AFM101 Lecture Notes - Lecture 1: Retained Earnings, Cash Flow, Financial Statement

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azureturtle555

26 Oct 2016

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Thomas Manning

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AFM101 Full Course Notes

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Document Summary

Statement of financial position (balance sheet) is to report the financial position (assets, liabilities and shareholders equity) of an accounting equity at a particular time. Structure: name of the entity, title of the statement, specific date of statement and lastly unit of measure (ex. Accounting entity organization that collects and reports financial information. (also called business or the corporation) Assets: resources controlled by the entity as a result of past business events, and from future economic benefits. (can be sold for cash) Liabilities: e(cid:374)tit(cid:455)"s o(cid:271)ligatio(cid:374)s that (cid:396)esult f(cid:396)o(cid:373) past e(cid:448)e(cid:374)ts. The(cid:455) a(cid:396)(cid:396)i(cid:448)e f(cid:396)o(cid:373) the pu(cid:396)(cid:272)hase of goods and services on credit. Sha(cid:396)eholde(cid:396)"s e(cid:395)uity (net worth) indicates the amount of financing provided by owners of the business as well as earnings over time. It arises from 3 sources: contributed capital (investment of cash or other assets by owner), retained earnings (earnings reinvested into the business) and other components.

Related Questions

QUESTION 2 (25 Marks: 45 minutes)

2.1 Answer the following questions:

a) Define current liabilities (2 marks)

b) Define current assets (2 marks)

c) In which sequence should notes to the financial statements be presented? (2 marks)

d) Discuss the identification of financial statements as noted in IAS 1. (2 marks)

e) Discuss consistency of presentation as a general feature of financial statements. (2 marks)

f) Discuss materiality and aggregation as a general feature of financial statements.(2 marks)

2.2 You are provided with the following statement of financial position of Brabham Limited:

Statement of financial position ON 31 December 20.12

ASSETS Land and buildings 165

Vehicle 85

Furnitureâs 45

Share Capital (2 000 000 authorised NPV shares) 125

Cash on hand (cash float) 5

Bank overdraft (2)

Inventory 26

Trade and other debtors 15

Shareholders for dividends 11

Total assets 475

Equity and liabilities

Retained earnings 305

Trade and other creditors 110

Long term loans 79

Accumulated depreciation 21

Income tax expense 30

Total equity and liabilities 515

Required 1. Critically evaluate the presentation of the above statement according to the requirement of IAS 1. (13 marks)

QUESTION 5 Which of the following statements BEST definesfinancial statements? A. Financial statements are plans andforecasts for future time periods. B. Financial statements are theverbal statements made to business news organizations by chieffinancial officers. C. Financial statements are documents thatreport on a business in monetary terms, providing information tohelp people make informed business decisions. D. Financialstatements are the information systems that record and measurebusiness transactions.

QUESTION 6 Which of the following statements is true of a trialbalance? A. A trial balance has the same format as a balance sheet.B. A trial balance presents data in debit and credit format. C. Atrial balance shows total amounts of assets, liabilities, but notequity. D. A trial balance is prepared after the balance sheet.

QUESTION 7 There are relatively few types of revenue. Which ofthe following in NOT a type of revenue? A. Sales B. Service C.Interest D. Unearned Revenue

QUESTION 8 The financial statements should be prepared in whatorder? A. Income statement, statement of owner's equity, balancesheet, statement of cash flows B. Balance sheet, statement ofowner's equity, income statement, statement of cash flows C.Statement of owner's equity, balance sheet, income statement,statement of cash flows D. Balance sheet, income statement,statement of owner's equity, statement of cash flows

QUESTION 9 Which of the following journal entries would berecorded if a business makes a cash payment to a supplier of $600"on account" (the business had purchased supplies on account in theprevious month)? A. Accounts payable 600 Cash 600 B. Accountspayable 600 Supplies 600 C. Cash 600 Supplies 600 D. Cash 600Accounts payable 600

QUESTION 10 Which of the following statements about revenue isCORRECT? A. Revenues increase owner's equity, so a revenueaccount's normal balance is a credit balance. B. Revenues decreaseowner's equity, so a revenue account's normal balance is a debitbalance. C. Revenues increase owner's equity, so a revenueaccount's normal balance is a debit balance. D. Revenues decreaseowner's equity, so a revenue account's normal balance is a creditbalance.

QUESTION 11 From a legal perspective, a proprietorship is: A.not a distinct entity from its proprietor. B. authorized understate charter. C. an entity separate from its proprietor. D.subject to regulation by the SEC.

