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# It Is Necessary To Close All Temporary Accounts

1. (TCO 3) At the...

1. (TCO 3) At the end of the period it is necessary to close all temporary accounts.

(1) Explain why this process is required (10 points) and

(2) provide an example of the closing of an expense account, Income Tax Expense in the form of a journal entry (10 points). (Points : 20)

2. (TCO 2) As required to complete Course Project 1, one must follow the cycle that includes 10 steps to complete the accounting cycle.

(1) Explain which financial reports can be generated (10 points) and

(2) provide an example of information that those financial reports would provide. (10 points) (Points : 20)

3. (TCO 5) Internal Control Procedures are required to safeguard company assets and to ensure ethical operation of the business.

(1) Explain how comparisons and compliance monitoring can satisfy the purpose of internal control (10 points) and

(2) provide an example of how this control could be implemented (10 points). (Points : 20)

4. (TCO 4) Inventory valuation methods determine the cost of goods sold and the inventory balance.

(1) Explain how the Last in First out (LIFO) method is applied (10 points) and

(2) provide an example of the impact that this method of inventory valuation will have on Cost of Goods Sold (COGS). (10 points) (Points : 20)

5. (TCO 1) To evaluate the financial operation and health of a business, ratio analysis is used.

(1) Provide the formula for Accounts Receivable Turnover and explain how it is computed (10 points) and

(2) provide an example of how this ratio can be used in decision-making in business. (10 points) (Points : 20)

1-6. (TCO 6) Depreciation is a process to allocate the cost of long-life assets to each period's income statement and adjusts the value of the asset on the balance sheet.

(1) Explain how the straight-line method is computed (10 points) and

(2) provide an example of how this method could be used on a new delivery truck purchased for \$25,000 to be used for 4 years with a salvage value of \$0 for year one only. (15 points) (Points : 25)

2-7. (TCO 6) To raise capital, companies might sell bonds. This allows them to bypass lenders such as banks and go directly to the investing public. Your company is planning to sell bonds with a face amount of \$10,000 and paying 5% annual interest.

(1) The day the bonds hit the market, the bond price is quoted at 101.5. What is the bond's selling price? (10 points) and

(2) how does the company record this sale in its accounting information system? Use journal entries to support your answer. (15 points) (Points : 25)

3-8. (TCO 1) Financial statement analysis is used by investors, creditors, and managers of business to evaluate the operation and health of the business. This information is in part the basis for decision-making.

(1) Identify ratios used to evaluate the profitability of a company (10 points) and

(2) provide an example of how the results of this analysis could be used to make business decisions. (15 points) (Points : 25)

1-9. (TCO 7) There are three different forms of business; sole-proprietor, partnership, and corporation.

(1) Explain why a corporation's government regulations may be a disadvantage (10 points) and

(2) as a stockholder explain why a stockholder would want to own preferred stock. (15 points) (Points : 25)

2-10. (TCO 4) Inventory valuation methods allow management to select a method that best fits their business model. Given the following data, what is the value of the cost of goods sold as determined by the First in First out (FIFO) method? Show all computations. (25 points)

Sales revenue 300 units at \$15 per unit Purchases 240 units at \$10 per unit Beginning inventory 120 units at \$8 per unit

3-11. (TCO 5) Most businesses extend credit to other businesses as a way of increasing sales. The risk is that some of the accounts may not pay the amount due. In these cases, we have to account for uncollectible receivables.

(1) Explain how the percent-of -sales method works (10 points) and

(2) provide an example of a journal entry that would adjust accounts for the loss. (15 points) (Points : 25)

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10/26/2012
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1. (TCO 3) At the end of the period it is necessary to close all temporary accounts. (1) Explain why this process is required (10 points) and (2) provide an example of the closing of an expense account, Income Tax Expense in the form of a journal entry (10 points). (Points : 20)

The process is required in order to zero out the income statement accounts for the next period. An example of closing the income tax expense account would be to credit income tax expense and debit income summary.

2. (TCO 2) As required to complete Course Project 1, one must follow the cycle that includes 10 steps to complete the accounting cycle. (1) Explain which financial reports can be generated (10 points) and (2) provide an example of information that those financial reports would provide. (10 points) (Points : 20)

Financial reports that can be generated are the balance sheet, income statement, cash flows statement, and statement of retained earnings. The balance sheet shows assets, liabilities and equity. The income tells you how much the company earned. Cash flow shows how the company used or generated cash. Statement of owners equity shows the sources of equity of the company.

3. (TCO 5) Internal Control Procedures are required to safeguard company assets and to ensure ethical operation of the business. (1) Explain how comparisons and compliance monitoring can satisfy the purpose of internal control (10 points) and (2) provide an example of how this control could be implemented (10 points). (Points : 20)

Comparisons and compliance monitoring can satisfy the purpose of internal control by notifying the proper channels in the company if there is an issue. You could implement this control by having an independent audit function audit compliance.

