会计专业英语第3章习题答案.doc

Answer for Chapter 3

3.1 Select the best answer for each of the following unrelated items
1.c 2. b 3. b 4. d 5.b 6. c 7.c 8.a 9.b 10.b
11d 12d 13b 14d 15 a 16d 17b 18 c 19 b 20c

3.2 Prepare an income statement
Windsor Corporation had the information listed below available in preparing an income statement for the year ended December 31, 2X11. All amounts are before income taxes. Assume a 30% income tax rate for all items.
Sales ₤ 600,000
Income from operation of discontinued cement division ₤ 100,000
Loss from disposal of cement division ₤ (80,000)
Operating expenses ₤ 125,000
Gain on sale of equipment ₤ 65,000
Cost of goods sold ₤ 420,000
Enquired
Prepare an income statement in good form which takes into account intra-period income tax allocation.
Solution
WINDSOR CORPORATION
Income Statement
or the Year Ended December 31, 2011
———————————————————————————————————————————
Sales ₤600,000
Cost of goods sold 420,000
Gross profit 180,000
Operating expenses 125,000
Income from operations 55,000
Other income and expense
Gain on sale of equipment 65,000
Income before income taxes 120,000
Income taxes 36,000
Income from continuing operations 84,000
Discontinued operations
Income from operation of discontinued cement
division, net of $30,000 income taxes ₤70,000
Loss from disposal of cement division,
net of $24,000 income tax savings (56,000) 14,000
Net income ₤ 98,000

3.3 Prepare the retained earnings statement
The balance in retained earnings on January 1, 20X1, for Blakely Inc., was $600,000. During the year, the corporation paid cash dividends of $70,000 and distributed a share dividend of $15,000. In addition, the company determined that it had overstated its depreciation expense in prior years by $50,000. Net income for 20X1 was $120,000.
Enquired
Prepare the retained earnings statement for 20X1.
Solution
BLAKELY INC.
Retained Earnings Statement
For the Year Ended December 31, 20X1

Balance, January 1 as reported $600,000
Correction for understatement of net income
in prior period (depreciation expense error) 50,000
Balance, January 1, as adjusted 650,000
Add: Net income 120,000
770,000
Less: Cash dividends $70,000
Share dividend 15,000 85,000
Balance, December 31 $685,000

3.4 Prepare fiancial statements
These financial statement items (in thousands) are for Chen Company at year-end, July 31, 2X11.

Salaries payable ¥ 4,580 Note payable (long-term) ¥ 3,300
Salaries expense 45,700 Cash 22,200
Utilities expense 19,100 Accounts receivable 9,780
Equipment 22,000 Accumulated depreciation 6,000
Accounts payable 4,100 Dividends 4,000
Commission revenue 56,100 Depreciation expense 4,000
Rent revenue 6,500 Retained earnings (1/1/2X11) 30,000
Share capital-ordinary 16,200
Enquired
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified statement of financial position at July 31, 2X11.

Solution
(a) CHEN COMPANY
Income Statement
For the Year Ended July 31, 2X11
———————————————————————————————————————————
Revenues
Commission revenue ¥56,100
Rent revenue 6,500
Total revenues ¥62,600
Expenses
Salaries expense 45,700
Utilities expense 19,100
Depreciation expense 4,000
Total expense 68,800
Net loss ¥ (6,200)

CHEN COMPANY
Retained Earnings Statement
For the Year Ended July 31, 2X11
———————————————————————————————————————————
Retained Earnings, August 1, 2X10 ¥30,000
Less: Net loss ¥6,200
Dividends 4,000 10,200
Retained Earnings , July 31, 2X11 ¥18,800

(b) CHEN COMPANY
Statement of Financial Position
July 31, 2X11
———————————————————————————————————————————
Assets
Property, plant, and equipment
Equipment ¥22,000
Less: Accumulated depreciation 6,000 ¥16,000
Current assets
Accounts receivable 9,780
Cash 22,200 31,980
Total assets ¥47,980
Equity and Liabilities
Equity
Share capital-ordinary………………………………………………… ¥16,200
Retained earnings 18,800 ¥35,000
Long-term liabilities
Note payable 3,300
Current liabilities
Accounts payable ¥4,100
Salaries payable 4,580 8,680
Total equity and liabilities ¥47,980

