Pendleton Automotive Corp. is a medium-sized wholesaler of automotive parts. It has 10 stockholders who have been paid a total of $1 million in cash dividends for 8 consecutive years. The board’s policy requires that, for this dividend to be declared, net cash provided by operating activities as reported in Pendleton Automotive’s current year’s statement of cash flows must exceed $1 million. President and CEO Hans Pfizer’s job is secure so long as he produces annual operating cash flows to support the usual dividend. At the end of the current year, controller Kurt Nolte presents president Hans Pfizer with some disappointing news. The net cash provided by operating activities is calculated by the indirect method to be only $970,000. The president says to Kurt, “We must get that amount above $1 million. Isn’t there some way to increase operating cash flow by another $30,000?” Kurt answers, “These figures were prepared by my assistant. I’ll go back to my office and see what I can do.” The president replies, “I know you won’t let me down, Kurt.” Upon close scrutiny of the statement of cash flows, Kurt concludes that he can get the operating cash flows above $1 million by reclassifying a $60,000, 2-year note payable listed in the financing activities section as “Proceeds from bank loan—$60,000.” He will report the note instead as “Increase in payables—$60,000” and treat it as an adjustment of net income in the operating activities section. He returns to the president, saying, “You can tell the board to declare their usual dividend. Our net cash fl ow provided by operating activities is $1,030,000.” “Good man, Kurt! I knew I could count on you,” exults the president. Instructions (a) Who are the stakeholders in this situation? (b) Was there anything unethical about the president’s actions? Was there anything unethical about the controller’s actions? (c) Are the board members or anyone else likely to discover the misclassification?
> Emron Inc. is considering these two alternatives to finance its construction of a new $2 million plant: 1. Issuance of 200,000 shares of common stock at the market price of $10 per share. 2. Issuance of $2 million, 6% bonds at face value. Complete the ta
> The following data are taken from the financial statements of Colby Company. Compute for each year (a) the accounts receivable turnover and (b) the average collection period. What conclusions about the management of accounts receivable can be drawn from
> Name the major ratios useful in assessing (a) liquidity and (b) solvency.
> (a) What is a convertible bond? (b) Discuss the advantages of a convertible bond from the standpoint of the bondholders and of the issuing corporation.
> Why is it necessary to convert accrual basis net income to cash-basis net income when preparing a statement of cash flows?
> (a) What are the principal differences between common stock and preferred stock? (b) Preferred stock may be cumulative. Discuss this feature. (c) How are dividends in arrears presented in the financial statements?
> On January 1, 2017, Opal Company issued $2,000,000 face value, 7%, 10-year bonds at $2,147,202. This price resulted in a 6% effective-interest rate on the bonds. Opal uses the effective-interest method to amortize bond premium or discount. The bonds pay
> The comparative balance sheets for Spicer Company as of December 31 are presented below. Additional information: 1. Operating expenses include depreciation expense of $42,000. 2. Land was sold for cash at book value. 3. Cash dividends of $12,000 were pa
> Identify the five components of a good internal control system.
> A The bank portion of the bank reconciliation for Bogalusa Company at October 31, 2017, is shown below. The adjusted cash balance per bank agreed with the cash balance per books at October 31. The November bank statement showed the following checks and
> Mobbe Company issued $500,000, 15-year, 7% bonds at 96. Instructions (a) Prepare the journal entry to record the sale of these bonds on January 1, 2017. (b) Suppose the remaining Discount on Bonds Payable was $12,000 on December 31, 2022. Show the balanc
> Zimmer Company completed its first year of operations on December 31, 2017. Its initial income statement showed that Zimmer had sales revenue of $198,000 and operating expenses of $83,000. Accounts receivable and accounts payable at year-end were $60,000
> The following financial information is available for Flintlock Corporation. Instructions Calculate the payout ratio and return on common stockholders’ equity for 2017 and 2016. Comment on your findings. (in millions) 2017 2016 Aver
> If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. (a) What does it mean to capitalize an item? (b) What is the definition provided for an intangible asset? (c
> If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Use the Master Glossary for determining the proper definitions. (a) Discontinued operations. (b) Comprehensi
> If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Use the Master Glossary to determine the proper definitions. (a) What are cash equivalents? (b) What are fin
> If your school has a subscription to the FASB Codification, go to http://aaahq org/ascLogin.cfm to log in and prepare responses to the following. (a) What is the stock dividend? (b) What is a stock split? (c) At what percentage point does the issuance of
> During the summer of 2002, the financial press reported that Citigroup was being investigated for allegations that it had arranged transactions for Enron so as to intentionally misrepresent the nature of the transactions and consequently achieve favorabl
> A company’s trade name is a very important asset to the company, as it creates immediate product identification. Companies invest substantial sums to ensure that their product is well-known to the consumer. Test your knowledge of who owns some famous bra
> Explain each of these important terms in issuing bonds: (a) Face value. (b) Contractual interest rate. (c) Bond certificate.
