This paper presents a series of solutions to twelve separate case studies that explore the fundamentals of accounting. The cases are independent of each other and require a range of skills, including the preparation of journal entries, T-charts and financial statements, along with a general understanding of accounting concepts, financial analysis and various calculations.
Financial Analysis
A company's retained earnings refers to the net profits for the year that are retained by the company. Balance sheet at 31 December 20X1 Assets Liabilities and shareholders' equity CURRENT ASSETS CURRENT LIABILITIES Retained earnings Total shareholders' equity. Balance sheet at 31 December 20X1 Assets Liabilities and shareholders' equity Retained earnings Total shareholders' equity of leased equipment.
Income Statement Presentation
Revenue from apparel sales at Totz can be presented under “Net sales of tangible products” and will be $70.6 million for 2015 and $75.3 million for 2016. Revenue from art services provided by Doodlez can be presented under “Service Revenue” and will be $3.9 million for 2015 and $11.2 million for 2016. Cost of sales for the company can also be broken down into more detailed categories.
We are told that cost of sales includes product costs, import costs, and direct labor costs, along with the costs incurred to produce inventory for sale. Therefore, the total cost of sales can be broken down into: “Cost of tangible goods sold”, which takes into account the clothing sold by Totz, “Cost of services”. Totz made a $1.7 million profit on the sale of an abandoned building after it moved its headquarters.
Although this is generally considered an unusual or infrequent transaction, it may not be reflected in the income statement as it may indicate that there are extraordinary items. Alternatively, it could also be presented under “Non-operating income” in a miscellaneous category, so as not to imply any extraordinary profit.
Financial Statement Analysis and Presentation
Data sheet..30-31 General ledger..32 Unadjusted trial balance..33 Adjustment of postings..34. Adjusted trial balance..35 Closing entries..36 Balance sheet..37 Income statement..38 Statement of retained earnings.. 39 Cash flow classifications..39.
Internal Controls
Employees could change the amount of cash taken from the cash registers so that the amount of money on the receipts and the amount removed from the cash register do not match. Lucy has the ability to misrecord the day's sales and take money from the register. Lucy has a knack for shoplifting when dealing with small customer problems.
Because the clerks have full authority to perform all types of transactions, they are able to create false returns and steal money from the register. Physical Audits - Conducting regular physical inventory audits would help prevent employees from stealing from the store. Her office is located at the back of the store away from other employees and.
Clerks can use coupons every time they purchase inventory at the store and can steal the difference from the register. Employees can steal cash from the cash register during the day without Kayla knowing exactly which employee stole the money.
Analysis of Inventories
The company becomes more efficient in its inventory management because it reduces its holding period, which means that inventory is sold faster. As an investor, additional information I might want from the company might include a debt ratio, current annual ratio, acid test, their average tenure from previous years to analyze exactly how much progress has been made, etc.
Capitalized Costs and Earnings Quality
Assets: probable future benefits obtained or controlled by an entity or company as a result of past transactions. ii. WorldCom recorded communication and telecommunications costs as assets on their balance sheet rather than reporting them as expenses. They have shown that they have future benefits by recording them as assets, but this is not the case. f) Depreciation Expense calculation and journal entry: .. g) Net income calculation, assuming that line costs are not improperly capitalized:.
Long-Term Liabilities
In this case, Targa Company plans to restructure a business line (Armor Track). The Company will consider moving a manufacturing operation to a new facility, which will result in the layoff of certain current employees. Targa prepares its statements in accordance with GAAP, so they must follow the guidelines to account for the employee benefits as well as the relocation costs. In the section, the codification states that any severance benefits must be recognized as a liability and a loss.
It further states that "recognized severance expense ... includes the amount of any lump sum payments and the present value of any expected future payments." So, in this particular case, the severance costs will include $500,000 for two weeks' severance and a facility manager's lump sum of $50,000. RECOGNITION OF CUTTING DOWN AND RELOCATION COSTS Section 420 of the Codification addresses costs associated with an exit activity that includes restructuring. It states that the costs include involuntary employee severance payments and closing and relocation costs.
