Answer the following question:
1. Describe LIFO as an Inventory Method. Discuss the differences in accounting for LIFO under:
• U.S. GAAP
• IFRS
• IRS
Compose an initial response that is one or two paragraphs long. In your response, please indicate where you found the relevant information by citing the appropriate sections or pages in the textbook.
2.Analyzing Transactions Using the Financial Statement Effects Template
Hanlon Advertising Company began the current month with the following balance sheet.
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Cash
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$ 80,000
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Liabilities
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$ 70,000
|
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Noncash assets
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135,000
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Contributed capital
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110,000
|
|
|
|
Earned capital
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35,000
|
|
Total assets
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$215,000
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Total liabilities and equity
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$215,000
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Following are summary transactions that occurred during the current month.
1. The company purchased supplies for $10,000 cash; none were used this month.
2. Services of $5,000 were performed this month on credit.
3. Services were performed for $20,000 cash this month.
4. The company purchased advertising for $16,000 cash; the ads will run next month.
5. The company received $2,400 cash as partial payment on accounts receivable from transaction 2.
6. The company paid $6,800 cash toward the accounts payable from the prior month.
7. Paid $6,200 cash toward this month's wages expenses.
8. The company declared and paid dividends of $1,000 cash.
(a) Record the effects of each transaction using the financial statement effects template.
(b) Prepare the income statement for this month and the balance sheet as of month-end.
Question 3. Reconciling and Computing Operating Cash Flows from Net Income
Petroni Company reports the following selected results for its current calendar year.
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Net income
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$195,000
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Depreciation expense
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37,500
|
|
Accounts receivable increase
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15,000
|
|
Accounts payable increase
|
9,000
|
|
Prepaid expenses decrease
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4,500
|
|
Wages payable decrease
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6,000
|
(a) Prepare the operating section only of Petroni Company's statement of cash flows for the year.
Hint: Remember to use negative signs with answers when appropriate.
(b) Which of the following statements best describes the sign (positive or negative) on depreciation expense?
a. The sign on depreciation is positive because depreciation lowers the tax liability of the company. A decrease in tax liability generates an increase in net income since less tax is paid.
b. The sign on depreciation is positive because the computation of net income included a noncash depreciation expense. The noncash expense is removed by adding depreciation.
c. The sign on depreciation is negative because expenses are always subtracted from net income in cash flow statements to reflect the true amount of cash generated from operating activities.
d. The sign on depreciation is negative because cash is paid for equipment used in operations that are not yet reflected in the cost of goods sold. This increase in the cost of goods sold is subtracted from net income.
(c) Which of the following statements best describes the reason that accounts receivable is listed on the statement of cash flows?
a. An increase in accounts receivable means Sales have also increased. Sales are an increase in cash and contribute a positive cash flow. Therefore, an increase in accounts receivable is listed on the cash flow statement as a positive adjustment to net income.
b. An increase in accounts receivable means more cash has been received than has been reported in Sales. This surplus is an increase in cash and contributes a positive cash flow. Therefore, an increase in accounts receivable is listed on the cash flow statement as a negative adjustment to net income.
c. An increase in accounts receivable means less cash has been received than has been reported in Sales. This deficit is a decrease in cash and contributes a negative cash flow. Therefore, an increase in accounts receivable is listed on the cash flow statement as a negative adjustment to net income.
d. An increase in accounts receivable means Sales have also increased. Sales have increased, but cash has not yet been received. Therefore, an increase in accounts receivable is listed on the cash flow statement as a negative adjustment to net income.
