ACC-201 (Financial Accounting)

Working Papers Chapter 05 AND Chapter 06

Note: Items below, highlighted in green do not have the answers
provided on the answer sheet. The items (in green below)
carry more weight in the grading / scoring of the assignment.

Chapter 5
BRIEF EXERCISE 5-7
Piccola Company
Income Statement (Partial)
For the Month Ended October 31, 2014
Sales Revenues
Sales Revenue ($280,000 + 100,000)
Less: Sales returns & Allowances
18,000
Sales discounts
5,000
Net Sales

380,000
23,000
357,000

BRIEF EXERCISE 5-9

(a)

Net Sales =

506,000 - 13,000 = 493,000

(b)

Gross Profit =

493,000 330,000 = 163,000

(c)

Income from Operations =

(d)

Gross profit rate =

163,000 110,000 = 53,000

163,000 / 493,000 = 33.1%

DO IT! 5-4
Accounts appear on EITHER the Income Statement OR the Balance Sheet NOT
both! On tests you will be given the choice of both. It is ALWAYS the wrong
answer.
Account
Accounts Payable
Accounts Receivable
Accum. Deprec. Bldgs

Financial Statement
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial

Classification
Current Liabilities
Current Assets
Property, plant, and

Cash
Casualty Loss from Vandalism
Common Stock
Cost of Goods Sold
Depreciation Expense
Dividends

Delivery Equipment
Freight-Out
Insurance Expense
Interest Payable
Inventory
Land
Notes Payable (due in 5 years)
Property Taxes Payable
Salaries and Wages Expense
Salaries and Wages Payable
Sales Returns and Allowances
Sales Revenue
Unearned Rent Revenue
Utilities Expense

Position
Statement of Financial
Position
Income Statement
Statement of Financial
Position
Income Statement
Income Statement
Retained Earnings
Statement
ORif no RE Stmnt is
done then the Balance
Sheet, Stockholders
Equity section.
Statement of Financial
Position
Income Statement
Income Statement
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Statement of Financial
Position
Income Statement
Statement of Financial
Position
Income Statement
Statement of Financial
Position
Statement of Financial
Position
Income Statement

equipment
Current Assets
Other income expense
Equity
Cost of Goods Sold
Operating Expense
Dedecution Section

Property, plant, and

Equipment
Operating Expense
Operating Expense
Current Liabilitiy
Current asset
Property, plant, and
Equipment
Non- Current Liabiltiy
Current Liability
Operating Expense
Current Liabilities
Sales Revenue
Sales Revenue
Current Liabilities
Operating Expense

EXERCISE 5-4
Date
June 10
(a)
11

Accounts Name

Inventory
Accts Payable
Inventory
Cash

Debit $

Credit
$

7,600
7,600
400
400

12
19

June 10
(b)

12

19

Accts Payable
Cash

300
300

Accts Pay
Inventory
Cash

7,300

Accts Receivable
Sales Revenue
Cost Of Goods Sold
Inventory

7,600

146
7,154
7,600
4,300
4,300

Sale Returns & Allowances

Accts Receivable
Inventory
Cost of Goods Sold

300
300
70
70

Cash
Sales Discounts
Accounts Receivable

7,154
146
7,300

EXERCISE 5-10
(a) MICHAEL COMPANY
Income Statement
For the Year Ended December 31, 2014
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations

Other Revenue & Gains

Interest Revenue
Other Expenses & L:osses
Interest Expense
Loss on Disposal of Plant Assets
Net Income

The first 5 lines are totals for

category totals or results of
calculations - they go to the
far right columns. Below Int
Exp and Loss are details so
they go into column 1, their
subtotal into column 2 and the
result of Other REV Other
EXP goes to far right column

2,200,000
1,256,000
944,000
725,000
219,000

33,000
70,000
17,000

87,000

Details

54,000
165,000
Subtotals

Totals
Details are typically amounts to be added or subtracted. Subtotals are usually the result of
the calculation in details. Totals are in the far right column. The higher up in management typically
deals with the big picture (totals) while supervisors (first line managers) most often focus on the
details or whatever your boss tells you to focus on.

Note that the GP (GROSS PROFIT) needs to be large enough to pay for all other expenses.
At Wal-Mart the GP of the stores must also cover the store rental, utilities etc along with
salaries of the store manager, store security etc. In addition, GP also covers corporate
salaries and expenses (like the computer systems, company jet, vice-presidents etc).
The above labeled OTHER Revenues or Expenses are not directly related to store
operations. The LOSS (or a GAIN) is separate because it results from a one-time
thing like selling a machine or a building. It is not resulting from the normal business
operations which is basically Income from Operations. If you are managing, or
buying, the company you assume Income from Operations will occur year-after-year BUT
items labeled Gains or Losses will not necessarily occur again.

