ACC 205 week 3-5

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Week 3 DQs

LIFO vs. FIFO

The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?

Depreciation

A variety of depreciation methods are used to allocate the cost of an asset to all of the accounting periods benefited by the use of the asset. Your client has just purchased a piece of equipment for $100,000. Explain the concept of depreciation. Which of the following depreciation methods would you recommend: straight-line depreciation, double declining balance method, or an alternative method?

Assignment

1. Specific identification method. Boston Galleries uses the specific identification method for inventory valuation. Inventory information for several oil paintings follows.

Painting	Cost
1/2 Beginning inventory	Woods	$21,000
4/19 Purchase	Sunset	21,800
6/7 Purchase	Earth	31,200
12/16 Purchase	Moon	4,000

Woods and Moon were sold during the year for a total of $35,000. Determine the firm’s

a. cost of goods sold.

b. gross profit.

c. ending inventory.

2. Inventory valuation methods: basic computations. The January beginning inventory of the White Company consisted of 300 units costing $40 each. During the first quarter, the company purchased two batches of goods: 700 Units at $44 on February 21 and 800 units at $50 on March 28. Sales during the first quarter were 1,400 units at $75 per unit. The White Company uses a periodic inventory system. Using the White Company data, fill in the following chart to compare the results obtained under the FIFO, LIFO, and weighted-average inventory methods.

FIFO	LIFO	Weighted Average

Goods available for sale	$	$	$
Ending inventory, March 31
Cost of goods sold

3. Perpetual inventory system: journal entries. At the beginning of 20X3, Beehler Company implemented a computerized perpetual inventory system. The first transactions that occurred during 20X3 follow:

· 1/2/20X3 Purchases on account: 500 units @ $6 = $3,000

· 1/15/20X3 Sales on account: 300 units @ $8.50 = $2,550

· 1/20/20X3 Purchases on Account: 200 units @ 5 = $1,000

· 1/25/20X3 Sales on Account: 300 units @ $8.50 = $2,550

The company president examined the computer-generated journal entries for these transactions and was confused by the absence of a Purchases account.

a. Duplicate the journal entries that would have appeared on the computer printout under FIFO & LIFO

b. Calculate the balance in the firm’s Inventory account under each method.

c. Briefly explain the absence of the Purchases account to the company president.

4. Inventory valuation methods: computations and concepts.

Wild Riders Surfboard Company began business on January 1 of the current year. Purchases of surfboards were as follows:

Date	Quantity	Unit Cost	Total Cost
1/3	100	$125	$12,500
4/3	200	$135	$27,000
6/3	100	$145	$14,500
7/3	100	$155	$15,500
Total	500		$69,500

Wild Riders sold 400 boards at $250 per board on the dates listed below. The company uses a perpetual inventory system.

Date	Quantity Sold	Unit Price	Total Sales
3/17	50	$250	$12,500
5/17	75	$250	$18,750
8/10	275	$250	$68,750
Total	400		$100,000

Instructions

a. Calculate cost of goods sold, ending inventory, and gross profit under each of the following inventory valuation methods:

· First-in, first-out

· Last-in, first-out

· Weighted average

b. Which of the three methods would be chosen if management’s goal is to

(1) produce an up-to-date inventory valuation on the balance sheet?

(2) show the lowest net income for tax purposes?

5. Depreciation methods. Mike Davis Enterprises purchased a delivery van for $40,000 in January 20X7. The van was estimated to have a service life of 5 years and a residual value of $6,000. The company is planning to drive the van 20,000 miles annually. Compute depreciation expense for 20X8 by using each of the following methods:

a. Units-of-output, assuming 17,000 miles were driven during 20X8

b. Straight-line

c. Double-declining-balance

6. Depreciation computations. Alpha Alpha Alpha, a college fraternity, purchased a new heavy-duty washing machine on January 1, 20X3. The machine, which cost $2,000, had an estimated residual value of $100 and an estimated service life of 4 years (1,800 washing cycles). Calculate the following:

a. The machine’s book value on December 31, 20X5, assuming use of the straight-line depreciation method

b. Depreciation expense for 20X4, assuming use of the units-of-output depreciation method. Actual washing cycles in 20X4 totaled 500.

c. Accumulated depreciation on December 31, 20X5, assuming use of the double-declining-balance depreciation method.

7. Depreciation computations: change in estimate. Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3 - 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.