QUESTION 12 Sharon Samson starts a plumbing service namedReliable Waterworks. Selected transactions are described asfollows: A) Sharon deposits $7,000 into a new checking account forthe business, recording the capital contribution. B) Reliable pays$4,000 cash for equipment to be used for plumbing repairs. C)Reliable borrows $15,000 from a local bank and deposits the moneyin the checking account. D) Reliable pays $600 rent for the firstmonth. E) Reliable pays $400 cash for plumbing supplies to be usedon various jobs in the future. F) Reliable completes a plumbingrepair project for a local lawyer and receives $1,300 cash. G)Sharon takes a cash withdrawal of $2,500. After all of thetransactions, what is the amount of total assets? A. $25,700 B.$20,200 C. $24,200 D. $5,200

QUESTION 13 The Accounts Payable account is a(n) ________account and carries a ________ normal balance. A. liability; debitB. asset; debit C. liability; credit D. asset; credit

QUESTION 14 The following are the ending month's balances forToys Galore. Accounts payable $6,790 Revenue $8,680 Cash $4,500Expenses $1,050 Furniture $8,370 Accounts receivable $ 7,710Capital $930 Notes payable $5,230 What is the total amount ofcredits for the trial balance? A. $30,310 B. $16,400 C. $21,630 D.$20,580

QUESTION 15 The Sarbanes-Oxley Act ("SOX") made it a criminaloffense to: A. steal shareholders' money. B. default on loans fromcreditors. C. declare bankruptcy. D. falsify financialinformation.

QUESTION 16 Which of the following is the order of steps tojournalize an entry? A. Record the transaction, identify eachaccount affected, determine increase or decrease in each account.B. Identify each account affected, determine increase or decreasein each account, record the transaction. C. Identify each accountaffected, record the transaction, determine increase or decrease ineach account. D. Determine increase or decrease in each account,identify each account affected, record the transaction

QUESTION 17 Mitchell Florists had the following total assets,liabilities, and equity as of December 31. Assets $450,000Liabilities 135,000 Equity 315,000 What is Mitchell's debt ratio asof December 31? A. 30% B. 70% C. 100% D. 43%

QUESTION 18 Which of the following financial statements reportsrevenues? A. Statement of cash flows B. Income statement C.Statement of owner's equity D. Balance sheet

QUESTION 19 Following is a list of account balances (except forowner's capital) of Wilson Mowing Service as of December 31 of thefirst year of operation: Accounts receivable $2,500 Accountspayable $3,500 Salary expense $4,500 Repairs expense $800 Truck$8,500 Equipment $6,300 Notes payable $8,200 Cash $6,800 Suppliesexpense $1,600 Service revenue $31,900 Gasoline expense $3,800Salary payable $200 The proprietor, J.D. Wilson, contributed $3,000at the beginning of the year; during the year, the proprietor took$12,000 in drawings. At the end of the year, what is net income? A.$11,900 B. $21,200 C. $24,100 D. $12,200

QUESTION 20 Which of the following is an asset account? A.Salaries Expense B. Accounts Payable C. Service Revenue D. PrepaidExpense

QUESTION 21 A journal entry for a $75 payment for Rent expensewas posted as a debit to Salary expense and a credit to Cash. Thiserror will cause which of the following conditions on the trialbalance? A. The sum of the credits will equal the sum of thedebits. B. The sum of the debits will exceed the sum of the creditsby $75. C. The sum of the credits will exceed the sum of the debitsby $150. D. The sum of the debits will exceed the sum of thecredits by $150.

QUESTION 22 The business receives cash from a customer that isowed to the company "on account," based on services rendered to thecustomer previously. How does the collection of the cash affect theaccounting equation? A. Assets increase; owner's equity increases.B. Assets increase; liabilities increase. C. Assets decrease;owner's equity decreases. D. One asset increases; one assetdecreases

QUESTION 23 A business completes service to a client and sendsout a sales invoice. The amount will be collected from the customerat a later time. Which of the following would be TRUE at the timewhen the invoice is sent out? A. Total assets will decrease. B. Netincome will increase. C. Owner's equity will decrease. D. Totalliabilities will increase.

QUESTION 24 Which of the following accounts increases with adebit? A. Cash B. Interest Payable C. Accounts Payable D. Smith,Capital

QUESTION 25 The Accounts Receivable account of Nuptials Inc. isshown below. Accounts Receivable Dr Cr 26,000 3,500 5,000 Calculatethe ending balance of the account. A. $33,500 debit B. $31,000,debit C. $3,500, credit D. $27,500, debit

QUESTION 26 The following transactions for the month of Marchhave been journalized and posted to the proper accounts. Mar. 1Martinez invested $9,000 cash in his new design services business.Mar. 2 Paid the first month's rent of $800. Mar. 3 Purchasedequipment by paying $3,000 cash and executing a note payable for$5,000. Mar. 4 Purchased office supplies for $750 cash. Mar. 5Billed a client for $10,000 of design services completed. Mar. 6Received $8,000 on account for the services previously recorded.What is the balance in Cash? A. $13,250 B. $12,450 C. $15,450 D.$14,000

