BUA108 CH02 Group 80 points
Chapter 2
Short Answer/Problem
1. What is the balancing equation? Explain each of the components of the
equation and give examples of each component.
2. Using the following information analyze the accounts receivable and the
allowance for doubtful accounts for this company:
Sales
Accounts receivable, net
Allowance for doubtful accounts
2009
$8,800
1,450
22
2008
$5,800
1,070
26
4. a. Explain how inventory is valued if the FIFO method is used.
b. Explain how inventory is valued if the LIFO method is used.
c. Why would a manager choose the FIFO method during an inflationary
period?
d. Why would a manager choose the LIFO method during an inflationary period?
6. Using the following information calculate the ending inventory balance and the
cost of goods sold expense that would be reported at the end of the year if the
following inventory valuation methods are used:
a. FIFO
b. LIFO
c. Average cost
Beginning inventory
Purchase #1
Purchase #2
Purchase #3
Sales
Units
8
10
14
12
40
Purchase Price
$5
$6
$7
$6
BUA108 CH02 Group 80 points
8. The Presto Company purchases equipment for $10,000. Management estimates
that the equipment will have a useful life of ten years and no salvage value.
a. Calculate depreciation expense and the book value of the equipment at the end
of the first year using the straight-line method of depreciation.
b. Calculate depreciation expense and the book value at the end of the first year
using the double-declining balance method of depreciation.
12. Write a short essay explaining the difference between an operating and a
capital lease.
14. Brian's Building Company reported the following amounts on their financial
statements this year:
Total assets
Total liabilities
Net income
Beginning retained earnings
Ending retained earnings
$56,000
$32,000
$ 7,500
$ 9,800
$10,400
a. Calculate total stockholders' equity.
b. Calculate the amount of dividends that were most likely paid this year.
15. Using the information below for Jumbo Corporation, calculate the amount of
dividends Jumbo most likely paid to common stockholders in 2008, 2009, and
2010.
Retained earnings balances
Net income
January 1, 2008
$500
December 31, 2008
$760
2008
$450
December 31, 2009
$875
2009
$325
December 31, 2010
$950
2010
$240
16. Why would a firm repurchase their own shares of common stock?
BUA108 CH02 Group 80 points
17. The following list of balance sheet accounts with corresponding amounts is
available for Green Co. at the end of the year. Classify the accounts using the
following headings: current assets, long-term assets, current liabilities, long-term
liabilities, and stockholders' equity. (Hint: You can check your answer using the
balance sheet equation.)
Accounts payable
Short-term investments
Deferred taxes, current
Property & Equip., net
Accounts receivable
Long-term debt
Current portion of longterm debt
29
22
6
67
11
20
5
Cash
Common stock
Treasury stock
Prepaid expenses
Inventories
Add'l. paid-in capital
25
1
(4)
3
13
51
Retained earnings
45
18. Using the following balance sheet, prepare a common size balance sheet:
Assets
Current assets
Cash
Short-term investments
Accounts receivable
Inventory
Prepaid expenses
Deferred taxes, current
Total current assets
5
15
21
23
3
6
73
Liabilities and stockholders' equity
Current liabilities
Accounts payable
29
Current portion of
long-term debt
9
Total current liabilities
38
Long-term liabilities
Long-term debt
45
Total liabilities
83
Long-term assets
Property & equipment 67
Goodwill
13
Long-term investments 5
Other assets
2
Stockholders' equity
Common stock and PIC 52
Retained earnings
25
Total stockholders' equity
77
Total assets
Total liabilities and equity
160
160
BUA108 CH02 Group 80 points
19. Analyze the following common size balance sheet:
2009
2008
Current assets:
Cash
Accounts receivable
Inventory
Total current assets
3%
20
35
58%
5%
18
30
53%
Property, plant and equipment
Other assets
Total assets
30
12
100%
40
7
100%
Current liabilities:
Accounts payable
Short-term debt
Total current liabilities
25%
38
63%
20%
33
53%
Long-term debt
Total liabilities
22
85%
17
70%
14
1
15%
100%
20
10
30%
100%
Common stock and paid in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity