Corporate Financial Accounting Study Set 3

Business

Quiz 1 :

Introduction to Accounting and Business

Quiz 1 :

Introduction to Accounting and Business

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Ethics in Action Marco Brolo is one of three partners who own and operate Silkroad Partners, a global import- export business. Marco is the partner in charge of recording partnership transactions in the accounts. On his way to work one day, Marco's car broke down. At the repair shop, Marco learned that his car's engine had significant damage, and it will cost over $2,000 to repair the damage. He does not have enough money in his bank account to cover the cost of the repair, and his credit cards are at their limit. This car is the only form of transportation that Marco has to get to and from work every day. He does not use his car for any business travel. After considering his options, Marco decides to take $2,000 from the partnership for the repair, and record it as an expense of the partnership. He believes that this is appropriate since he needs his car to get to work every day. 1. Is Marco behaving ethically? Why? 2. Who is affected by Marco's decision? 3. What other alternatives might Marco consider?
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Ethics in Business
Ethical behavior requires an individual to do the things which are morally correct. In business sense ethical behavior on part of the owners and managers require them to act and take decisions which are beneficial for the business as a whole. It requires the personal interest to be ignored and decisions which are best for the business should be taken.
1.M in the present case is not behaving ethically as he was using the car for the transportation to go and from work every day and it was his personal responsibility to maintain the same in the proper condition.
As M did not have the sufficient money to pay for the damage, he can take a short term loan from the business and can repay it later on. But, asking for the damage expense to be recovered from the business is not the correct step.
2.M's decision regarding claiming the damage amount of $2000 from business, affects remaining partners of the firm. As in the business all the profits and losses are shared among the partners, the share of expense will increase for the remaining partners.
3.Macro may consider another alternative as of getting the loan from the company for damage expenses, and later on repaying the same. He can also demand for interest free loan and repayment in installments. M can also describe the entire situation to other partners, and if they agree that Macro can claim $2000 from the business, then he can surely recover the same.

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Why are most large companies like Microsoft, PepsiCo, Caterpillar , and AutoZone organized as corporations?
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Most large companies are organized as corporations for numerous reasons. The most important reason is that a large company requires a lot of capital and other resources that may not be attainable if it were structured as a proprietorship or partnership. Corporations are able to obtain the necessary capital and resources by issuing ownership of the company known as stock.

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Home Depot: Ratio of liabilities to stockholders' equity The Home Depot, Inc. , is the world's largest home improvement retailer and one of the largest retailers in the United States based on sales volume. Home Depot operates over 2,200 stores that sell a wide assortment of building, home improvement, and lawn and garden items. Home Depot recently reported the following end-of-year balance sheet data (in millions): img A. Determine the total liabilities at the end of Years 1, 2, and 3. B. Compute the ratio of liabilities to stockholders' equity for all three years. (Round to two decimal places.) C. What conclusions regarding the margin of protection to creditors can you draw from the trend in this ratio for the three years?
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Liability to Stockholder's equity Ratio
This ratio depicts the link between the liabilities of a corporation and the equity of the owners of the corporation. This ratio is used by bankers, stockholders and creditors for analyzing the performance of the corporation financially. This ratio is calculated by using the below mentioned equation.
img a.Accounting equation shows the relationship between the assets of an entity with the liabilities and owner's equity. This equation can be used to calculate the value of liabilities when the value of assets and stockholder's equity is given. The accounting equation is presented as shown below.
img Year 1
img The Net liability for the Year 1 is
img Year 2
img The Net liability for the Year 2 is
img .
Year 3
img The Net liability for the Year 3 is
img b.Year 1
In the year 1 total net liability is $22,620 and the value of stockholder's equity is $17,898. The ratio is computed using the below mentioned formula. img The ratio of liability to equity in the year 1 is
img .
Year 2
In the year 2 total net liabilities is $24,027 and the value of stockholder's equity is $17,777. The ratio is computed using the below mentioned formula. img The ratio of liability to equity in the year 2 is
img .
Year 3
In the year 3 total net liabilities is $27,996 and the value of stockholder's equity is $12,522. The ratio is computed using the below mentioned formula. img The ratio of liability to equity in the year 3 is
img .
c.It can concluded that as there is an increasing trend of ratio of liabilities to stockholders respectively from 1.26 to 1.35 to 2.23, it can be said that in the business the owners funds are decreasing and creditors amount is increasing.

