ESLSCA UNIVERSITY

Financial Accounting
Handout
Master of Business Students

Fall Semester 2019

Instructor
Dr. Maha Ramadan
Associate Professor of Accounting
e-mail mshramadan@yahoo.com
cell phone 01001047652
Task One:
Match each account to its classification on the balance sheet:
Stockholders’
Account Asset Liability Equity
a. Notes Payable

b. Cash

c. Common Stock

d. Inventories

e. Accounts Receivable

f. Accounts Payable

g. Property, Plant &

Equipment

h. Notes Payable

i. Retained Earnings

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Task Two
Presented below is selected information related to Broadway Company at December 31,
2018. Broadway reports financial information monthly:

Accounts Payable $3,000 Salaries Expense $16,500

Cash 7,000 Notes Payable 25,000
Advertising Expense 6,000 Rent Expense 10,500
Service Revenue 54,000 Accounts Receivable 13,500
Equipment 29,000 Drawings 7,500

Required:

1. Determine the total assets of Broadway Company at December 31, 2018

2. Determine the net income of Broadway Company reported for December 31, 2018
3. Determine the owner's equity of Broadway Company at December 31, 2018

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Task Three
The following information relates to Olga Co. for the year 2018

Olga, Capital , Jan 1, 2018 $48,000 Advertising Expense $1,800

Olga, Drawings during 2010 7,000 Rent Expense 12,000
Service Revenue 67,000 Utilities Expense 3,100
Salaries Expense 30,000
Required:
Prepare an income statement and an owner's equity statement for the year ending
December 31, 2018

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Task Four
Analyze each of the following transactions of World Wide Webster by performing
each of the following.

(a) Owners invested $10,000 cash to start the business.

1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(b) Borrow $15,000, using a note payable to the bank.

1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(c) Purchased a truck for $15,000 and equipment for $5,000 cash.
1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(d) Purchase $300 worth of supplies on credit. “On credit” (or “on account”) means that you
receive the supplies now, and pay for them later.

1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(e) Sign contract for first website design for $10,000.

1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(f) Company pays off $300 Accounts Payable.

1. Decide if a transaction took place.

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2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(g) Company pays for and receives $600 worth of supplies.

1. Decide if a transaction took place.
2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(h) Earned $9500 for services rendered, $3000 cash is received from customers and the
balance is billed to customers.
1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(i)Paid employees salaries $2,200.

1. Decide if a transaction took place.
2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(j) Received $4000 in cash from customers who were previously been billed.
1. Decide if a transaction took place.
2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

(i)Withdrew $1000 cash for personal use

1. Decide if a transaction took place.

2. Identify the accounts affected.

3. Classify each account affected.

4. Identify direction and amount.

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Task Five:
Complete the following schedule for Red Eye Company.

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Task Six

An inexperienced book keeper prepared the following trial balance. Prepare a correct
trial balance, assuming all account balances are normal

Debit Credit
Cash $14,800
Prepaid Insurance $3,500
Accounts Payable 3,000
Unearned Revenue 2,200
Capital 13,000
Drawings 4,500
Service Revenue 25,600
Salaries Expense 18,600
Rent Expense 2,400
Total $35,600 $52,000

Answer

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Task Seven
The following is a list of financial statement items and amounts from a recent income
statement and balance sheet of Basic Corporation. All accounts have normal balances.
The company’s year ended on December 31, 2014.

For each financial statement item listed, indicate whether it appears on the income statement
or balance sheet.

Income Balance
Financial Statement Item Amount Statement Sheet
Accounts Payable $ 41,000
Accounts Receivable 262,000
Accrued Expenses Payable 37,000
Additional Paid-in Capital 70,000
Cash and Cash Equivalents 125,000
Common Stock ($10 par value) 100,000
Cost of Sales 350,000
General and Administrative Expenses 75,000
Income Tax Expense 32,000
Intangible Assets, Net 85,000
Interest and Other Income, Net 10,000
Inventory 167,000
Notes Payable (due In 2012) 433,000
Other Current Assets 5,000
Other Current Liabilities 89,000
Other Noncurrent Assets 15,000
Prepaid Expenses 31,000
Property, Plant and Equipment, Net 184,000
Research and Development Costs 250,000
Retained Earnings 161,000
Sales and Service Revenues 943,000
Selling Expenses 125,000
Short-Term Investments 57,000

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Task Eight: Prepare in good form a multistep income statement for
the year ended December 31, 2014.