3.5 Prepare a statement of cash flows
A comparative statement of financial position for Mann Company appears below:
MANN COMPANY
Comparative Statement of Financial Position
Dec. 31, 2Y11 Dec. 31, 2Y10
Assets
Equipment €60,000 €32,000
Accumulated depreciation—equipment (20,000) (14,000)
Long-term investments -0- 18,000
Prepaid expenses 6,000 9,000
Inventory 25,000 18,000
Accounts receivable 18,000 14,000
Cash 27,000 10,000
Total assets €116,000 €87,000
Equity and Liabilities
Share capital-ordinary € 40,000 €23,000
Retained earning 22,000 10,000
Bonds payable 37,000 47,000
Accounts payable 17,000 7,000
Total equity and liabilities €116,000 €87,000
Additional information:
1. Net income for the year ending December 31, 2Y11 was €27,000.
2. Cash dividends of €15,000 were declared and paid during the year.
3. Long-term investments that had a cost of €18,000 were sold for €14,000.
4. Sales for 2Y11 were €120,000.
Enquired
Prepare a statement of cash flows for the year ended December 31, 2Y11, using the indirect method.
Solution
MANN COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2Y11

Cash flows from operating activities
Net income €27,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense € 6,000
Loss on sale of long-term investments 4,000
Increase in accounts receivable (4,000)
Decrease in prepaid expenses 3,000
Increase in inventories (7000)
Increase in accounts payable 10,000 12,000
Net cash provided by operating activities 39,000
Cash flows from investing activities
Sale of long-term investments 14,000
Purchase of equipment (28,000)
Net cash used by investing activities (14,000)
Cash flows from financing activities
Issuance of ordinary shares 17,000
Retirement of bonds payable (10,000)
Payment of cash dividends (15,000)
Net cash used by financing activities (8,000)
Net increase in cash 17,000
Cash at beginning of period 10,000
Cash at end of period €27,000

3.6 Perform vertical analysis
December 31, 2X12 December 31, 2X11
Inventory € 780,000 € 600,000
Accounts receivable 510,000 400,000
Total assets 3,000,000 2,500,000
Enquired
Using these data from the comparative statement of financial position of Luca Company perform vertical analysis.

Solution
Dec. 31, 2012 Dec. 31, 2011
Amount Percentage* Amount Percentage**
Inventory € 780,000 26% € 600,000 24%
Accounts receivable 510,000 17% 400,000 16%
Total assets 3,000,000 100.0% 2,500,000 100.0%

**
*

3.7 Perform horizontal analysis

Comparative information taken from the Wells Company financial statements is shown below:
2X12 2X11
(a) Notes receivable $ 20,000 $ -0-
(b) Accounts receivable 175,000 140,000
(c) Retained earnings 30,000 (40,000)
(d) Income taxes payable 45,000 20,000
(e) Sales 900,000 750,000

(f) Operating expenses 170,000 200,000
Enquired
Using horizontal analysis, show the percentage change from 2X11 to 2X12 with 2X11 as the base year.
Solution
(a) Base year is zero. Not possible to compute.
(b) $35,000 ÷ $140,000 = 25% increase
(c) Base year is negative. Not possible to compute.
(d) $25,000 ÷ $20,000 = 125% increase
(e) $150,000 ÷ $750,000 = 20% increase
(f) $30,000 ÷ $200,000 = 15% decrease

3.8 Perform horizontal analysis
The following items were taken from the financial statements of Ritz, Inc., over a four-year period:
Item 2Y12 2Y11 2Y10 2Y09
Net Sales €800,000 €650,000 €600,000 €500,000
Cost of Goods Sold 580,000 460,000 420,000 400,000
Gross Profit €220,000 €190,000 €180,000 €100,000

Enquired
Using horizontal analysis and 2Y09 as the base year, compute the trend percentages for net sales, cost of goods sold and gross profit. Explain whether the trends are favorable or unfavorable for each item.
Solution
Item 2Y12 2Y11 2Y10 2Y09
Net Sales 160% 130% 120% 100%
Cost of Goods Sold 145% 115% 105% 100%
Gross Profit 220% 190% 180% 100%

The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing which could be unfavorable, but the sales are increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show a favorable, increasing trend.