(b) MICHAEL COMPANY

Income Statement
For the Year Ended December 31, 2014
Revenues:
Net Sales
Interest Revenue
Total Revenues
Expenses:
Cost of Goods Sold
Operating Expenses
Interest Expense
Loss on Disposal of Plant Assets
Total Expenses
Net Income

2,200,000
33,000
2,233,000
1,256,000
725,000
70,000
17,000
2,068,000
165,000

A multi-step income statement (a above) has far more detail than a single-step
income statement (b above).

EXERCISE 5-12
a) $860,000 $533,200 = $326,800
b) $326,800/$860,000 = 38%. The gross profit rate is generally considered to
be more useful than the gross profit amount. The rate expresses a more
meaningful (qualitative) relationship between net sales and gross profit.
The gross profit rate indicates what portion of each sales dollar goes to
gross profit. The trend of the gross profit rate is closely watched by
financial statement users, and is compared with rates of competitors
and with industry averages. Such comparisons provide information about
the effectiveness of a companys purchasing function and the soundness
of its pricing policies.

c) Income from operations is $105,800 ($326,800 $221,000), and net income

is $98,800 ($105,800 $7,000).
d) The amount shown for net income is the same in a multiple step income statement
and a single-step income statement. Both income statements report the same
revenues and expenses, but in different order. Net income in Endeaver's single-step
income statement is also $98,800.
e) Inventory is reported as a current asset immediately below prepaid
expenses.

Chapter 6
BRIEF EXERCISE 6-5
a)
b)
c)
d)

FIFO would result in the higher net income

FIFO would result in the higher ending inventory.
LIFO would result in the lowest tax expense it results the lowest net income
Average-cost would result in the more stable income over a number
of years because it averages out any big changes in the cost of inventory

DO IT! 6-2
Cost of Goods Available for Sale
Ending Inventory
FIFO
LIFO
Average
Cost

(3,000*5) +(8,000*7) = 71,000

3,000 +8,000 9,400 = 1,600 units

71,000 (1,600*7) = 59,800

71,000 (1,600*5) = 63,000
71,000/11,000 = 6.45 per unit
9,400*6.455 = 60,677

EXERCISE 6-6
FIFO
Beginning inventory
Purchases:
June 12

1,000
1,800

June 23
Cost of Goods Available for Sale
Less: Ending
Cost of Goods Sold
LIFO
Beginning inventory
Purchases:
June 12
June 23
Cost of Goods Available for Sale
Less: Ending
Cost of Goods Sold

3,500

5,300
6,300
840
5,460

1,000
3,500
1,800

5,300
6,300
600
5,700

(b) FIFI will produce higher ending inventory due to rising costs. Under FIFO the
earliest costs assigned to cost of goods sold and the latest costs remain in ending
inventory.
(c)
LIFO method will produce higher cost of goods. Under LIFO most recent cost
are charged to cost of goods sold and the earliest cost are included in ending
inventory.

EXERCISE 6-7
FIFO
Beginning Inventory
Purchases
Cost of Goods Available for Sale
Less: Ending Inventor
Cost of Goods Sold

10,000
26,000
36,000
10,400
26,250

LIFO
Beginning Inventory
Purchases
Cost of Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold

10,000
26,000
36,000
8,000
28,000

AVERAGE
Beginning Inventory
Purchases

10,000
26,000

Cost of Goods Available for Sale

Less: Ending Inventory
Cost of Goods Sold

36,000
9,600
26,4

b.

FIFO would result in highest income since the earlier lower costs are
matched with revenues

c.

FIFO would result in inventories approximating current cost in balance

sheet, since the more recent units are assumed to be on hand

d.

FIFO results in Givens paying the least taxes the first year since income
will be lower.

EXERCISE 6-9
Cost
Cameras
Minolta
Canon
Total
Light meters
Vivitar
Kodak
Total
Total inventory

Market

Lower of
Cost
or Market

1,360
900
2,260

1,248
912
2,160

1,248
900

1,500
1,610
3,110
$5,370

1,380
1,890
3,270
$5,430

1,380
1,610
$5,138

EXERCISE 6-14
(a)
Inventory Turnover
Days in Inventory

Silver Company
(47,000 + 55,000) /2 = 3.76
365/3.76 = 97 Days

Gold Company
(71,000 + 69,000) / 2
365/4.17 = 88 Days

b) Gold company is moving inventory faster. Its inventory turnover is higher and its days in
inventory are lower