Instructions

a. Compute depreciation for 20X3 - 20X7 by using the following methods: straight line, units of output, and double-declining-balance.

b. On January 1, 20X5, management shortened the remaining service life of the machine to 15 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.

c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.

Week 4 Dqs

Current Liability

What is a current liability? From the perspective of a user of financial statements, why do you believe current liabilities are separated from long-term liabilities? Based on your current experience as well as any additional research you may have done provide two examples of situations where businesses collect monies from customers and employees and reports these amounts as a current liability.

Client Recommendations

A client comes to you thinking about starting a consulting business. Your client is specifically interested in what type of entity should be created for this new business. Based on your readings or any additional research you may have done, discuss the advantages and disadvantages of the following: sole proprietorship, partnership, and corporation. Based on these advantages and disadvantages provide a clear recommendation to your client.

Assignment

1. Payroll accounting. Assume that the following tax rates and payroll information pertain to Brookhaven Publishing:

· Social Security taxes: 4% on the first $55,000 earned per employee

· Medicare taxes: 1.5% on the first $130,000 earned per employee

· Federal income taxes withheld from wages: $7,500

· State income taxes: 4% of gross earnings

· Insurance withholdings: 1% of gross earnings

· State unemployment taxes: 5.4% on the first $7,000 earned per employee

· Federal unemployment taxes: 0.8% on the first $7,000 earned per employee

The company incurred a salary expense of $50,000 during February. All employees had earned less than $5,000 by month-end and no wages have been paid during the month.

a. Prepare the necessary entry to record Brookhaven’s February payroll. The entry will include deductions for the following:

· Social Security taxes

· Medicare taxes

· Federal income taxes withheld

· State income taxes

· Insurance withholdings

b. Prepare the journal entry to record Brookhaven’s payroll tax expense. The entry will include the following:

· Matching Social Security taxes

· Matching Medicare taxes

· State unemployment taxes

· Federal unemployment taxes

2. Current liabilities: entries and disclosure. A review of selected financial activities of Visconti’s during 20XX disclosed the following:


1-Dec: Borrowed $10,000 from the First City Bank by signing a 3-month, 15% note payable.
Interest and principal are due at maturity.
10-Dec: Established a warranty liability for the XY-80, a new product. Sales are expected to
total 1,000 units during the month. Past experience with similar products indicates
that 3% of the units will require repair, with warranty costs averaging $27 per unit (parts only).
22-Dec: Purchased $16,000 of merchandise on account from Oregon Company, terms 2/10, n/30.
26-Dec: Borrowed $5,000 from First City Bank; signed a 15% note payable due in 60 days. (Assume 360 day year for interest)
31-Dec: Repaired six XY-80s during the month at a total cost of $162
31-Dec: Accrued three days of salaries at a total cost of $1,400.

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on December 31 to record accrued interest for each of the notes payable.

3. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31:

2-Aug: Borrowed $55,000 from the Bank of Kingsville by signing a 90-day, 12% note.

20-Aug: Issued a $50,000 note to Harris Motors for the purchase of a $50,000 delivery truck. The note is due in 180 days and carries a 12% interest r ate.

10-Sep: Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued

a 30-day, 12% note in settlement of the balance owed.

11-Sep: Issued a $60,000 note to Datatex Equipment in settlement of an overdue account

payable of the same amount. The note is due in 30 days and carries a 14% interest rate.

10-Oct: The note to Pans Enterprises was paid in full.

11-Oct: The note to Datatex Equipment was paid in full.

30-Oct: Paid note to Bank of Kingsville.

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on December 31 to record accrued interest. (Daily interest is calculated utilizing the 360 day method).

c. Prepare the Current Liability section of Red Bank’s balance sheet as of December 31. Assume that the Accounts Payable account totals $203,600 on this date.

Week 5 Dqs

Ratios

Ratios provide the users of financial statements with a great deal of information about the entity. Do ratios tell the whole story? How could liquidity ratios be used by investors to determine whether or not to invest in a company?

Profit Margin

	Year Ending December 2012	Year Ending December 2011	Year Ending December 2010
Revenues	40,000	35,000	33,000
Operating Expenses
Salaries	15,000	10,000	9,000
Maintenance and Repairs	6,000	9,000	10,000
Rental Expense	2,500	2,500	2,500
Depreciation	2,000	2,000	2,000
Fuel	4,000	3,500	2,500
Total Operating Expenses	29,500	27,000	26,000
Operating Income	10,500	8,000	7,000
Sales and Administrative Expenses	6,000	4,000	3,000
Interest Expense	2,500	2,000	1,000
Net Income	2,000	2,000	3,000

Above is a comparative income statement for Cecil, Inc. for the years 2010, 2011, and 2012. Calculate the net-profit margin for each of these years. Comment on the profit margin trend.