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Continuing Company Analysis-Amazon and Best Buy: Ratio of liabilities to stockholders' equity Amazon.com, Inc. is one of the largest Internet retailers in the world. We will use Amazon as a continuing company exercise to reinforce the various tools and techniques for analyzing financial statements. We will begin with the ratio of liabilities to stockholders' equity. Ratios can be used to compare companies in the same industry. For Amazon, there are a number of competitors that sell media, electronic, and other merchandise. Best Buy, Inc. is one such company. The following total liabilities and stockholders' equity information (in millions) is provided for Amazon and Best Buy for the end of a recent year: img A. Compute the ratio of liabilities to stockholders' equity for each company. (Round to two decimal places.) B. What conclusions regarding the margin of protection to creditors can you draw for these two companies?
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Team Activity In teams, select a public company that interests you. Obtain the company's most recent annual report on Form 10-K. The Form 10-K is a company's annually required filing with the Securities and Exchange Commission (SEC). It includes the company's financial statements and accompanying notes. The Form 10-K can be obtained either (A) from the investor relations section of the company's Web site or (B) by using the company search feature of the SEC's EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html. Based on the information in the company's most recent annual report, answer the following questions: 1. What is the official name of the company? 2. Where are the company's principal offices located? 3. Who is the company's chief executive officer? 4. Is the company primarily a service, merchandising, or manufacturing business? 5. How does the company describe its business? 6. Which financial statements are included in the annual report?
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Financial statements The amounts of the assets and liabilities of Journey Travel Agency at December 31, 2018, the end of the year, and its revenue and expenses for the year follow. The retained earnings were $1,341,000 on January 1, 2018, the beginning of the year. During the year, dividends of $75,000 were paid. img Instructions 1. Prepare an income statement for the year ended December 31, 2018. 2. Prepare a retained earnings statement for the year ended December 31, 2018. 3. Prepare a balance sheet as of December 31, 2018. 4. What item appears on both the retained earnings statement and the balance sheet?
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What is the role of accounting in business?
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Types of businesses The following is a list of well-known companies: 1. Alcoa Inc. 2. Boeing 3. Caterpillar 4. Citigroup Inc. 5. CVS 6. Dow Chemical Company 7. eBay Inc. 8. FedEx 9. Ford Motor Company 10. Gap Inc. 11. H R Block 12. Hilton Hospitality, Inc. 13. Procter Gamble 14. SunTrust 15. Walmart Stores, Inc. A. Indicate whether each of these companies is primarily a service, merchandise, or manufacturing business. If you are unfamiliar with the company, use the Internet to locate the company's home page or use the finance Web site of Yahoo (finance.yahoo.com). B. For which of the preceding companies is the accounting equation relevant?
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Professional ethics A fertilizer manufacturing company wants to relocate to Yellowstone County. A report from a fired researcher at the company indicates the company's product is releasing toxic by-products. The company suppressed that report. A later report commissioned by the company shows there is no problem with the fertilizer. Should the company's chief executive officer reveal the content of the unfavorable report in discussions with Yellowstone County representatives? Discuss.
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Lowe's: Ratio of liabilities to stockholders' equity Lowe's Companies, Inc. , a major competitor to The Home Depot in the home improvement retail business, operates over 1,800 stores. Lowe's recently reported the following end-of-year balance sheet data (in millions): img A. Determine the total stockholders' equity at the end of Years 1, 2, and 3. B. Compute the ratio of liabilities to stockholders' equity for all three years. (Round to two decimal places.) C. What conclusions regarding the margin of protection to creditors can you draw from the trend in this ratio for the three years? D. Using the balance sheet data for Home Depot in ADM-2, how does Lowe's ratio of liabilities to stockholders' equity compare to that of Home Depot?
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Accounting equation Be-The-One is a motivational consulting business. At the end of its accounting period, December 31, 2017, Be-The-One has assets of $395,000 and liabilities of $97,000. Using the accounting equation, determine the following amounts: A. Stockholders' equity as of December 31, 2017. B. Stockholders' equity as of December 31, 2018, assuming that assets decreased by $65,000 and liabilities increased by $36,000 during 2018.
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Transactions On September 1 of the current year, Joy Tucker established a business to manage rental property. She completed the following transactions during September: A. Opened a business bank account with a deposit of $36,000 in exchange for common stock. B. Purchased office supplies on account, $1,800. C. Received cash from fees earned for managing rental property, $6,750. D. Paid rent on office and equipment for the month, $5,000. E. Paid creditors on account, $1,375. F. Billed customers for fees earned for managing rental property, $9,500. G. Paid automobile expenses for month, $840, and miscellaneous expenses, $960. H. Paid office salaries, $3,600. I. Determined that the cost of supplies on hand was $350; therefore, the cost of supplies used was $1,450. J. Paid dividends, $3,000. Instructions 1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings: img 2. Briefly explain why issuing common stock and revenues increased stockholders' equity, while dividends and expenses decreased stockholders' equity. 3. Determine the net income for September. 4. How much did September's transactions increase or decrease retained earnings?