> The following control procedures are used in Bunny’s Boutique Shoppe for cash disbursements. 1. Each week, 100 company checks are left in an unmarked envelope on a shelf behind the cash register. 2. The store manager personally approves all payments befo
> The financial statements of Amazon.com, Inc. are presented in Appendix D. Financial statements of Wal-Mart Stores, Inc. are presented in Appendix E. Instructions (a) Identify two accounts on Amazon’s balance sheet that provide evidence that Amazon uses a
> (a) Distinguish among the following bases of comparison: intra company, intercompany, and industry averages. (b) Give the principal value of using each of the three bases of comparison.
> Describe the indirect method for determining net cash provided (used) by operating activities.
> Monet, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for $11,000. Assuming the shares are held in the treasury, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d)
> On January 1, 2017, Lachte Corporation issued $1,800,000 face value, 5%, 10-year bonds at $1,667,518. This price resulted in an effective-interest rate of 6% on the bonds. Lachte uses the effective-interest method to amortize bond premium or discount. Th
> Data for Granger Inc. are presented in P12-9A(given below): Further analysis reveals that accounts payable pertain to merchandise creditors. Instructions Prepare a statement of cash flows for Granger Inc. using the direct method. GRANGER INC. Compar
> Arroyo Company issued $600,000, 10-year, 6% bonds at 103. Instructions (a) Prepare the journal entry to record the sale of these bonds on January 1, 2017. (b) Suppose the remaining Premium on Bonds Payable was $10,800 on December 31, 2020. Show the balan
> Suppose selected comparative statement data for the giant bookseller Barnes & Noble are presented here. All balance sheet data are as of the end of the fiscal year (in millions). Instructions Compute the following ratios for 2017. (a) Profit margin.
> The following accounts appear in the ledger of Paisan Inc. after the books are closed at December 31, 2017. Common Stock (no-par, $1 stated value, 400,000 shares authorized, 250,000 shares issued) $ 250,000 Paid-in Capital in Excess of Stated Value
> In this chapter, you learned that companies prepare a statement of cash flows in order to keep track of their sources and uses of cash and to help them plan for their future cash needs. Planning for your own short- and long-term cash needs is every bit a
> a. Indicate whether each of the following statements is true or false. 1. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivale
> The July 1998 issue of Inc. magazine includes an article by Jeffrey L. Seglin entitled “Would You Lie to Save Your Company?” It recounts the following true situation: “A Chief Executive Officer (CEO) of a $20-million company that repairs aircraft engines
> The following transactions are for Alonzo Company. 1. On December 3, Alonzo Company sold $500,000 of merchandise to Arte Co., terms 1/10, n/30. The cost of the merchandise sold was $330,000. 2. On December 8, Arte Co. was granted an allowance of $25,000
> Hans Miken, president of Miken Corporation, believes that it is a good practice for a company to maintain a constant payout of dividends relative to its earnings. Last year, net income was $600,000, and the corporation paid $120,000 in dividends. This ye
> When the total cash inflows exceed the total cash outflows in the statement of cash flows, how and where is this excess identified?
> Contrast these types of bonds: (a) Secured and unsecured. (b) Convertible and callable.
