BTB110
Financial Accounting Review – Fall, 2007
1.Presented below are selected financial statement items for Frenette Corporation for June 30,
2004:
Cash, July 1, 2003
Inventory
Cash paid to suppliers
Building
Common shares
Cash paid for income tax
$ 60,000
65,000
105,000
400,000
25,000
20,000
Cash dividends paid
Cash paid to buy equipment
Equipment
Revenues
Cash received from customers
$ 10,000
25,000
40,000
200,000
185,000
Instructions: Determine which of these items should be included in a cash flow statement, and
then prepare the statement for Frenette Corporation for the year ended June 30, 2004.
Include all items EXCEPT Inventory, Building, Common Shares, Equipment and Revenues. You
are looking for items that indicate either cash inflow or cash outflow.
Financing:
Cash dividend paid
Total Financing Outflow:
-$10,000
-$10,000
Investing
Cash paid to buy equipment
Total Investing Outflow
Operating
Cash paid to suppliers
Cash paid for Income Tax
Cash received from customers
Total Cash Inflow from
Operations
Add Cash, July 1, 2003
Total Cash Flow
-$25,000
-$25,000
-$105,000
-$20,000
+$185,000
+$50,000
+$60,000
+$75,000
2. . Here are the incomplete financial statements for Baxter, Inc.
Baxter Incorporated
Balance Sheet
November 30, 2004
Assets
Cash
Inventory
Building
$5,000
10,000
50,000
Total Assets
65,000
Liabilities& Shareholder Equity
Liabilities
Accounts Payable
$7,000
Shareholder Equity
Common Shares
(1)
Retained Earnings
(2)
Total Liabilities +
65,000
Retained Earnings
Baxter Incorporated
Statement of Earnings
Year Ended November 30, 2004
Revenues
Operating Expenses
Earnings before Income Tax
Income Tax Expense
Net Earnings
Baxter Incorporated
Statement of Retained Earnings
Year Ended November 30, 2004
Beginning retained earnings
Net Earnings
Dividends
Ending Retained Earnings
$80,000
(3)
$30,000
10,000
(4)
$10,000
(5)
($5000)
$25,000
Required:
a) Determine the missing amounts for items 1-5
b) Assume that the statements shown above give a net earnings figure on the cash basis.
Using the information given below, recalculate net earnings to reflect accounting on the
accrual basis.
1. A review of records at the end of November indicates that Baxter has earned
$4750 in November, but will be receiving it in January, 2005.
2. A review of records indicates that Baxter owes suppliers $2500 for goods
purchased in November. Baxter plans to pay for those goods in December.
3. A review of company records indicates that $225 of office supplies (listed in the
inventory account ) has been used up during November,
4. Company records show that $750 included in the cash account represents
unearned revenue. The customer paid in advance, nad has not yet received the
service he paid for.
Solution: You can’t always fill in the blanks from top to bottom. You have to begin where you
have the most information. In this problem, it is simplest to begin with the Statement of Retained
Earnings:
Ret. Earn(begin) + net earnings – dividends paid = Ret Earn (end)
$10,000
+
x
$5,000 = $25,000
x = $25,000+ $5,000 - $10,000
x = $20,000 (5) and (4)
Come to think of it, you could also have solved for (4) and indicated that as the answer for (5)
In any event, from the income statement, we have the following:
Revenue – Oper. Expenses = Income before taxes
$80,000 x
= $30,000
Oper. Exp. = $80,000 - $30,000 = $50,000 (3)
Earning before tax – tax = Net Income
$30,000
- $10,000 = $20,000 (4)
Assets = Liabilities + Shareholder Equity
$65,000 = $7,000 + x
x = $65,000 - $7,000
x = $58,000
Shareholder Equity = Capital Stock +Retained Earnings
$58,000 =
x
+ $25,000 (2) – given as the balance in the Retained
Earnings Statement
Cap Stock = $58,000 - $25,000 = $33,000(1)
Part B
Net Income = $20,000 Cash Basis
To Convert to the Accrual Basis (i.e., revenue declared is the amounts earned in a period
whether received or not, and expenses declared in the same period are the costs incurred
in that period to run the business)
1. Revenue earned but not yet received…..Increased Revenue increases Net Income
Add $4750 to Net Income
2. An undeclared expense ….increasing expenses decrease net income
Deduct $2500 from Net Income
3. An undeclared expense…increasing expenses decreases net income
Deduct $225 from Net Income
4.Revenue received but not yet earned…a decrease to revenue for the period decreases
net income
Deduct $750 from Net Income
$20,000 + $4750 - $2500 - $225 - $750 =$21,275
3.On January 2, 2001, Powell Company purchased an electroplating machine to help
manufacture a part for one of its key products. The machine cost $182,250, and was estimated
to have a useful life of 4 years after which it could be sold for $18,500.