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Task Nine
Using the information provided in the trial balance, prepare in good form a
classified balance sheet as of December 31, 2014.

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Task Ten
Bruno Company has decided to expand its operations. The bookkeeper recently
completed the balance sheet presented on the current page in order to obtain
additional funds for expansion.
Assets
Current assets
Cash $260,000
Accounts receivable (net) 340,000
Inventories at lower of average cost or market 401,000
Trading securities—at cost (fair value $120,000) 140,000
Property, plant, and equipment
Building (net) 570,000
Office equipment (net) 160,000
Land held for speculation 175,000
Intangible assets
Goodwill 80,000
Cash surrender value of life insurance 90,000
Prepaid expenses 12 ,000
Liabilities and stockholders’ Equity
Current liabilities
Accounts payable 135,000
Pension obligation 82,000
Rent payable 49,000
Long-term liabilities
Bonds payable 500000
Notes payable (due next year) 125,000
Stockholders’ equity
Preferred Stock and Common stock (each $10.00 par,
10,000 shares preferred and 19,000 shares common) 290,000
Additional paid-in capital 180,000
Treasury Stocks 90000
Retained earnings 80000

Additional Information
1. The cash balance is net of a bank overdraft of $20000 from a different bank where
the cash account is deposited
2. The accumulated depreciation balance for the buildings is $160,000 and for the
office equipment, $105,000. 3. The allowance for doubtful accounts has a balance of
$17,000.
Required
1. Indicate your criticisms of the above statement of financial position (mention 10
mistakes) and briefly explain the proper treatment of the item being criticized.
2. Calculate the correct amount of current assets and current liabilities
3. Compute the company’s working capital

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Task Ten: FINANCIAL RATIO FORMULAS
The bookkeeper for Angeles Ochoa Company has prepared the
following balance sheet as of July 31, 2016
Angeles Ochoa Co.
Balance Sheet
As of July 21, 2016
Cash $69,000 Notes and $44,000
Accounts
Receivable
Accounts 40,500 Long term 75,000
Receivable Liabilities
Inventories 60,000 Stockholders equity 155,500
Equipment 84,000
Patents 21,000
Total $274,500 Total $274,500

The following additional information is provided

1. Cash includes $1200 in a petty cash fund and $9000 in a bond sinking fund.
2. The net accounts receivable balance comprises the following three items:
accounts receivable debit balance $50,000, accounts receivable credit balance
$6,000 and AFDA $3,500
3. 3Merchandise inventory costing $5,300 was shipped out on consignment on
July 31, 2016. The ending inventory balance does not include the consigned
goods. Receivables in the amount of $5,300 were recognized on the consigned
goods.
4. Equipment had a cost of $98,000 and an accumulated depreciation balance of
$14,000.
5. Taxes payable of $6,000 were accrued on July 31. Angeles co. had set up a
cash fund to meet this obligation. This cash fund was not included in the cash
balance, but was offset against the taxes payable amount.

Required:
Prepare a corrected classified balance sheet as of July 31,2016 from the
available information adjusting the account balances using the additional
information.