QUESTION 27 Which of the following sequences states the order inwhich a trial balance lists accounts? A. Equity â Assets âLiabilities B. Liabilities â Assets â Equity C. Assets â Equity âLiabilities D. Assets â Liabilities â Equity

QUESTION 28 Which of the following statements is FALSE? A. Atrial balance shows total amounts for assets, liabilities, andequity. B. A trial balance is created before the balance sheet isprepared. C. A trial balance presents data in debit and creditformat, but a balance sheet does not. D. A trial balance showstotal debits and total credits.

QUESTION 29 A promise received from a business's customers topay for goods and services that they received from the business iscalled a(n): A. revenue. B. account receivable. C. account payable.D. expense.

QUESTION 30 You can evaluate the economic resources, debt, andoverall financial position of a company in which of the followingfinancial statements? A. Income statement B. Balance sheet C.Statement of owner's equity D. Statement of cash flows

QUESTION 31 A book holding all of the accounts is called the: A.income statement. B. journal. C. ledger. D. balance sheet.

QUESTION 32 Which of the following groups of accounts BOTHnormally have a debit balance? A. Assets and Liabilities B.Liabilities and Owner's equity C. Revenues and Expenses D. Assetsand Expenses

QUESTION 33 A business buys $500 of supplies on account. Whichaccount is debited? A. Supplies B. Cash C. Service revenue D.Accounts payable

Basic Financial Ratios

The accounting staff of CCB Enterprises has completed the financial statements for the 2016 calendar year. The statement of income for the current year and the comparative statements of financial position for 2016 and 2015 follow.

CCB Enterprises
Statement of Income
For the Year Ended December 31, 2016
(thousands omitted)
Revenue:
Net sales	$794,620
Other	58,420
Total revenue	$853,040
Expenses:
Cost of goods sold	$530,320
Research and development	24,480
Selling and administrative	155,320
Interest	19,600
Total expenses	$729,720
Income before income taxes	$123,320
Income taxes	49,328
Net income	$73,992

CCB Enterprises
Comparative Statements of Financial Position
December 31, 2016 and 2015
(thousands omitted)
	2016	2015
Assets
Current assets:
Cash and short-term investments	$25,910	$20,860
Receivables, less allowance for doubtful accounts
($1,130 in 2016 and $1,410 in 2015)	48,190	50,300
Inventories, at lower of FIFO cost or market	64,860	62,100
Prepaid items and other current assets	5,220	3,280
Total current assets	$144,180	$136,540
Other assets:
Investments, at cost	$105,880	$105,880
Deposits	10,160	7,980
Total other assets	$116,040	$113,860
Property, plant, and equipment:
Land	$12,100	$12,100
Buildings and equipment, less accumulated depreciation
($126,330 in 2016 and $122,240 in 2015)	268,840	247,870
Total property, plant, and equipment	$280,940	$259,970
Total assets	$541,160	$510,370
Liabilities and Ownersâ Equity
Current liabilities:
Short-term loans	$22,180	$23,900
Accounts payable	72,240	71,070
Salaries, wages, and other	26,300	26,780
Total current liabilities	$120,720	$121,750
Long-term debt	$160,620	$171,030
Total liabilities	$281,340	$292,780
Ownersâ equity:
Common stock, at par	$43,840	$42,010
Paid-in capital in excess of par	64,020	61,260
Total paid-in capital	$107,860	$103,270
Retained earnings	151,960	114,320
Total ownersâ equity	$259,820	$217,590
Total liabilities and ownersâ equity	$541,160	$510,370

Required:

1. Calculate the following financial ratios for 2016 for CCB Enterprises:

Round items h, j, and k to the nearest whole number. Round all other answers to two decimal places. Assume a 360-day year.

a. Times interest earned	to 1
b. Return on total assets	%
c. Return on common stockholders' equity	%
d. Debt-to-equity ratio (at December 31, 2016)	to 1
e. Current ratio (at December 31, 2016)	to 1
f. Quick (acid-test) ratio (at December 31, 2016)	to 1
g. Accounts receivable turnover ratio (Assume that all sales are on credit.)	times
h. Number of days' sales in receivables	days
i. Inventory turnover ratio (Assume that all purchases are on credit.)	times
j. Number of days' sales in inventory	days
k. Number of days in cash operating cycle	days

2. Which of the following statements pertaining to ratio analysis of CCB Enterprises is true?
All of these are true.

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AFM101 Lecture Notes - Lecture 1: Retained Earnings, Cash Flow, Financial Statement

AFM101 Full Course Notes

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