Exam 3: Operating Decisions and the Accounting System

Analyze the transactions of a business organized as a corporation described below and indicate their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a minus sign ( to indicate a decrease.

The profit of a business is computed by subtracting revenues from expenses.

When a growing company finds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to finance the inventory purchases.

A company reports sales revenue of $120 million this year and $110 million last year. Their total assets in the current year are $80 million and last year's total assets were $75 million. What is the current year's asset turnover ratio?

The normal balance of the Dividend account is a debit.

The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

At the end of December, the owner of an apartment complex realized that the December rent had not been collected from one of the tenants. December 31 was the end of the accounting year; therefore, the owner made the appropriate adjusting entry at that time. When the December rent was collected in January of the following year, the entry made by the apartment owner should include which of the following?

Asset turnover measures

A company that ships product to its customers in January 20B but records them as revenue in December 20A has not violated the revenue principle because they were manufactured and ready for sale before the accounting year end.

For each of the following accounts indicate (a) the type of account (Asset, Liability, Shareholders' Equity, Revenue, Expense), (b) the debit and credit effects, and (c) the normal account balance.

Tony's Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?

Deferred in the case of revenues means collected in advance of being earned and accrued in the case of revenues means not yet collected.

You have been hired as the accountant for a newly formed real estate company called Porter Real Estate Limited. The following business transactions occurred during the month of September, 2013: 1. Shareholders invest $50,000 in cash for 10,000 common shares to start a real estate office. 2. Signed a lease for office space. 3. Paid $200 cash for office supplies 4. Purchased office equipment for $6,000, paying $2,500 in cash and signing a 30-day, note payable for the remainder. 5. Purchased $100 of office supplies on account. 6. Real estate commissions billed to clients amount to $5,400. 7. Paid $700 in cash for the current month's rent. 8. Paid $50 cash on account for office supplies purchased in transaction 5. 9. Received a bill for $500 for advertising for the current month. 10. Paid $2,500 cash for office salaries. 11. Paid $1,000 cash dividends to shareholders. 12. Received a cheque for $3,000 from a client in payment on account for commissions billed in transaction 6. Record the transactions for September, 2013.

Cost of sales is usually the largest expense for manufacturing or merchandising companies.

A gain on sale of land causes an increase in income as a result of normal operating activities.

The normal balance of all accounts is a debit.

During 20B, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 20C. The 20B statement of earnings of the company should report which of the following amounts for service revenues?

For a merchandising company, the largest operating cash outflow would result from which of the following?

Immediately after the adjusting entries were journalized and posted for the 20B year, the accounts of Way Corporation showed the following balances: Give the amount that should be shown in each of the following accounts before any transactions are recorded for the year 20C:

Unadjusted financial statements do not reflect revenues earned or expenses incurred in the accounting period if the receipt or payment of cash occurs in a different period.