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Task Eleven
The following is a comparative balance sheet for Anne Boleyn Corporation:

December 31
Assets 2018 2017
Cash $69,000 22,000
Accounts Receivable 82,000 66,000
Inventories 180,000 189,000
Land 75,000 110,000
Equipment 260,000 200,000
Accumulated Depreciation-equipment (69,000) (42,000)
Total 597,000 545,000
Liabilities and Stockholders' Equity
Accounts Payable $34,000 47,000
Bonds Payable 150,000 200,000
Common Stock 214,000 164,000
Retained Earnings 199,000 134,000
Total 597,000 545,000

Additional Information
1. Net income for 1996 was $115,000
2. Cash Dividends of $50,000 were declared and paid
3. Bonds Payable amounting to $50,000 were retired through the issuance of
common stock

Required:
Prepare a statement of cash flows for 2018 for Anne Boeyn Corpration

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TASK ELEVEN
The market value of Farmington Corp.'s common shares was quoted at $54 per share
at December 31, 2011, and 2010. Planetarium 's balance sheet at December 31, 2011,
and 2010, and statement of income and retained earnings for the years then ended are
presented below:
Farmington Corp.
Balance Sheet
December 31
2011 2010
Assets:
Current assets:
Cash $ 9,000,000 $ 5,200,000
Short-term investments 17,200,000 11,400,000
Accounts receivable (net) 109,000,000 115,000,000
Inventories, lower of cost or market 122,000,000 140,000,000
Prepaid expenses 4,000,000 2,800,000
Total current assets $261,200,000 $274,400,000

Property, plant, and equipment (net) 350,000,000 315,000,000

Investments, at equity 2,800,000 3,500,000
Long-term receivables 15,000,000 20,000,000
Copyrights and patents (net) 6,000,000 7,000,000
Other assets 8,000,000 9,100,000
Total assets $643,000,000 $629,000,000

Liabilities and Stockholders' Equity:

Current liabilities:
Notes payable $ 7,000,000 $ 17,000,000
Accounts payable 35,000,000 52,000,000
Accrued expenses 27,500,000 30,000,000
Income taxes payable 1,500,000 2,000,000
Current portion of long-term debt 10,000,000 9,500,000
Total current liabilities 81,000,000 110,500,000

Long-term debt 200,000,000 190,000,000

Deferred income taxes 69,000,000 65,000,000
Other liabilities 15,000,000 9,500,000
Total liabilities 365,000,000 375,000,000

Stockholders' equity:
Common stock, par value $1; authorized 20,000,000
shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000
10% cumulative preferred shares, par value $100;
issued and outstanding 60,000 shares 6,000,000 6,000,000
Additional paid-in capital 119,000,000 119,000,000
Retained earnings 141,000,000 117,000,000
Total stockholders' equity 278,000,000 254,000,000
Total liabilities and stockholders' equity $643,000,000 $629,000,000

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 Farmington Corp.
Statement of Income and Retained Earnings
Year ended December 31
2011 2010

Net sales $540,000,000 $500,000,000

Cost and expenses:
Cost of goods sold 370,900,000 400,000,000
Selling, general, and administrative expenses 70,000,000 65,000,000
Other, net 9,100,000 6,000,000
Total costs and expenses 450,000,000 471,000,000

Income before interest expenses and income taxes 90,000,000 29,000,000

Interest expenses 7,000,000 600,000
Income taxes 20,000,000 11,000,000
Net income 63,000,000 17,400,000

Required:
Based on the above information, compute the following ratios for the years 2010 and
2011): (Show supporting computations in good form and comment on each ratio)

(a) Current ratio.

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(b) Acid-test (quick) ratio.
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(c) Receivables turnover.
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(d) Inventory turnover.
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(e) Days Sales in Inventory.
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(f) Days Sales in Receivables

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(g) Total operating cycle.
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(h) Pretax Profit Margin.
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(i) Long term debts to assets ratio.

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(j) Interest Coverage Ratio.
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(k) ROE
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(l) Earnings per share on common stock.
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TASK TWELVE
The following is a set of ratios calculated from the financial statements of Kraco
Retailers, Inc.