Compute each year’s depreciation expense under the following depreciation methods: (5 marks)
a. straight-line
b. double declining balance (CCA)
Year
2001
2002
2003
2004
Straight-line
$40,937.50
$40,937.50
$40,937.50
$40,937.50
Cost = $182,250
Salvage Value = $18,500
Useful Life = 4 years
Straight Line Depreciation: Cost – Salvage
Est. Life
$182,250 - $18,500
4
$163,750/4 = $40,937.50/yr.
Double Declining Balance
$91,125
$45,562.50
$22,781.25
$4,281.25
Double Declining Balance:
As asset that will last 4 years is depreciated at a rate of 25% per year.
Therefore, the double declining rate is 2* 25% = 50% per year on the cost excluding the salvage.
Year 1 depn expense = 50% * 182,250 = $91,125
Accum depn = $91,125
Net Book Value = $182,250 - $91,125 = $91,125
Year 2 depn = 50% * $91,125 = $45,562.50
Accum depn =$91,125 +$45,562.50 = $136,687.50
Net Book Value = $182,250 - $136,687.50 = $45,562.50
Year 3 Depn = 50% * 45,562.50 = $22,781.25
Accum Depn = $136,687.50 + $22,781.25 = $159,468.75
Net Book Value = $182,250 – $159,468.75 = $22,781.25
Salvage Value = $18,500
Therefore Year 4 depreciation = $22,781.25 - $18,500 = $4,281.25
4.
The Agricultural Genetics Company Cash account reported a balance of $7,393 on May
31, 2005. On the same date, the company’s bank statement from the Western Bank reported a
balance of $9,134.
A comparison of the details in the bank statement with the details in the Cash account
revealed the following facts:
1. The bank statement included a debit memo for $50 for bank service charges.
2. Cash sales of $638 on May 12 were deposited in the bank. The company correctly
recorded the sale in their books, however the bank statement shows a deposit for $386
on this date.
3. The May 31 deposit of $1,141 was not included in the deposits on the May bank
statement.
4. Outstanding cheques at May 31 totalled $1679.
5. On May 18, the company issued cheque #1181 for $585 to L. Kingston on account. The
bank paid out $585 to L. Kingston, but the bookkeeper incorrectly recorded the cheque
value as $855 in the company books.
6. A review of the bank statement revealed that the Agricultural Genetics Company received
$2,031 in electronic payments from customers on account during May. The bank had
also credited the company’s account with $24 interest revenue on May 31. Agricultural
had no prior notice of these amounts.
7. On May 31, the bank statement showed an NSF charge of $820 for a cheque issued by
Pete Dell, a customer of Agricultural Genetics Company on account. This amount
includes a $20 service charge by the bank.
Bank Reconciliation Statement for Agricultural Genetics (May 31, 2005)
Balance as per Bank Statement
$ 9,134
Balance as per Company Cash
Account
$7,393
Add: Deposit in Transit (3)
$ 1,141
Add: Amounts Collected by
Bank:
Subtotal
$10,275
Electronic Transfer (6)
$2,031
Less: Outstanding cheques(4)
($ 1,679) Interest Revenue (6)
$ 24
Subtotal
$ 8,596
Subtotal
$9,448
Add: To Balance due to Bank
$ 252
Less: NSF cheque (includes
($ 820)
Error in deposit (638-386) (2)
$20 service charge) (7)
Adjusted Bank Balance
.
$ 8,848
Less: Bank Charges (1)
Subtotal
Add: Bookkeeper error (5)
(855 – 585 = 270)
Adjusted Cash Account
Balance
($ 50)
$8,578
$ 270
$8,848