4. (TCO 4) Inventory valuation methods determine the cost of goods sold and the inventory balance. (1) Explain how the Last in First out (LIFO) method is applied (10 points) and (2) provide an example of the impact that this method of inventory valuation will have on Cost of Goods Sold (COGS). (10 points) (Points : 20)

LIFO is applied by expensing inventory in the order it was added. It has nothing to do with the physical flow of inventory. This creates what's known as "lifo layers" of inventory that is undervalued and that must be reoved. LIFO will create generally a higher COGS than other methods of inventory accounting.

5. (TCO 1) To evaluate the financial operation and health of a business, ratio analysis is used. (1) Provide the formula for Accounts Receivable Turnover and explain how it is computed (10 points) and (2) provide an example of how this ratio can be used in decision-making in business. (10 points) (Points : 20) 1-

Average Receivables/net income is the receivables turnover. It is computed by taking the beginning and ending AR value and dividing that by 2 to get the average receivables then taking that amount and dividing it by the net income. This will show you how many times receivables are collected during the year. This information can be used to assess the credit policy of the company.

6. (TCO 6) Depreciation is a process to allocate the cost of long-life assets to each period's income statement and adjusts the value of the asset on the balance sheet. (1) Explain how the straight-line method is computed (10 points) and (2) provide an example of how this method could be used on a new delivery truck purchased for \$25,000 to be used for 4 years with a salvage value of \$0 for year one only. (15 points) (Points : 25) 2-

Depreciation is where you divide the cost of the item, less the residual value, over the useful life of the asset. If you bought a truck for \$25,000 that will be used for four years with no residual value you would take \$25,000/4 = \$6,250.

7. (TCO 6) To raise capital, companies might sell bonds. This allows them to bypass lenders such as banks and go directly to the investing public. Your company is planning to sell bonds with a face amount of \$10,000 and paying 5% annual interest. (1) The day the bonds hit the market, the bond price is quoted at 101.5. What is the bond's selling price? (10 points) and (2) how does the company record this sale in its accounting information system? Use journal entries to support your answer. (15 points) (Points : 25) 3-

\$10,000 x 1.015 = \$10,150 selling price

Debit Cash
Credit Bonds Payable

8. (TCO 1) Financial statement analysis is used by investors, creditors, and managers of business to evaluate the operation and health of the business. This information is in part the basis for decision-making. (1) Identify ratios used to evaluate the profitability of a company (10 points) and (2) provide an example of how the results of this analysis could be used to make business decisions. (15 points) (Points : 25) 1-

Profitability ratios include gross margin, Return on Assets, return on equity. The results could be used to evaluate projects and make decisions over which projects to take on or not. It could also be used to benchmark the company against competitors to assess performance and see where improvements could be made.

9. (TCO 7) There are three different forms of business; sole-proprietor, partnership, and corporation. (1) Explain why a corporation's government regulations may be a disadvantage (10 points) and (2) as a stockholder explain why a stockholder would want to own preferred stock. (15 points) (Points : 25) 2-

Corporation's government regulations may be a disadvantage because of double taxation and because of the restriction of business activities. For example, a corporation cannot just transfer assets to shareholders generally without a tax impact. A stockholder would want preferred stock because dividends are paid first to preferred shareholders, and preferred shareholders are paid before common shareholders in a corporate liquidation.

10. (TCO 4) Inventory valuation methods allow management to select a method that best fits their business model. Given the following data, what is the value of the cost of goods sold as determined by the First in First out (FIFO) method? Show all computations. (25 points) Sales revenue 300 units at \$15 per unit Purchases 240 units at \$10 per unit Beginning inventory 120 units at \$8 per unit 3-

Sales Revenue = \$300 x 15 =
COGS = 240 x 10 = \$2,400
COGS = \$60 x 8 = \$480
Total COGS = \$2,880

Net income = \$1,620

11. (TCO 5) Most businesses extend credit to other businesses as a way of increasing sales. The risk is that some of the accounts may not pay the amount due. In these cases, we have to account for uncollectible receivables. (1) Explain how the percent-of -sales method works (10 points) and (2) provide an example of a journal entry that would adjust accounts for the loss.

The percent of sales method takes a determined percentage of sales and then writes that off as uncollectible. The amount is usually small - less than 10%.

A journal entry to adjust for bad debt would be debit bad debt expense and credit allowance for doubtful accounts.

meg-CPA-CFE, Master's Degree
Satisfied Customers: 16,592
Experience: Tennessee CPA, CFE, with Master of Accountancy from Ole Miss
Verified
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Satisfied Customers: 16,592
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