QUESTION:
What is the difference between expense and expenditure? (3)
Expenditure Vs Expenses
Expenditure : It is the cost benefiting or spreading over two or more accounting periods.
Expense is the portion of Expenditure for one accounting period only.
Question:
What is the principle advantage of using direct method of cash flow statement? (3)
The direct method of cash flow is preferred by accounting standards organizations because it provides better information for accurate predictions about the future. The direct method is one way for a company to prepare its cash flow statement for presentation to shareholders. Both U.S. generally accepted accounting principles (GAAP) and International Accounting Standards (IAS) recommend companies present operating cash flows using the direct method format. In addition, the direct method is straightforward and easier to understand. Essentially, the direct method sorts all of a company’s transactions and summarizes them into categories akin to taking a bank statement and sorting out checks, type of bill paid and deposits by source of inflow. For example, under operating activities, the direct method itemizes cash collected from customers, a cash inflow, and lists cash outflows such as rent paid as negative numbers to derive cash from operations.
Question:
Why should company prefer to use LIFO instead of FIFO?
If a company that sells products (retailer, manufacturer, etc.) finds the cost of its items increasing, the use of LIFO will result in less taxable income and less income
tax payments than FIFO. Over a long period of time, or when costs increase dramatically, the lower income tax payments will be significant. Another reason for a company to use the LIFO cost flow assumption is to improve the matching of costs with sales. Under LIFO, the recent costs will be matched on the income statement with the recent sales revenues. (Recall that LIFO means the “last costs in” will be the “first costs out” of inventory and onto the income statement as the cost of goods sold.)
Question:
Classify the following activities as cash flow from operating, investing and financing activities
1.proceed from issuing shares
Financing activities
2. Interest received on loans
Operating activities
3.repayment of debt principal, capital lease
Financing activities
4.loans made and acquired of other firm’s debt
Investing activities
5. Divinded received from securities.
Investing activities
Q1. Differentiate between closing entries and adjusting entries. (3)
Adjusting entries are made at the end of the accounting period (but prior to preparing the financial statements) in order for a company’s accounting records and financial statements to be up-to-date on the accrual basis of accounting. Closing entries are dated as of the last day of the accounting period, but they are entered into the accounts after the financial statements are prepared. For the most part, closing entries involve the income statement accounts. The closing entries set the balances of all of the revenue accounts and the expense accounts to zero.
Q2. Why wrong inventory valuation effects two periods? Explain (3)
An inventory error affects two periods because 1) the ending inventory of one period will become the beginning inventory for the following period, and 2) the calculation of the cost of goods sold is beginning inventory + purchases
ending inventory.
Q3. Is it necessary to review every cash transaction by its receipt? (3)
Yes, it necessary to review every cash transaction by its receipt
Q4. Explain how the adoptions of FIFO method rather than LIFO will tend to raise or lower the quality of a company’s earnings? Assume the continuance of the inflation. (5)
During Inflation, FIFO shows less expense on income statement and higher inventory valuation on balance sheet and values ending inventory at current cost, whereas LIFO shows higher expenses on income statement and lower inventory valuation on balance sheet.
Q5. Patterson Company reported net income for the current year of Rs. 666,000. During the year the company’s accounts receivable increased by Rs. 50,000, inventory decreased by Rs. 23,000, accounts payable decreased by Rs. 55,000, prepaid expenses increased by Rs. 35,000, and accrued expenses payable increased by Rs. 14,000. Determine the amount of cash provided by or used for operating activities by the indirect method. (5)
Net income 666,000
Accounts receivable increased (50,000) Inventory decreased 23,000
Pre-paid expenses increased (35,000) Accounts payable decreased (55,000) Accrued expenses payable increased 14,000
Net cash from OP activities 563,000
Is depreciation a source of fund or not? Give reasons (3)
Depreciation is a process of allocation of cost. It can not be a source of fund. At least by charging the adequate depreciation, the taxable profit may be legally reduced. The tax burden may be reduced. It may help to conserve working capital. It may indirectly regulate the fund position but can not increase funds.
How cash dividend effect our financial statements (3)
When a corporation declares a cash dividend on its stock, its retained earnings are decreased and its current liabilities (Dividends Payable) are increased. When the cash dividend is paid, the Dividends Payable account is decreased and the corporation’s Cash account is decreased.