Assignment

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

	Edison	Stagg	Thornton
Cash	$6,000	$5,000	$4,000
Short-term investments	3,000	2,500	2,000
Accounts receivable	2,000	2,500	3,000
Inventory	1,000	2,500	4,000
Prepaid expenses	800	800	800
Accounts payable	200	200	200
Notes payable: short-term	3,100	3,100	3,100
Accrued payables	300	300	300
Long-term liabilities	3,800	3,800	3,800

a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

	20X5	20X4
Net credit sales	$832,000	$760,000
Cost of goods sold	530,000	400,000
Cash, Dec. 31	125,000	110,000
Average Accounts receivable	205,000	156,000
Average Inventory	70,000	50,000
Accounts payable, Dec. 31	115,000	108,000
Instructions a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The company reported the following information for 20X7:


Net sales	$1,750,000
Interest expense	120,000
Income tax expense	80,000
Preferred dividends	25,000
Net income	130,000
Average assets	1,200,000
Average common stockholders' equity	500,000

a. Compute the profit margin on sales ratio, the return on equity and the return on assets, rounding calculations to two decimal places.

b. Does the firm have positive or negative financial leverage? Briefly explain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2	20X1
Current Assets	$86,000	$80,000
Property, Plant, and Equipment (net)	99,000	90,000
Intangibles	25,000	50,000
Current Liabilities	40,800	48,000
Long-Term Liabilities	153,000	160,000
Stockholders’ Equity	16,200	12,000
Net Sales	500,000	500,000
Cost of Goods Sold	322,500	350,000
Operating Expenses	93,500	85,000

a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your work.

5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the 20X1 and 20X2 financial statements follow.

20X2	20X1
Current Assets	$86,000	$80,000
Property, Plant, and Equipment (net)	99,000	80,000
Intangibles	25,000	50,000
Current Liabilities	40,800	48,000
Long-Term Liabilities	153,000	150,000
Stockholders’ Equity	16,200	12,000
Net Sales	500,000	500,000
Cost of Goods Sold	322,500	350,000
Operating Expenses	93,500	85,000

a. Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

Final Paper Focus of the Final Paper Write a five-to seven-page financial statement analysis of a public company, formatted according to APA style as outlined in the Ashford Writing Center. In this analysis you will discuss the financial health of this company with the ultimate goal of making a recommendation to other investors. Your paper should consist of the following sections: introduction, company overview, horizontal analysis, ratio analysis, final recommendation, and conclusions. Your paper needs to include a minimum of two scholarly resources in addition to the textbook as references. Here is a breakdown of the sections within the body of the assignment: Company Overview Provide a brief overview of your company (one to two paragraphs at most). What industry is it in? What are its main products or services? Who are its competitors? Horizontal Analysis of Income Statement and Balance Sheet Prepare a three-year horizontal analysis of the income statement and balance sheet of your selected company. Discuss the importance and meaning of horizontal analysis. Discuss both the positive and negative trends presented in your company. Ratio Analysis Calculate the current ratio, quick ratio, cash to current liabilities ratio, over a two-year period. Discuss and interpret the ratios that you calculated. Discuss potential liquidity issues based on your calculations of the current and quick ratios. Are there any factors that could be erroneously influencing the results of the ratios? Discuss liquidity issues of competitive companies within the same industry. Recommendation Based on your analysis would you recommend an individual invest in this company? What strengths do you see? What risks do you see? It is perfectly acceptable to state that you would recommend avoiding this company as long as you provide support for your position. Writing the Final Paper 1. Must be five to seven double-spaced pages in length, and formatted according to APA style as outlined in the Ashford Writing Center. 2. Must include a title page with the following:

a. Title of paper b. Student’s name c. Course name and number d. Instructor’s name e. Date submitted

3. Must begin with an introductory paragraph that has a succinct thesis statement. 4. Must address the topic of the paper with critical thought. 5. Must end with a conclusion that reaffirms your thesis. 6. Must document all sources in APA style, as outlined in the Ashford Writing Center. 7. Must include a separate reference page, formatted according to APA style as outlined in the Ashford Writing Center.