(d) Which of the following statements best describes the reason that prepaid expense is listed on the statement of cash flows?
a. Since prepaid expense is an asset, a decrease in prepaid expense means assets have decreased causing cash to decrease. This contributes a negative cash flow. Therefore, a decrease in prepaid expense is listed on the cash flow statement as a negative adjustment to net income.
b. Since prepaid expense is a liability, a decrease in prepaid expense means liabilities have decreased causing cash to increase. This contributes a positive cash flow. Therefore, a decrease in prepaid expense is listed on the cash flow statement as a negative adjustment to net income.
c. Prepaid expense is an asset because Cash had been paid, but the expense had not yet been realized. A decrease in this asset means an expense has been recognized in the current period, decreasing net income, but not affecting cash. Therefore, decrease in prepaid expense is listed on the cash flow statement as a positive adjustment to net income.
d. Prepaid expense is a liability because expense has been realized, but Cash has not yet been paid. A decrease in liabilities leads to an increase in Cash and positive cash flow. Therefore, a decrease in prepaid expense is listed on the cash flow statement as a positive adjustment to net income.
2. Reconciling and Computing Operating Cash Flows from Net Income
Petroni Company reports the following selected results for its current calendar year.
|
Net income
|
$195,000
|
|
Depreciation expense
|
37,500
|
|
Accounts receivable increase
|
15,000
|
|
Accounts payable increase
|
9,000
|
|
Prepaid expenses decrease
|
4,500
|
|
Wages payable decrease
|
6,000
|
(a) Prepare the operating section only of Petroni Company's statement of cash flows for the year.
Hint: Remember to use negative signs with answers when appropriate.
(b) Which of the following statements best describes the sign (positive or negative) on depreciation expense?
a. The sign on depreciation is positive because depreciation lowers the tax liability of the company. A decrease in tax liability generates an increase in net income since less tax is paid.
b. The sign on depreciation is positive because the computation of net income included a noncash depreciation expense. The noncash expense is removed by adding depreciation.
c. The sign on depreciation is negative because expenses are always subtracted from net income in cash flow statements to reflect the true amount of cash generated from operating activities.
d. The sign on depreciation is negative because cash is paid for equipment used in operations that are not yet reflected in the cost of goods sold. This increase in the cost of goods sold is subtracted from net income.
(c) Which of the following statements best describes the reason that accounts receivable is listed on the statement of cash flows?
a. An increase in accounts receivable means Sales have also increased. Sales are an increase in cash and contribute a positive cash flow. Therefore, an increase in accounts receivable is listed on the cash flow statement as a positive adjustment to net income.
b. An increase in accounts receivable means more cash has been received than has been reported in Sales. This surplus is an increase in cash and contributes a positive cash flow. Therefore, an increase in accounts receivable is listed on the cash flow statement as a negative adjustment to net income.
c. An increase in accounts receivable means less cash has been received than has been reported in Sales. This deficit is a decrease in cash and contributes a negative cash flow. Therefore, an increase in accounts receivable is listed on the cash flow statement as a negative adjustment to net income.
d. An increase in accounts receivable means Sales have also increased. Sales have increased, but cash has not yet been received. Therefore, an increase in accounts receivable is listed on the cash flow statement as a negative adjustment to net income.
(d) Which of the following statements best describes the reason that prepaid expense is listed on the statement of cash flows?
a. Since prepaid expense is an asset, a decrease in prepaid expense means assets have decreased causing cash to decrease. This contributes a negative cash flow. Therefore, a decrease in prepaid expense is listed on the cash flow statement as a negative adjustment to net income.
b. Since prepaid expense is a liability, a decrease in prepaid expense means liabilities have decreased causing cash to increase. This contributes a positive cash flow. Therefore, a decrease in prepaid expense is listed on the cash flow statement as a negative adjustment to net income.
c. Prepaid expense is an asset because Cash had been paid, but the expense had not yet been realized. A decrease in this asset means an expense has been recognized in the current period, decreasing net income, but not affecting cash. Therefore, decrease in prepaid expense is listed on the cash flow statement as a positive adjustment to net income.
d. Prepaid expense is a liability because expense has been realized, but Cash has not yet been paid. A decrease in liabilities leads to an increase in Cash and positive cash flow. Therefore, a decrease in prepaid expense is listed on the cash flow statement as a positive adjustment to net income.