The net result of the declaration and payment of the dividend is that the corporation’s assets and stockholders’ equity have decreased. Specifically, the balance sheet accounts Cash and Retained Earnings were decreased. The income statement is not affected by the declaration and payment of cash dividends on common stock. (The cash dividends on preferred stock are deducted from net income to arrive at net income available for common stock.) The cash dividends will be reported as a use of cash in the financing activities section of the statement of cash flows.
Income statement or cash flow statement which among these give better profitability? Give reason (3)
It’s important to note that the Cash Flow Statement reflects a firm’s liquidity. It does not show profitability – the Income Statement does that.
Because there is different between liquidity and profitability :
Liquidity
It is the ability of a business to pay its debts in time. By having good liquidity, we mean that a business has sufficient liquid funds (cash and cash equivalents) so that it can repay liabilities. ( 5 )
Nestle Pakistan has two conflicting objectives. Management wants to report the highest possible earnings to stockholders in the near future yet also wants to minimize the taxable income. Indicate the depreciation method that the company will probably use in its financial statements and its federal income tax return. Explain your answer with the reasons.
Accelerated deprecation method will increase the earnings of stockholders and defer the tax liability to far future years and current tax liability will minimum in near future.
What are the three factors which affect the income statement and cash flow? (3)
Financial Statements have the limitation that assessment of future profitability is not possible by reading these. Future profitability depends on a number of factors e.g. quality of products, activities of competitors, general economic situation etc., a picture of which cannot emerge from financial statements.
1) Difference between Cost and Expense? (3)
Cost can be defined as the monetary value of the utility (or benefit) which is yet to be derived from the resources used by the business to earn income.
In simple words it is the benefit that we are expecting to have in future from the asset(s) by using such asset(s) for business purposes or by selling such asset in an arms length transaction.
Expense can be defined as the monetary value of the utility that has already expired because of the use of the resources in business activities directed towards generating income.
In simple words it is the monetary amount of the benefit used up in the asset(s). So, basically it is the consideration that we have paid in generating income.
2) If the company issues stocks or bonds to pay debts, would you include it in the cash flow statement?
If a company issues stocks or bonds for cash and then pays off the debt, the transaction is reported in the financing section of the statement of cash flows. If the transaction is a direct conversion of debt to equity (shares of stock) or debt to bonds and no cash receipts or cash payments occur, the transaction is to be disclosed as supplementary information.
3) Explain how the adoptions of FIFO method rather than LIFO will tend to
raise or lower the quality of a company’s earnings? Assume the continuance of the inflation
During Inflation, FIFO shows less expense on income statement and higher inventory valuation on balance sheet and values ending inventory at current cost, whereas LIFO shows higher expenses on income statement and lower inventory valuation on balance sheet
What is deferred expense?
The term “deferred expense” is used to describe a payment that has been made, but it won’t be reported as an expense until a future accounting period. Entries to distribute un-earned revenue i.e. revenue collected in advance (deferred revenue). It is first recorded as liability, and is gradually reduced in the subsequent accounting period.
How LIFO method help in tax saving?
LIFO approach can help reduce your administrative burden and increase the potential to realize significant tax savings
If a company that sells products (retailer, manufacturer, etc.) finds the cost of its items increasing, the use of LIFO will result in less taxable income and less income tax payments than FIFO. Over a long period of time, or when costs increase dramatically, the lower income tax payments will be significant.
Why businesses record Land at its original cost, even though its of much more value then its cost. Give reasons. 3marks
Land is the long term asset which is never depreciated, rather it is appreciated in value but we do not record the appreciation in its value due to the Historical cost principle of GAAP. If we appreciate its value then our balance sheet would get out of order & would not tally. Revaluation model principle is also important here. Therefore land is always shown at the price at which we bought it rather than its current market value.
Do inventory valuation methods affect profitability of the company? Give examples 3marks
Inventory valuation methods affect reported profits of the company but as it is do not affect profits. it has the ability to influence profits. Inventory valuation methods are FIFO, LIFO, and Weighted Average cost & specific identification. IAS1 deals with inventory valuation & does not allow the use of LIFIO. in FIFO CGS comprises of oldest market price of stock while closing inventory comprises of recent market prices, in inflationary period FIFO may report lower net profits & some companies may use it as a manipulating device to gain undue tax shields.
Gul Ahmad company has Cash sales 270,000 credit sales 490,000 account receivable decreased by 320,000.