> (a) Gina Jaimes believes that the analysis of financial statements is directed at two characteristics of a company: liquidity and profitability. Is Gina correct? Explain. (b) Are short-term creditors, long-term creditors, and stockholders interested in p
> For what reasons might a company like IBM repurchase some of its stock (treasury stock)?
> Megan Corporation purchased machinery on January 1, 2017, at a cost of $250,000. The estimated useful life of the machinery is 4 years, with an estimated salvage value at the end of that period of $30,000. The company is considering different depreciatio
> Condensed financial data of Granger Inc. follow. Additional information: 1. New plant assets costing $100,000 were purchased for cash during the year. 2. Old plant assets having an original cost of $57,500 and accumulated depreciation of $48,500 were so
> Saylor Co. sold $3,000,000, 8%, 10-year bonds on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on January 1. The company uses straight-line amortization on bond premiums and discounts. Financial statements are prepared annually.
> The financial statements of Amazon.com, Inc. are presented in Appendix D. Financial statements of Wal-Mart Stores, Inc. are presented in Appendix E. Instructions Answer the following questions for each company. (a) What is the balance in cash and cash eq
> The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Ryder Corporation at December 31, 2017. Common Stock ($2 stated value) $1,600,000 Paid-in Capital in Excess of Par Value—Preferred Stock 45,000 Paid-
> Lendell Company has these comparative balance sheet data: Additional information for 2017: 1. Net income was $25,000. 2. Sales on account were $375,000. Sales returns and allowances amounted to $25,000. 3. Cost of goods sold was $198,000. 4. Net cash pr
> Assume information similar to that in DO IT! 5-2. That is: On October 5, Iverson Company buys merchandise on account from Lasse Company. The selling price of the goods is $5,000, and the cost to Lasse Company is $3,000. On October 8, Iverson returns defe
> Clean Aire Anti-Pollution Company is suffering declining sales of its principal product, non biodegradable plastic cartons. The president, Wade Truman, instructs his controller, Kate Rollins, to lengthen asset lives to reduce depreciation expense. A proc
> Jerry Hogan, president of Norwest, Inc., is considering the issuance of bonds to finance an expansion of his business. He has asked you to do the following: (1) discuss the advantages of bonds over common stock financing, (2) indicate the types of bonds
> René Kelly, president of RL Industries, wishes to issue a press release to bolster her company’s image and maybe even its stock price, which has been gradually falling. As controller, you have been asked to provide a list of 20 financial ratios and other
> Cooper Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient
> Horizontal analysis (trend analysis) percentages for Phoenix Company’s sales revenue, cost of goods sold, and expenses are listed here. Explain whether Phoenix’s net income increased, decreased, or remained unchanged
> Sudz Corporation has these accounts at December 31: Common Stock, $10 par, 5,000 shares issued, $50,000; Paid-in Capital in Excess of Par Value $22,000; Retained Earnings $42,000; and Treasury Stock, 500 shares, $11,000. Prepare the stockholders’ equity
> Barrister Company acquires the land and building owned by Ansel Company. What types of costs may be incurred to make the asset ready for its intended use if Barrister Company wants to use only the land? If it wants to use both the land and the building?
> (a) What are long-term liabilities? Give two examples. (b) What is a bond?
> Which is the better investment—common stock with a par value of $5 per share or common stock with a par value of $20 per share?
> Contrast the advantages and disadvantages of the direct and indirect methods of preparing the statement of cash flows. Are both methods acceptable? Which method is preferred by the FASB? Which method is more popular?