2015 2016 Current industry

Average
Current Ratio 1.60 1.62 1.64
Acid Test Ratio 0.64 0.64 0.68
Times Interest Earned 8.54 8.48 8.54
Net Profit Margin 13.3% 12.0% 13.0%
Asset Turnover 1.86 1.84 1.86
Inventory Turnover 3.16 3.22 3.18
Receivables Turnover 5.4 5 4.8
No. of Days in inventory 115.5 113.354 114.78
Days Sales in Receivables 67.59 73 76.04

Required
Analyze the previous set of ratios concerning the improvement and deterioration of
each ratio from one year to the other and compared to the industry average

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Short cases
Choose the Correct Answer
1. Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these
2. The statement of financial position is useful for analyzing all of the following
except
a. Liquidity. c. Solvency.
b. Profitability. d. Financial flexibility.
3. The balance sheet contributes to financial reporting by providing a basis for all of
the following except
a. Computing rates of return.
b. Evaluating the capital structure of the enterprise.
c. Determining the increase in cash due to operations.
d. Assessing the liquidity and financial flexibility of the enterprise.
4. The current assets section of the balance sheet should include
a. Machinery. c. Patents.
b. Goodwill. d. Inventory.
5. Which of the following should not be considered as a current asset in the balance
sheet?
a. Installment notes receivable due over 10 months in accordance with normal
trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the
business.
c. Equity or debt securities purchased for trading.
d. The cash surrender value of a life insurance policy carried by a corporation on
its president.
6. Which of the following is not a long-term investment?
a. Cash surrender value of life insurance c. Franchise
b. Land held for speculation d. A sinking fund
7. Which item below is not a current liability?
a. Unearned revenue c. Accounts receivable
b. The currently maturing portion of long-term debt d. Trade accounts payable
8. An example of an item which is not an element of working capital is
a. Accrued interest on notes receivable. c. Goodwill.
b. Goods in process. d. Trading investments.
9. Company had assets of $100,000 and liabilities of $60,000. What is the balance of
stockholders’ equity?
a. $0 c. $40,000
b. $60,000. d. $100,000

10. Treasury stock should be reported as a(n)

a. Current asset. C. Investment.
b. Other asset. D. Reduction of stockholders' equity.

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11. Which of the following is not an acceptable major asset classification?
a. Current assets c. Long-term investments
b. Property, plant, and equipment d. Deferred charges
12. Which of the following is a contra account?
a. Premium on bonds payable c. Unearned revenue
b. Patents d. Accumulated depreciation
13. In preparing a statement of cash flows, sale of treasury stock would be classified
as a(n)
a. Operating activity. c. Financing activity.
b. Extraordinary activity. d. Investing activity.
14. In preparing a statement of cash flows, which of the following transactions would
be considered an investing activity?
a. Sale of equipment c. Sale of merchandise on credit
b. Payment of a cash dividend d. Issuance of bonds payable at a discount
15. For Grimmett Company, the following information is available:
Goodwill $200,000 Trademarks 65,000 Long-term
receivables 75,000
In Grimmett’s balance sheet, intangible assets should be reported at
a. $65,000. c. $75,000.
b. $265,000. d. $275,000.
16. Houghton Company has the following items: common stock, $720,000; treasury
stock, $85,000; Taxes payable $100,000 and retained earnings, $313,000. What total
amount should Houghton Company report as stockholders’ equity?
a. $848,000. c. $948,000.
b. $1,048,000. d. $1,118,000.
17. Which of the following is not a major characteristic of a plant asset?
a. Possess physical substance c. Acquired for resale
b. Acquired for use d. Long-term in nature
18. Markowitz Company reported the following data:
2014 2015
Sales $2,000,000 $2,600,000
Net Income 300,000 400,000
Assets at year end 1,800,000 2,500,000
What is Markowitz’s asset turnover for 2015?
a. 1.04 c. 1.07
b. 1.21 d. 1.44

19. Stine Corp.'s trial balance reflected the following account balances at December
31, 2010:
Accounts receivable (net) $24,000
Trading securities 6,000
Accumulated depreciation on equipment and furniture 15,000
Cash 11,000
Inventory 30,000
Equipment 25,000
Patent 4,000