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Name some users of accounting information.
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Cost principle On June 25, Ritts Roofing extended an offer of $250,000 for land that had been priced for sale at $300,000. On July 9, Ritts accepted the seller's counteroffer of $275,000. On October 1, the land was assessed at a value of $280,000 for property tax purposes. On December 22, Ritts was offered $305,000 for the land by a national retail chain. At what value should the land be recorded in Ritts Roofing's records?
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Peyton Smith enjoys listening to all types of music and owns countless CDs. Over the years, Peyton has gained a local reputation for knowledge of music from classical to rap and the ability to put together sets of recordings that appeal to all ages. During the last several months, Peyton served as a guest disc jockey on a local radio station. In addition, Peyton has entertained at several friends' parties as the host deejay. On June 1, 2018, Peyton established a corporation known as PS Music. Using an extensive collection of music MP3 files, Peyton will serve as a disc jockey on a fee basis for weddings, college parties, and other events. During June, Peyton entered into the following transactions: img Instructions 1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings: img 2. Prepare an income statement for PS Music for the month ended June 30, 2018. 3. Prepare a retained earnings statement for PS Music for the month ended June 30, 2018. 4. Prepare a balance sheet for PS Music as of June 30, 2018.
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Transactions Interstate Delivery Service is owned and operated by Katie Wyer. The following selected transactions were completed by Interstate Delivery during May: 1. Received cash in exchange for common stock, $18,000. 2. Paid advertising expense, $4,850. 3. Purchased supplies on account, $2,100. 4. Billed customers for delivery services on account, $14,700. 5. Received cash from customers on account, $8,200. Indicate the effect of each transaction on the following accounting equation elements: Assets, Liabilities, Common Stock, Dividends, Revenue, and Expense. To illustrate, the answer to (1) follows: (1) Asset (Cash) increases by $18,000; Common Stock increases by $18,000.
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Financial statements The amounts of the assets and liabilities of Wilderness Travel Service at April 30, 2018, the end of the year, and its revenue and expenses for the year follow. The retained earnings were $145,000 at May 1, 2017, the beginning of the year, and dividends of $40,000 were paid during the year. img Instructions 1. Prepare an income statement for the year ended April 30, 2018. 2. Prepare a retained earnings statement for the year ended April 30, 2018. 3. Prepare a balance sheet as of April 30, 2018. 4. What item appears on both the income statement and retained earnings statement?
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Financial statements Seth Feye established Reliance Financial Services on July 1, 2018. Reliance Financial Services offers financial planning advice to its clients. The effect of each transaction and the balances after each transaction for July follow: img Instructions 1. Prepare an income statement for the month ended July 31, 2018. 2. Prepare a retained earnings statement for the month ended July 31, 2018. 3. Prepare a balance sheet as of July 31, 2018. 4. ( Optional ) Prepare a statement of cash flows for the month ending July 31, 2018.
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Transactions Amy Austin established an insurance agency on March 1 of the current year and completed the following transactions during March: A. Opened a business bank account with a deposit of $50,000 in exchange for common stock. B. Purchased supplies on account, $4,000. C. Paid creditors on account, $2,300. D. Received cash from fees earned on insurance commissions, $13,800. E. Paid rent on office and equipment for the month, $5,000. F. Paid automobile expenses for month, $1,150, and miscellaneous expenses, $300. G. Paid office salaries, $2,500. H. Determined that the cost of supplies on hand was $2,700; therefore, the cost of supplies used was $1,300. I. Billed insurance companies for sales commissions earned, $12,500. J. Paid dividends, $3,900. Instructions 1. Indicate the effect of each transaction and the balances after each transaction, using the following tabular headings: img 2. Briefly explain why issuing common stock and revenues increased stockholders' equity, while dividends and expenses decreased stockholders' equity. 3. Determine the net income for March. 4. How much did March's transactions increase or decrease retained earnings?
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Business entity assumption Ozark Sports sells hunting and fishing equipment and provides guided hunting and fishing trips. Ozark is owned and operated by Eric Griffith, a well-known sports enthusiast and hunter. Eric's wife, Linda, owns and operates Lake Boutique, a women's clothing store. Eric and Linda have established a trust fund to finance their children's college education. The trust fund is maintained by Missouri State Bank in the name of the children, Mark and Steffy. A. For each of the following transactions, identify which of the entities listed should record the transaction in its records: img 1. Linda authorized the trust fund to purchase mutual fund shares. 2. Linda purchased two dozen spring dresses from a St. Louis designer for a special spring sale. 3. Eric paid a breeder's fee for an English springer spaniel to be used as a hunting guide dog. 4. Linda deposited a $2,000 personal check in the trust fund at Missouri State Bank. 5. Eric paid a local doctor for his annual physical, which was required by the workers' compensation insurance policy carried by Ozark Sports. 6. Eric received a cash advance from customers for a guided hunting trip. 7. Linda paid her dues to the YWCA. 8. Linda donated several dresses from inventory for a local charity auction for the benefit of a women's abuse shelter. 9. Eric paid for dinner and a movie to celebrate their twelfth wedding anniversary. 10. Eric paid for an advertisement in a hunters' magazine. B. What is a business transaction?
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