Week Two Assignment Intermediate Accounting

E 4-16 Statement of cash flows preparation

The flowing summary transactions occurred during 2011 for Bluebonnet Bakers

Cash received from:

Customers 380,000

Interest on note receivable 6,000

Sale of investments 30,000

Proceeds from note payable 100,000

Cash paid for:

Purchase of inventory 160,000

Interest on note payable 5,000

Purchase of equipment 85,000

Salaries to employees 90,000

Principal on note payable 25,000

Payment of dividends to shareholders 20,000

The balance of cash and cash equivalents at the beginning of 2011 was 17,000.


Prepare a statement of cash flows for 2011 for Bluebonnet Bakers. Use the direct method for reporting operating activities.

E 4-19 Statement of cash flows directly from transactions

The following transactions occurred during March 2011 for Wainwright Corporation. The company owns and operates a wholesale warehouse.

1. Issued 30,000 shares of capital stock in exchange for 3000,000 in cash.

2. Purchased equipment at a cost of 40,000. 10,000 cash was paid and a note payable was signed for balance owed.

3. Purchased inventory on account at a cost of 90,000. The company uses the perpetual inventory system.

4. Credit sales for the month totaled 120,000. The cost of the goods sold was 70,000.

5. Paid 5,000 in rent on the warehouse building for the month of March

6. Paid 6,000 to an insurance company for fire and liability insurance fo a one-year period beginning April 1, 2011.

7. Paid 70,000 on account for the merchandise purchased in 3.

8. Collected 55,000 from customers on account.

9. Recorded depreciation expense of 1,000 for the month on the equipment.


1. Analyze each transaction and classify each as a financing, investing and/or operating activity ( a transaction can represent more than one type of activity). In doing so, also indicate the cash effect of each, if any. If there is no cash effect, simply place a check mark in the appropriate column(s). Example:

Financing Investing Operating

1. 300,000

2. Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was 40,000.

E 4-22 Statement of cash flows; indirect method

Presented below is the 2011 income statement and comparative balance sheet information for Tiger Enterprises

Tiger Enterprises

Income Statement

For the Year Ended December 31, 2011

($ in thousands)

Sales Revenue 7,000

Operating Expense:

Cost of goods sold 3,360

Depreciation 240

Insurance 100

Administrative and other 1,800

Total operating expenses 5,000

Income before income taxes 1,500

Income tax expense 600

Net income 900

Balance Sheet Information($ in thousands) Dec 31,11 Dec 31,10


Cash 300 200

Accounts receivable 750 830

Inventory 640 600

Prepaid insurance 50 20

Plant and equipment 2,100 1,800

Less: Accumulated depreciation (840) (600)

Total assets 3,000 2,850

Liabilities and Shareholders Equity:

Accounts Payable 300 360

Payables for administrative and other expenses 300 400

Income taxes payable 200 150

Note payable (due 12/31/12) 800 600

Common stock 900 800

Retained earnings 500 540

Total liabilities and shareholders equity 3,000 2,850


Prepare Tiger s statement of cash flows, using the indirect method to present cash flows from operating activities. (Hint: You will have to calculate dividend payments.)

Judgment Case 4-9 Income Statement presentation

Each of the following situations occurred during 2011 for one of your audit clients:

1. The write-off of inventory due to obsolescence.

2. Discovery that depreciation expenses were omitted by accident from 2010 s income statement.

3. The useful lives of all machinery were changed from eight to five years.

4. The depreciation method used for all equipment was changed from the declining-balance to the straight-line method.

5. Ten million dollars face value of bonds payable were repurchased (paid off) prior to maturity resulting in a material loss of 500,000. The company considers the event unusual and infrequent.

6. Restructuring cost were incurred

7. The Stridewell Company, manufacturing of shoes, sold all of its retail outlets. It will continue to manufacture and sell its shoes to other retailers. A loss was incurred in the disposition of the retail stores. The retail stores are considered components of the entity.

8. The inventory costing method was changed from FIFO to average cost.


1. For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material):

a. As an extraordinary item.

b. As an unusual or infrequent gain or loss

c. As a prior period adjustment.

d. As a change in accounting principle

e. As a discontinued operation.

f. As a change in accounting estimate.

g. As a change in accounting estimate achieved by a change in accounting principle.

2. Indicate whether each situation would be included in the income statement continuing operations (CO) or below continuing operations (BC), or if it would appear as an adjustment to retained earnings (RE). Use the format shown below to answer requirements 1 and 2.

Situation Treatment Financial Stmt Presentation

(CO, BC, or RE)







E 5-3 Installment sales method; journal entries

Charter Corporation, which began business in 2011, appropriately uses the installment sales method of accounting for its installment sales. The following data were obtained for sales during 2011 and 2012:

2011 2012

Installment sales 360,000 350,000

Cost of installment sales 234,000 245,000

Cash collections on installment sales during:

2011 150,000 100,000

2012 – 120,000


Prepare summary journal entries for 2011 and 2012 to account for the installment sales and cash collections. The company uses the perpetual inventory system.

E 5-10 Long-term contract; percentage of completion and completed contract and cost recovery methods

On June 15, 2011, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for 220 million. The expected completion date is April 1, 2013, just in time for the 2013 baseball season. Cost incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions)

2011 2012 2013

Cost incurred during the year $ 40 $ 80 $ 50

Estimated cost to complete as of 12/31 120 60 –


1. Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage-of completion method.

2. How much revenue will Sanderson report in its 2011 and 2012 income statements related to this contract using the completed contract method?

3. Determine the amount of gross profit or loss to be recognized in each of the three years using the completed contract method.

4. Determine the amount of revenue, cost and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate.

5. Suppose the estimated costs to complete at the end of 2012 are 80 million instead of 60 million. Determine the amount of gross profit or loss to be recognized in 2012 using the percentage-of-completion method.

Case 5-23 Using ratios to test reasonableness of data

You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPA s often use ratios to test the reasonableness of accounting numbers provided by the client. Since ratios reflect the relationships among various account balances, if it is assumed that prior relationships still hold, prior years ratios can be used to estimate what current balances should approximate. However, you never actually performed this kind of analysis until now. The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown below and tells you these reflect the relationships maintained by Covington Pike in recent years.

Profit margin on sales = 5 %

Return on assets = 7.5%

Gross profit margin = 40%

Inventory turnover ratio = 6 times

Receivables turnover ratio = 25

Acid-test ratio = 9

Current ratio = 2 to 1

Return on shareholders equity = 10%

Debt to equity ratio = 1/3

Times interest earned ratio = 12 times

Jotted in the margins are the following notes:

Net income 15,000

Only one short-term not (5,000); all other current liabilities are trade accounts

Property, plant, and equipment are the only noncurrent assets

Bonds payable are the only noncurrent liabilities

The effective interest rate on short-term notes and bonds is 8%

No investment securities

Cash balance totals 15,000

Required: You are requested to approximate the current year s balances in the form of a balance sheet and income statement to the extent the information allows. Accompany those financial statements with the calculations you use to estimate each amount reported.