Question 1. Circle the correct option
1. Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used
a by parties internal to the business enterprise only.
b. by investors only.
c. by parties both internal and external to the business enterprise.
d. primarily by management.
2. Which of the following statements is not an objective of financial reporting?
a. Provide information that is useful to users in making resource allocation decisions.
b. Provide information about an entity's economic resources, obligations, and equity/net assets.
c. Provide information on the liquidation value of an enterprise.
d. Provide information about changes in an entity's economic resources, obligations, and equity/net assets.
3. Which of the following statements is not a motivation to increase earnings?
a. Bonus based on net income
b. Improve bargaining with employee unions
c. Increase perceived value of the firm and reduce perceived risk
d. If close to violation of a contractual obligation
4. Financial statements are prepared for the user. Which of the following best describes the responsibility for the preparation of financial statements?
a. They are the responsibility of management.
b. They are the responsibility of external auditors.
c. They are the responsibility of shareholders.
d. They are the responsibility of standard setters.
Question 2.
Answer the following questions using the concept of Information Asymmetry and be specific with your terminology within Information Asymmetry (i.e. type of information asymmetry):
In a private sale of a used car, often times,:
The Seller will provide the Buyer with historical records regarding maintenance work performed on the car (e.g. oil changes completed, spark plugs replaced, oil filter changed, etc.) in order to reduce the Buyer's concerns regarding purchasing a "lemon"; and
For a similar reason, the Buyer will often hire an auto mechanic to evaluate the used car.
Why are such actions taken?
(b) On a university course outline, 35% of the course evaluation is assigned to group projects and the remaining 65% is assignment to exams. Also included on the course outline is the following statement: "Students must pass the individual components of the course in order to pass the course". Why is this statement included?
Question 3.
Part of this course involves being able to visualize and complete the accounting cycle. This first question challenges you in this regard. You may need to review your Introductory Accounting textbook/notes.
The process, logic and terminology associated with the accounting cycle will be used regularly throughout this course so it is important to not only complete this question but also to understand what is happening.
You are the accountant with Big Time Nicknacks Inc. (Nicknacks). The business is owned and operated by Matthew Moses. Matthew has been so busy that he hasn't had any time to complete his Financial Statements for the 11 months ended November 30, 2014. Matthew's bank manager has threatened to cancel Nicknacks' bank loan if he does not receive an Income Statement showing the company's gross profit and net income by next week.
Matthew started to make adjustments and corrections but simply ran out of time. He assembled the attached worksheet and handed you the following information he thought you might need.
No depreciation has been recorded on the business vehicle. It was purchased on January 1, 2014 at a cost of $25,000. He plans to use the vehicle for 5 years at which time the resale value is estimated to be $1,000.
An inventory count indicated $46,000 of inventory at November 30, 2014. Nicknacks uses a perpetual inventory system.
Nicknacks recently signed an agreement with a "Dollar Store" to supply them with gold and silver charms. The contract is worth $100,000 and will commence in February of 2015. Nicknacks received and cashed a $20,000 cheque from the customer in November 2014 in respect of this contract. The cash receipt was recorded as part of sales revenue.
Nicknack's annual fire insurance policy of $2,400 was paid on April 1, 2014 and was fully expensed at that time.
On June 1, 2014 Nicknacks lent a long-time employee $15,000. She signed a promissory note agreeing to repay the amount on May 31, 2017. The interest rate is 5% per year with interest payable every May 31.
Rent of $5,000 per month has not been paid or recorded for the last two months.
Required:
1) Prepare an Adjusting Journal Entry, if necessary, for each of the items (a) to (f) above. If no Adjusting Journal Entry is required, briefly explain why.
2) Complete the attached worksheet with applicable cross-references to your adjustments in #1 above. Use the letters (a) - (f) for your cross references. If you want to add any new accounts to the worksheet, use the blank lines near the bottom of the worksheet. COPY AND PASTE THIS WORKSHEET INTO YOUR ASSIGNMENT AND TYPE INTO THE APPLICABLE BOXES.
3) Prepare a multiple-step income statement in good format. Ignore income taxes.
4) Prepare a balance sheet in good format.
5) Answer the following questions
Fill-in the blank: Journal entries are _____________________ to the general ledger accounts.
If Nicknacks were to record and post Closing Entries on November 30, 2014, what should be the balance in the general ledger account for "Sales Revenue" at that time? Why?
Nicknacks uses a perpetual inventory system. If it had used a periodic inventory system, would the net income in your answer to #3 above change? If so, by how much. If not, why not?