The Principles of Accounting ACC/280



April 20, 2009

Student:_____________________________________

Instruction: You may write your answers with this question paper and save it with your name and submit through your individual forum before due date.

1. In order to be relevant, accounting information must: 2%

a. be neutral. Answer:________b________

b. be verifiable.

c. help predict future events.

d. be a faithful representation.

2. One of the two constraints in accounting is: 2%

a. comparability. Answer:__________a_______(not sure)

b. materiality.

c. reliability.

d. relevance.

3. The assumption that assumes a company will continue in operation long

enough to carry out its existing objectives is the: 2%

a. economic entity assumption. Answer:_______b__________

b. going concern assumption.

c. monetary unit assumption.

d. time period assumption.

4. All of the following are intangible assets except 2%

a. patents. Answer:________b_________

b. land improvements.

c. goodwill.

d. franchises.

5. A daily cash count of register receipts made by a cashier department

supervisor demonstrates an application of which of the following internal

control principles? 2%

a. Documentation procedures Answer:________c_________

b. Segregation of duties

c. Establishment of responsibility

d. Independent internal verification

Part II, Journal Entries & Accounting Equation

1. Account classification

ASSETS LIABILITIES AND CAPITAL

a. Current assets f. Current liabilities

b. Investments g. Long-term liabilities

c. Plant and equipment h. Preferred stock

d. Intangibles i. Common stock

e. Other assets j. Additional paid-in capital

k. Retained earnings

l. Items excluded from balance sheet

Using the letters above, classify the following accounts according to the preferred and ordinary balance sheet presentation.

g 1. Bond sinking fund

i 2. Common stock distributable

k 3. Appropriation for plant expansion

f 4. Bank overdraft

g 5. Bonds payable (due 2010)

j 6. Premium on common stock

l 7. Securities owned by another company which are collateral for that company's note

a 8. Trading securities

a 9. Inventory

g 10. Unamortized discount on bonds payable

d 11. Patents

a 12. Unearned revenue

2. The trial balance of Swift Company shows the following balances for

selected accounts on November 30, 2006:

Prepaid Insurance $ 5,000 Unearned Revenue $ 1,800

Equipment 40,000 Notes Payable 24,000

Accumulated Depreciation 8,800 Interest Payable 400

Instructions

Using the additional information given below, prepare the appropriate monthly adjusting entries at November 30, 2006. Show computations.

A. Revenue earned for services rendered to customers, but not yet billed, totaled $4,000 on November 30.

Dr. Cr.

|Unearned Revenue |4000 | |

| | |4000 |

|Revenue earned | | |

| | | |

B. The note payable is a 7%, 1-year note issued October 1, 2006.

Dr. Cr.

|Interest Expenses |140 | |

| Interest payable | |140 |

| | | |

C. The equipment was purchased on January 2, 2004, for $50,000. It has an estimated life of 4 years and an

estimated salvage value of $2,000. Swift uses the straight-line depreciation method.

Dr. Cr.

|Depreciation Expenses |1000 | |

| Accumulated Depreciation | |1000 |

| | | |

D. An insurance policy was acquired on June 30, 2006; the premium paid for 2 years was $12,000.

Dr. Cr.

|Insurance expenses |500 | |

| Prepaid Insurance | |500 |

| | | |

E. Swift received $1,800 of revenue in advance from a customer on November 1,2005. Two-thirds of this amount

was earned by November 30.

Dr. Cr.

|Unearned Revenue |1200 | |

| Revenue earned | |1200 |

| | | |

Part III — RATIO ANALYSIS

The condensed financial statements of Westward Corporation for 2006 are presented below.

Westward Corporation Westward Corporation

Balance Sheet Income Statement

December 31, 2006 For the Year Ended December 31, 2006

Assets Revenues $2,000,000

Current assets Expenses

Cash and temporary Cost of goods sold 1,080,000

investments $ 30,000 Selling and administrative

Accounts receivable 70,000 expenses 495,000

Inventories 120,000 Interest expense 30,000

Total current assets 220,000 Total expenses 1,605,000

Property, plant, and Income before income taxes 395,000

equipment (net) 780,000 Income tax expense 140,000

Total assets $1,000,000 Net income $ 255,000

Liabilities and Stockholders' Equity

Current liabilities $ 80,000

Long-term liabilities 300,000

Common stockholders' equity 620,000

Total liabilities and

stockholders' equity $1,000,000

Additional data as of December 31, 2005: Inventory = $100,000; Total assets = $900,000; Common stockholders' equity = $540,000.

Instructions

Compute the following listed ratios for 2006 showing formula and supporting calculations.

(a) Current ratio = Current assets / Current liabilities = 220000 / 80000 = 2.75

(b) Debt to total assets = Long term debt + current liabilities / Total assets = 380000 / 1000000 = .38

(c) Times interest earned = Earning before tax and interest/ Interest expenses = 39500 +30000 / 30000 = 14.16

(d) Inventory turnover = Cost of goods sold / Inventory = 1080000 / 120000 = 9

(e) Profit margin ratio = Net Income / Sales * 100 = 255000 / 2000000 * 100 = 12.75%

(f) Return on common stockholders' equity = Net Income / stockholders' equity = 255000 / 620000 = 41.13%

(g) Return on assets = Net Income / Total assets = 255000 /1000000 = 25.5%

Part IV. Questions and answers

1. What is GAAP? Why is it important to use GAAP on preparing financial statements?

GAAP are a common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. Financial accounting information must be assembled and reported objectively. Third-parties who must rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP). GAAP relies on various assumptions like Business Entity, Going concern, Monetary Unit and time period. Principals in GAAP are Cost principle, revenue principal, matching principal and disclosure principal. GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. GAAP also improve comparability across the companies and across the international boundaries.

2. What is an example of a potentially unethical accounting situation? Why is the situation unethical? What is meant by the statement, “You can not teach ethics”? How do ethics impact the financial results of a company?

A potentially unethical accounting situation could be where the company’s manager takes some goods from the inventory and the same are not accounted for or using the companies facilities for your business. These situations are unethical because the inventory is the property of company and not the personal property of manager and if it is used the manager should pay for the same to the company.

Yes it is true that ethics can not be taught and they have to come from within an individual. If during the office time you are working on your personal assignments or removing the goods from premises without authorization are clear violation of ethics. Nobody should tell you that you are stealing, it is self evident. There can not be any hard and fast book on what is correct or what is incorrect. It all depends on the situation and the facts of the case. It might be said that taking gifts from suppliers is inappropriate but if the gift just a token amount like a pen or a diary then it might be ok to take. In short, ethics are a judgment call and can not be imparted by bookish knowledge

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