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 Prepaid expenses 2,000
Land held for future business site 18,000
In Stine's December 31, 2010 balance sheet, the current assets total is
a. $90,000. c. $82,000.
b. $77,000. d. $73,000.
20. Kinder Company purchased equipment for $210,000 on 1/1/2015. The
estimated residual value is $10,000, and the estimated useful life is 10 years.
The straight line method is used for depreciation.
What is the annual depreciation expense on this asset?
a. $19,000 c. $20,000
b. $22,000 d. $190,000
21. Refer to the previous problem, the book value of the equipment at end of the
third year is:
a. $180,000 c. $200,000
b. $ 170,000 d. $150,000

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 22-Agnes Company reported the following data:
Quick Assets 55,000
Current Assets 150,000
Total liabilities 300,000
Average net receivables 12,600
Beginning inventory 38,000
Long term liabilities 200,000
Net credit sales 126,000
Cost of goods sold 84,000
Ending inventory 46,000

What was the current ratio for Agnes Co.?

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Quick Ratio $55,000
Current Assets 150,000
Total liabilities 300,000
Average net receivables 12,600
Beginning inventory 38,000
Long term liabilities 200,000
Net credit sales 126,000
Cost of Goods Sold 84,000
Ending Inventory 46,000
What was inventory turnover ratio?

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Sales Revenue (75% on credit) $300,000

Expenses (26% on credit) 60,000
Accounts Receivable net at December 31, 2014 8,000
(a decrease of $4000 during 2014)
Total Assets 200,000
Stockholders' equity 150,000

What was accounts receivables turnover ratio?

Determine the number of days to collect accounts receivable

25. Bailey Corporation reported the following data for the year 2014
Determine Bailey's Debt to equity ratio using the following data
Net income $10,000
Total Assets 16,000
Total stockholders' equity 8,000

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26. -MusicPod's earnings per share ratios were $2.47 and $2.07 respectively for 2015
and 2014. MusicPod's stock was trading at $53.00 and $41.50 per share at the end of
2015 and 2014 respectively. The company paid cash dividends per share of $.85 in
2015 and $.63 in 2014. Total stockholders' equity was $13,572 million and $11,896
million in 2015 and 2014 respectively. The common shares outstanding were
approximately 1,782,000 during both 2015 and 2014. Music Pod's dividend yield ratio
for 2015 is closest to:

a. 34.4% b. 1.4% c.30.4% d.1.6%

27-The primary difference between revenues and gains is:

A. Gains are increases in net assets from peripheral activities while revenues are
increases from ongoing activities.

B. Revenues increase operating income and gains have no impact on net income.

C. Revenues cause increases in net assets as a result of peripheral activities and gains
cause increases through ongoing activities.

D. Gains result in an increase in operating income whereas revenues do not impact

operating income.

28. Lanz company has provided the following information

Cash Sales totaled $255,000 Credit Sales totaled $479,000
Cash collections from customers for services to be provided =$88,000
A $22,000 loss from the sale of property, plant and equipment occurred
Interest income was $7,700 Interest Expense was $19,900
Cost of Goods Sold $336,000 Rent Expense was 36,000
Salaries Expense was $49,000 Other operating expenses totaled $79,00
Unearned Revenue $4000
Lantz Company has provided the following information:

How much was Lantz's operating income?

A. 219,700 B. 322,000 C.199,800 D.234,000

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29. The balance sheet for Glenwood Corporation at December 31, 2014 showed the following
subtotals:

Based on the above data, calculate the following amounts:

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Liquidity Ratios
Current Ratio=

Working Capital=Current Assets-Current Liabilities.

Activity Ratios (Efficiency Ratios)

Inventory turnover = Number of days in inventory =

Receivables Turnover = Days Sales in receivables =

Payables Turnover = No. of Days of payables =
Debt to asset ratio = Long term debts to assets ratio=

Solvency Ratios
Debt to equity ratio= Assets to stockholders' equity

Debt to asset ratio= Long term debt to asset ratio=

Interest Coverage Ratios Cash Coverage =

=
EBIT= Net income+ interest expense+ income tax
expense
Profitability Ratios

Du Pont /ROA= X

Du Pont ROE = X X

Basic Earnings Per Share (EPS): Diluted Earnings Per Share (EPS)

Quality of Income =
A ratio higher than one indicates higher quality earnings

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