> The financial statements of Amazon.com, Inc. are presented in Appendix D. Financial statements of WalMart Stores, Inc. are presented in Appendix E. Instructions (a) Based on the information contained in these financial statements, determine the following
> In recent years, Jayme Company has purchased three machines. Because of frequent employee turnover in the accounting department, a different accountant was in charge of selecting the depreciation method for each machine, and various methods have been use
> Data for Warner Company are presented in P12-7A(given below). Further analysis reveals the following. 1. Accounts payable pertain to merchandise suppliers. 2. All operating expenses except for depreciation were paid in cash. 3. All depreciation expense
> On January 1, 2017, Tacoma Corporation had these stockholders’ equity accounts. Common Stock ($10 par value, 70,000 shares issued and outstanding) $700,000 Paid-in Capital in Excess of Par Value 500,000 Retained Earnings 620,000 Dur
> Fong Corporation sold $2,000,000, 7%, 5-year bonds on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on January 1. Fong Corporation uses the straight-line method to amortize bond premium or discount. Instructions (a) Prepare all
> On August 1, 2017, Gonzaga Corporation issued $600,000, 7%, 10-year bonds at face value. Interest is payable annually on August 1. Gonzaga’s year-end is December 31. Instructions Prepare journal entries to record the following events. (a) The issuance of
> Gwynn Incorporated had the following transactions involving current assets and current liabilities during February 2017. Feb. 3 Collected accounts receivable of $15,000. 7 Purchased equipment for $23,000 cash. 11 Paid $3,000 for a 1-year insurance policy
> On March 1, 2017, Boyd Company acquired real estate, on which it planned to construct a small office building, by paying $80,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $1,700. Ad
> The information in the table is from the statement of cash flows for a company at four different points in time (M, N, O, and P). Negative values are presented in parentheses. Instructions For each point in time, state whether the company is most likely
> Wells Fargo & Company, headquartered in San Francisco, is one of the nation’s largest financial institutions. Suppose it reported the following selected accounts (in millions) as of December 31, 2017. Instructions Prepare the stock
> Assume that you are either (a) the president of a company that is very dependent on ongoing research and development, writing a memo to the FASB complaining about the cur-rent accounting standards regarding research and development, or (b) the FASB membe
> The R&D division of Pele Corp. has just developed a chemical for sterilizing the vicious Brazilian “killer bees” which are invading Mexico and the southern United States. The president of Pele is anxious to get the chemical on the market because Pele pro
> The Moto Hotel opened for business on May 1, 2017. Here is its trial balance before adjustment on May 31. Other data: 1. Insurance expires at the rate of $450 per month. 2. A count of supplies shows $1,050 of unused supplies on May 31. 3. Annual depreci
> On January 1, 2015, Picard Corporation issued $3,000,000, 5-year, 8% bonds at 97. The bonds pay interest annually on January 1. By January 1, 2017, the market rate of interest for bonds of risk similar to those of Picard Corporation had risen. As a resul
> Larry Dundee is the chief executive officer of Palmer Electronics. Dundee is an expert engineer but a novice in accounting. Dundee asks you, as an accounting student, to explain (a) the bases for comparison in analyzing Palmer’s financial statements and
> Walt Jax, the owner-president of Computer Services Company, is unfamiliar with the statement of cash flows that you, as his accountant, prepared. He asks for further explanation. Instructions Write him a brief memo explaining the form and content of the
> Vertical analysis (common-size) percentages for Palau Company’s sales revenue, cost of goods sold, and expenses are listed here. Did Palau’s net income as a percent of sales increase, decrease, or remain unchanged ove
> (a) Why is net cash provided by operating activities likely to be lower than reported net income during the growth phase? (b) Why is net cash from investing activities often positive during the late maturity phase and during the decline phase?
> Bylie Company has an old factory machine that cost $50,000. The machine has accumulated depreciation of $28,000. Bylie has decided to sell the machine. (a) What entry would Bylie make to record the sale of the machine for $25,000 cash? (b) What entry wou
> Hudson Corporation’s balance sheet at December 31, 2016, is presented below. During January 2017, the following transactions occurred. Hudson uses the perpetual inventory method. Jan. 1 Hudson accepted a 4-month, 8% note from Betheny C
> Brady Furniture Corp. is nationally recognized for making high-quality products. Management is concerned that it is not fully exploiting its brand power. Brady’s production managers are also concerned because their plants are not operat
> Identify the liabilities classified by Apple as current.
