $25,000
C. $45,000
D. $20,000
10) Two individuals at a retail store work the same cash register. You evaluate this
situation as
A. a violation of establishment of responsibility
B. a violation of segregation of duties
C. supporting the establishment of responsibility
D. supporting internal independent verification
11) The Sarbanes-Oxley Act imposed which new penalty for executives?
A. Fines
B. Suspension
C. Criminal prosecution for executives
D. Return of ill-gotten gains
12) The Sarbanes-Oxley Act requires that all publicly traded companies maintain a system
of internal controls. Internal controls can be defined as a plan to
A. safeguard assets
B. monitor balance sheets
C. control liabilities
D. evaluate capital stock
13) The purchase of treasury stock
A. decreases common stock authorized
B. decreases common stock issued
C. decreases common stock outstanding
D. has no effect on common stock outstanding

120
14) Which of the following is a fundamental factor in having an effective, ethical corporate
culture?
A. Efficient oversight by the companys Board of Directors
B. Workplace ethics
C. Code of conduct
D. Ethics management programs
15) Dawson Company issued 500 shares of no-par common stock for $4,500. Which of the
following journal entries would be made if the stock has a stated value of $2 per share?
A. Cash: $4,500
Common Stock: 4,500
B. Cash: $4,500
Common Stock: 1,000
Paid-In Capital in Excess of Par 3,500
C. Cash: $4,500
Common Stock: 1,000
Paid-In Capital in Excess of Stated Value 3,500
D. Common Stock: $4,500
Cash: $4,500

16) Hahn Company uses the percentage of sales method for recording bad debts expense.
For the year, cash sales are $300,000 and credit sales are $1,200,000. Management
estimates that 1% is the sales percentage to use. What adjusting entry will Hahn Company
make to record the bad debts expense?
A. Bad Debts Expense: $15,000
Allowances for Doubtful Accounts: $15,000
B. Bad Debts Expense: $12,000
Allowances for Doubtful Accounts: $12,000
C. Bad Debts Expense: $12,000
Accounts Receivable: $12,000
D. Bad Debts Expense: $15,000
Accounts Receivable: $15,000

121
17) Blanco, Inc. has the following income statement (in millions):
BLANCO, INC.
Income Statement for the Year Ended December 31, 2011
Net Sales: $200
Cost of Goods Sold: 120
Gross Profit $80
Operating Expenses: $44
Net Income: $36
Using vertical analysis, what percentage is assigned to Net Income?
A. 100%
B. 82%
C. 18%
D. 25%

18) Marsh Company has other operating expenses of $240,000. There has been an increase
in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 lower
than in the prior period. Using the direct method of reporting cash flows from operating
activities, what were Marsh's cash payments for operating expenses?
A. $228,000
B. $232,000
C. $200,000
D. $280,000
19) Andrews, Inc. paid $45,000 to buy back 9,000 shares of its $1 par value common stock.
This stock was sold later at a selling price of $6 per share. The entry to record the sale
includes a
A. credit to Paid-In Capital from Treasury Stock for $9,000
B. credit to Retained Earnings for $9,000
C. debit to Pain-In Capital from Treasury Stock for $45,000
D. debit to Retained Earnings for $45,000
20) The book value of an asset is equal to the
A. assets market value less its historic cost
B. blue book value relied on by secondary markets
C. replacement cost of the asset
D. assets cost less accumulated depreciation

122
21) Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset
and are referred to as
A. capital expenditures
B. expense expenditures
C. improvements
D. revenue expenditures
22) The interest charged on a $200,000 note payable, at a rate of 6%, on a 2-month note
would be:
A. $12,000
B. $6,000
C. $3,000
D. $2,000
23) If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the
annual net cash cost of this borrowing if the income tax rate is 30%?
A. $3,000,000
B. $90,000
C. $300,000
D. $210,000
24) A corporation issued $600,000, 10%, 5-year bonds on January 1, 2011 for 648,666,
which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1
and July 1. If the corporation uses the effective-interest method of amortization of bond
premium, the amount of bond interest expense to be recognized on July 1, 2011, is
A. $30,000
B. $24,000
C. $32,434
D. $25,946
25) If a corporation has only one class of stock, it is referred to as
A. classless stock
B. preferred stock
C. solitary stock
D. common stock

123
26) ABC, Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and
50,000 shares of $1 par value common stock outstanding at December 31, 2011. What is the
annual dividend on the preferred stock?
A. $50 per share
B. $5,000 in total
C. $500 in total
D. $.50 per share
27) When the selling price of treasury stock is greater than its cost, the company credits the
difference to
A. Gain on Sale of Treasury Stock
B. Paid-in Capital from Treasury Stock
C. Paid-in Capital in Excess of Par Value
D. Treasury Stock
28) Intangible assets _______
A. should be reported under the heading Property, Plant, and Equipment
B. should be reported as a separate classification on the balance sheet
C. should be reported as Current Assets on the balance sheet
D. are not reported on the balance sheet because they lack physical substance
29) Where would the event purchased land for cash appear, if at all, on the indirect
statement of cash flows?
A. Operating activities section
B. Investing activities section
C. Financing activities section
D. Does not represent a cash flow
30) In performing a vertical analysis, the base for cost of goods sold is

B. Net Sales

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