Since the company has entered into irrevocable contracts regarding the restructuring, the company will recognize these costs as a liability.
Shareholder’s Equity
They could also buy them back to increase earnings per share, to provide shares for employee stock compensation plans, or to provide a tax-efficient distribution to shareholders. Merck does not disclose its own stock as an asset because an asset is held for a future financial benefit.
Stock Options
In this case, Xilinx has a stock-based incentive plan that allows employees to buy a certain number of shares in the company at a set price over a given period of time. The share-based compensation plans are used to attract and retain employees and to give them an ownership interest in the company. The company only distributes the shares or the cash amount after the recipient of the share meets the vesting requirement.
Under Xilinx's stock purchase plan, employees can obtain a 24-month warrant to purchase company stock at the end of each six-month exercise period. The company is required to measure the cost of all employee equity awards that are expected to be exercised based on the grant-date fair value and to record that cost as a compensation expense over the period during which the employee is obligated to serve. to perform in return for the award. The company is also required to record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of acceptance.
The amount of the expense appears in the Cash from Operating Expenses section of the Statement of Cash Flows under “Share-Based Compensation”. The income tax effect is the amount that becomes an income tax payable on stock compensation expense.
Revenue Recognition
The waiter then pours the beer into a large mug and hands it to the student. The contract is concluded when the student orders a beer in a mug and the waiter takes the order. The bartender then offers the student a large beer and a coupon for two pretzels (this is typical business practice).
The bartender pours the beer into the beer mug and hands it to the student. A contract is made when the student accepts the offer and the bartender takes that order. The bartender is obliged to give the student a large beer together with a coupon for two pretzels.
The transaction price is $7, which is how much the student paid the bartender for the beer and coupon. The contract is concluded when the student orders two pretzels and the waiter takes the order.
Deferred Income Taxes
Accounting income refers to the income that is reported in the financial statements of the taxable entity. Permanent tax differences: refer to transactions that are generally recognized for financial reporting purposes but not for income tax purposes. Temporary tax differences: refer to assets or liabilities that have a difference between the accounting value on the balance sheet and its tax base.
Income taxes may have multiple statutory rates for different income levels, and a sales tax may have a fixed statutory rate. For an individual, this is the average rate at which his earned income is taxed, while for a company, this is the average rate at which his profits are taxed. A company reports deferred income taxes as part of their total income tax expense instead of reporting their tax bill because they want their total taxable income to be lower.
A deferred tax asset is defined as an asset on the balance sheet that can be used to reduce taxable income. An entity should create a valuation allowance for a deferred tax asset if there is more than a 50% probability that the entity will not realize part of the asset.
Leases
Capital lease: a lease where the lessor finances only the leased asset, and all other ownership rights pass to the lessee. The criteria for a capital lease may be one of the following: ownership passes from the lessor to the lessee by the end of the term; bargain purchase option (the lessee can buy the asset from the lessor at the end of the lease term for a lower than market price); the lease period covers at least 75% of the useful life of the asset (the lease must be non-cancelable at that time); or the present value of the minimum lease payments required by the lease is at least 90% of the fair value of the asset at the inception of the lease. Direct finance lease: an arrangement where a lessor buys assets and leases them to its customers, with the intention of generating income from the resulting interest payments.
The lessor recognizes the gross investment in the lease and the corresponding amount of unearned income. Sale-type lease: classified as such by the lessor when the fair value of the leased asset at the beginning of the lease differs from its book value, it includes real estate and there is a transfer of ownership to the lessee until the end of the lease the term of the lease. Leases can represent different types of transactions, so it is important to know what type of transaction is taking place, especially since some of the leases have different accounting methods.
This lease will be treated as an operating lease as it does not meet any of the criteria for a capital lease, but is still an asset lease. It appears that the $46.8 million rent expense value will be included in the “Selling, General and Administrative” section of the income statement.