> The corporate charter of Gage Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first 2 years of operation, Gage sold 70,000 shares to shareholders and reacquired 4,000 of these shares. After these transactions, h
> Two popular methods of financial statement analysis are horizontal analysis and vertical analysis. Explain the difference between these two methods.
> Why is it necessary to use comparative balance sheets, a current income statement, and certain transaction data in preparing a statement of cash flows?
> The financial statements of Louis Vuitton are presented in Appendix F. Instructions for accessing and using the company’s complete annual report, including the notes to its financial statements, are also provided in Appendix F. Instructions Using the not
> Blythe Corporation and Jacke Corporation, two companies of roughly the same size, are both involved in the manufacture of shoe-tracing devices. Each company depreciates its plant assets using the straight-line approach. An investigation of their financia
> Presented below are the financial statements of Warner Company. Additional data: 1. Depreciation expense was $17,500. 2. Dividends declared and paid were $20,000. 3. During the year equipment was sold for $8,500 cash. This equipment cost $18,000 origina
> Spahn Company manufactures backpacks. During 2017, Spahn issued bonds at 10% interest and used the cash proceeds to purchase treasury stock. The following financial information is available for Spahn Company for the years 2017 and 2016. Instructions (a)
> The following information is taken from Lassen Corp.’s balance sheet at December 31, 2016. Interest is payable annually on January 1. The bonds are callable on any annual interest date. Lassen uses straight-line amortization for any bo
> What are the essential features of the allowance method of accounting for bad debts?
> Cassini Company Ltd. publishes a monthly sports magazine, Fishing Preview. Subscriptions to the magazine cost $28 per year. During November 2017, Cassini sells 6,300 subscriptions for cash, beginning with the December issue. Cassini prepares financial st
> Nordstrom, Inc. operates department stores in numerous states. Suppose selected financial statement data (in millions) for 2017 are presented below. For the year, net credit sales were $8,258 million, cost of goods sold was $5,328 million, and net cash
> The following are comparative balance sheets for Mitch Company. Additional information: 1. Net income for 2017 was $93,000. 2. Depreciation expense was $34,000. 3. Cash dividends of $39,000 were declared and paid. 4. Bonds payable amounting to $50,000 w
> On October 31, the stockholders’ equity section of Manolo Company’s balance sheet consists of common stock $648,000 and retained earnings $400,000. Manolo is considering the following two courses of action: (1) declaring a 5% stock dividend on the 81,000
> You are a loan officer for White Sands Bank of Taos. Paul Jason, president of P. Jason Corporation, has just left your office. He is interested in an 8-year loan to expand the company’s operations. The borrowed funds would be used to pu
> Pete Kent and Maria Robles are examining the following statement of cash flows for Sullivan Company for the year ended January 31, 2017. Pete claims that Sullivan’s statement of cash flows is an excellent portrayal of a superb first ye
> What is just-in-time inventory management? What are its potential advantages?
> The notes that accompany a company’s financial statements provide informative details that would clutter the amounts and descriptions presented in the statements. Refer to the financial statements of Apple Inc. in Appendix A. Instructions for accessing a
> Earl Kent, your uncle, is an inventor who has decided to incorporate. Uncle Earl knows that you are an accounting major at U.N.O. In a recent letter to you, he ends with the question, “I’m filling out a state incorporation application. Can you tell me th
> The September 1, 2009, edition of CFO.com contains an article by Marie Leone and Tim Reason entitled “Dirty Secrets.” You can access this article at www.cfo.com/article.cfm/14292477?f=singlepage. Instructions Read the article and answer the following qu
> Presented below is an aging schedule for Bryan Company. At December 31, 2016, the unadjusted balance in Allowance for Doubtful Accounts is a credit of $8,000. Instructions (a) Journalize and post the adjusting entry for bad debts at December 31, 2016. (
> The stockholders’ equity section of Mabry Corporation’s balance sheet consists of common stock ($8 par) $1,000,000 and retained earnings $300,000. A 10% stock dividend (12,500 shares) is declared when the market price per share is $19. Show the before-an
> What are the two principal components of stock- holders’ equity?
