Exam 3: Accrual Accounting

A company's reported earnings are $1,000 and cash flows are $600. Based on economic conditions during the year, the company booked allowances of $250. As a result of contractual incentives, the company booked a further $150 in accruals. What is the total of the unbiased accruals and excessive accruals?

Lee Limited began operations on January 1, 2019. The following data relate to the company's first 2 years in business: Reported Amount Correct Amount Inventory December 31,2019 25,000 20,000 December 31,2020 35,000 30,000 Cost of goods sold For 2019 400,000 ?????? For 2020 450,000 ????? What is the correct cost of goods sold amount for 2020?

An adjusted trial balance for Wizard Industries Ltd. at December 31, 2020, follows. Prepare a balance sheet at December 31, 2020, with items classified as current or non-current.

Using the conceptual frameworks and other ideas, discuss whether a change in accounting policy should be treated prospectively or retrospectively.

If the gross profit percentage used in the gross profit inventory method were understated, which of the following is correct?

What is an "accrual"?

The following information was provided from the records of Nimble Limited, which began operations in the current year: Accrued expenses (payable), end of year \ 22,000 Sales revenue (cash and credit) 325,000 Prepaid expenses, end of year 5,000 Cash collected on customer accounts during the year 31,000 Cash paid for expenses (including prepaid expenses and cost of 187,000 goods sold) What was the company's pre-tax income for the year?

Windmere Corporation had total shareholders' equity of $765,000 at the beginning of the year and $873,000 at the end of the year. Shareholders invested an additional $75,000 in common shares and $15,000 in preferred shares during the year. Net income was $43,000. Calculate the dividends paid for the year.

Mandel Corp. repaid a bank loan for $980,000. What effect does this transaction have on these accounts?

Winder Corporation had total shareholders' equity of $665,000 at the beginning of the year and $773,000 at the end of the year. Shareholders invested an additional $75,000 during the year. Also during the year, cash dividends of $20,000 were declared and paid. Calculate the net income or loss for the year.

Explain how financial information prepared using accrual accounting provides better information to predict future cash flows than financial information prepared using the cash basis of accounting.

Explain why companies prepare financial statements on an annual basis.

Sing Songs Ltd. started operations on January 1, 2019. During its first year of operations, the company had a choice of accounting policies: Accounting Option 1 Accounting Option 2 Inventory valuation FIFO Average cost Bad debt expense 7\% of sales Allowance: 20\% of losing (gross) accounts receivable Warranty expense 5\% of sales Allowance: an analysis of sales and repairs Using the information provided below, discuss whether the cumulative cash flows will be the same or different each accounting option. 2019 2020 2021 Sales (all on account) 10,500,000 13,500,000 14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Bad debt expense 7\% of sales 735,000 945,000 987,000 Bad debt expense AFDA based on 200,000 200,000 1,387,000 analysis of AR Warranties actually paid 180,000 500,000 525,000 Warranty expense 5\% of sales 525,000 675,000 705,000 Warranty expense provision based on 385,000 525,000 700,000 analysis of sales and repairs Depreciation expense 1,100,000 1,100,000 1,100,000 All other operating expenses (paid 2,500,000 2,800,000 3,000,000 immediately)

What is an "operating" cycle?

Explain why a change in accounting policy requires the adjustment of both prior and future periods, whereas a change in estimate requires only adjustment of current and future periods.

Sing Songs Ltd. started operations on January 1, 2019. During its first year of operations, the company had a choice of accounting policies: Accounting Option 1 Accounting Option 2 Inventory valuation FIFO Average cost Bad debt expense 7\% of sales Allowance: 20\% of losing (gross) accounts receivable Warranty expense 5\% of sales Allowance: an analysis of sales and repairs Using the following information about activities for 2019-2021, derive the 2019 net income (only)under both accounting options and explain why the net income under the two methods is not the same. 2019 2020 2021 Sales (all on account) 10,500,000 13,500,000 14,100,000 Inventory purchases (paid immediately) 4,500,000 3,000,000 2,900,000 Ending inventory value: FIFO 1,800,000 2,000,000 2,150,000 Ending inventory value: Average cost 1,710,000 1,750,000 2,150,000 Collections 9,500,000 12,500,000 7,165,000 Amounts actually written off 100,000 250,000 750,000 Warranties actually paid 180,000 500,000 525,000 Estimated warranty payable ending balance based on ageing analysis of sales 385,000 525,000 700,000 Depreciation expense All other operating expenses (paid 2,500,000 2,800,000 3,000,000 mmediately)

An adjusted trial balance for Soorya Industries Limited at December 31, 2020, follows. Prepare a balance sheet at December 31, 2020, with items classified as current or non-current.

What is a financing cash cycle?

Changes in accounting estimates are based on

Which statement is not correct about expenses in the income statement?