3.9 Analysis the liquidity of the Howell Company
Howell Company has the following selected accounts after posting adjusting entries:
Accounts Payable € 55,000
Notes Payable, 3-month 80,000
Accumulated Depreciation—Equipment 14,000
Salary Payable 27,000
Notes Payable, 5-year, 8% 30,000
Estimated Warranty Liability 34,000
Salary Expense 6,000
Interest Payable 3,000
Mortgage Payable 200,000
Sales Tax Payable 21,000

Enquired
(a) Prepare the current liability section of Howell Company's statement of financial position, assuming $25,000 of the mortgage is payable next year. List liabilities in magnitude order, with largest first.
(b) Comment on Howell 's liquidity, assuming total current assets are €450,000.
Solution
(a) HOWELL COMPANY
Current Liabilities
Notes payable, 3-month € 80,000
Accounts payable 55,000
Estimated warranty liability 34,000
Salary payable 27,000
Long-term debt due within one year 25,000
Sales tax payable 21,000
Interest payable 3,000
Total Current Liabilities €245,000

(b) The liquidity position looks favorable. If all current liabilities are paid out of current assets, there would still be €205,000 of current assets. The current assets are almost twice the current liabilities and it appears as though Howell Company has sufficient current resources to meet current obligations when due.

3.10 Calculate the debt to total assets and times interest earned ratios
Franco Corporation reports the following selected financial statement information at December 31, 2X11:
Total Assets $110,000
Total Liabilities 65,000
Net Income 18,000
Interest Income 1,600
Interest Expense 900
Tax Expense 300
Enquired
Calculate the debt to total assets and times interest earned ratios.
Solution
Debt to total assets: $65,000 ÷ $110,000 = 59%
Times interest earned: ($18,000 + $900 + $300) ÷ $900 = 21.33 times

3.11 Compute the receivables turnover and the average collection period
Berman Company reported the following financial information:

12/31/2X11 12/31/2X10
Accounts receivable $ 320,000 $ 360,000
Net credit sales 2,550,000 2,420,000
Enquired
Compute (a) the receivables turnover and (b) the average collection period for 2X11.
Solution
(a) Receivables turnover = $2,550,000 ÷ $340,000 = 7.5 times
(b) Average collection period = 365 ÷ 7.5 = 49 days

3.12 Calculate the net income and EPS
Banks Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.
(a) Issue 400,000 ordinary shares at $10 per share.
(b) Issue 8%, 10-year bonds at par ($4,000,000).
Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 ordinary shares outstanding prior to the new financing.
Enquired
Calculate each of the following for each alternative:
(1) Net income.
(2) Earnings per share.
Solution
(a) Issue Shares (b) Issue Bonds
Income before interest and taxes $3,000,000 $3,000,000
Interest (8% × $4,000,000) — 320,000
Income before income taxes 3,000,000 2,680,000
Income tax expense 900,000 804,000
(1) Net income $2,100,000 $1,876,000

Shares outstanding 1,000,000 600,000

(2) Earnings per share $2.10 $3.13

3.13 Compute the return on ordinary shareholders’ equity ratio
The following information is available for Ritter Corporation:
2Y11 2Y10
Average ordinary shareholders’ equity $1,500,000 $1,000,000
Average total shareholders’ equity 2,000,000 1,500,000
Ordinary dividends declared and paid 72,000 50,000
Preference dividends declared and paid 30,000 30,000
Net income 330,000 270,000
Enquired
Compute the return on ordinary shareholders’ equity ratio for both years. Briefly comment on your findings.
Solution
2Y10 2Y11
Return on ordinary
shareholders’ equity ratio: $270,000 – $30,000 $330,000 – $30,000
————————— = 24% ————————— = 20%
$1,000,000 $1,500,000
Ritter’s return on common stockholders’ equity ratio decreased approximately 17% during 2011. Ritter’s earnings increased during 2011 by 22%, but its average ordinary shareholders’ equity increased by 50%, causing the return on ordinary shareholders’ equity to decline by 17%.

3.14 Calculate book value per share
Bellingham Corporation has the following equity balances at December 31, 2X11.
Share Capital–Ordinary, $1 par $ 3,500
Share Premium–Ordinary 24,500
Retained Earnings 62,500
Total $90,500
Enquired
Calculate book value per share.
Solution
Number of shares outstanding: $3,500/$1 = 3,500
Book value per share: $90,500/3,500 = $25.86
3.15 Calculate financial ratios
Selected information from the comparative financial statements of Fryman Company for the year ended December 31 appears below:
2X11 2X10
Inventory $ 140,000 $160,000
Accounts receivable (net) 180,000 200,000
Total assets 1,200,000 800,000
Long-term debt 400,000 300,000
Current liabilities 140,000 110,000
Net credit sales 1,330,000 700,000
Cost of goods sold 900,000 530,000
Interest expense 50,000 25,000
Income tax expense 60,000 29,000
Net income 150,000 85,000
Enquired
Answer the following questions relating to the year ended December 31, 2X11. Show computations.
1. Inventory turnover for 2X11 is __________.
2. Times interest earned in 2X11 is __________.
3. The debt to total assets ratio for 2X11 is ____