Calculate net sales reported in income statement. 2marks
my ans= 270 + 490 = 760
Calculate cash received from customers on account of account receivable. = 270 + 320 = 590
Q3. Is it possible that income summary reports a net loss while the cash generated from operations is a positive figure? Give example 5marks.
Yes it is possible that income summary shows net loss while net cash generated from operations is a positive figure. Because income summary includes all expenses while cash generated from operations exclude non cash & non operating items like depreciation, gain on sale of assets etc. we add them back while calculating the figure for profit. Income summary:
Listed below in random order are the items to be included in the balance sheet Of the Myster y Mountain Lodge at December 31, 2001:
Equipment Rs. 29,200 Buildings Rs. 450,000
Land 425,000 Owner’s capital? Accounts payable 54,800 Cash 21,400 Accounts receivable 10,600 Furnishings 58,700 Salaries payable 33,500 Snowmobiles 15,400 Interest payable 12,000 Notes payable 620,000
Requirement:
Prepare a Balance Sheet at December 31, 2001.
Question No: 29 (Marks: 3 )
Assume that net income was Rs. 200,000, depreciation expense was Rs. 10,000, accounts receivable increased by Rs. 15,000, and accounts payable increased by Rs. 5,000. Calculate the cash flow from operating activities.
A. Net Cash Flow from Operating Activities 200000Rs.
Net income 200,000
Added back
Deprecation 10,000
Increase in account receivable (15,000) Increase in Account payable 5000
Net cash flow from OP activity 200,000
Patterson Company reported net income for the current year of Rs. 666,000. During the year the company’s accounts receivable increased by Rs. 50,000, inventory decreased by Rs. 23,000, accounts payable decreased by Rs. 55,000, pre-paid expenses increased by Rs. 35,000, and accrued expenses payable increased by Rs. 14,000. Determine the amount of cash provided by or used
operating activities by the indirect method.
Net income 666,000
Accounts receivable increased (50,000) Inventory decreased 23,000
Pre-paid expenses increased (35,000) Accounts payable decreased (55,000) Accrued expenses payable increased 14,000
Net cash from OP activities 563,000
Classify the following activities as cash flow from operating, investing and financing activities.
Payments for repurchase of company shares
Collections on loan principal and sales of other firms’ debt instruments Tax payments
Expenditure for purchase of other firms’ equity instruments Payments to suppliers for goods and services
Payments for repurchase of company shares:
Financing activities
Collections on loan principal and sales of other firms’ debt instruments: financing activities.
Tax payments:
Operating activities
Expenditure for purchase of other firms’ equity instruments:
Financing activities
Payments to suppliers for goods and services:
Operating activities
Olympic Inc., had the following cash flows during the current year: Cash received from customers Rs. 240,000 Interest and dividend received 50,000 Proceeds from the sale of the plant assets 330,000 Cash paid to suppliers and employees 127,000 Cash paid for the purchase of investments 45,000 Cash paid for the purchase of treasury stock 36,000
Patterson Company reported net income for the current year of Rs. 666,000. During the year the company’s accounts receivable increased by Rs. 50,000, inventory decreased by Rs. 23,000, accounts payable decreased by Rs. 55,000, prepaid expenses increased by Rs. 35,000, and accrued expenses payable increased by Rs. 14,000. Determine the amount of cash provided by or used for operating activities by the indirect method.
A. Net Cash Flow from Operating Activities 663000Rs.
Valuation of stock, FIFO and LIFO methods.
Valuation of Stock
Any manufacturing organization purchases different material through out the year. The prices of purchases may be different due to inflationary conditions of the
economy. The question is, what item should be issued first & what item should be issued later for manufacturing. For this purpose, the organization has to make a policy for issue of stock. All the issues for manufacturing and valuation of stock are recorded according to the policy of the organization. Mostly these three methods are used for the valuation of stock:
• First in first out (FIFO)
• Last in first out (LIFO) • Weighted average
First in first out (FIFO)
The FIFO method is based on the assumption that the first merchandise purchased is the first merchandised issued. The FIFO uses actual purchase cost. Thus, if merchandise has been purchased at several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold for a given sales transaction may involve several different cost prices.
Characteristics
• This is widely used method for determining values of cost of goods sold and closing stock.
• In the FIFO method, oldest available purchase costs are transferred to cost of goods sold. That means the cost if goods sold has a lower value and the profitability of the organization becomes higher.
• As the current stock is valued at recent most prices, the current assets of the company have the latest assessed values.
Last in first out (LIFO)
As the name suggests, the LIFO method is based on the assumption that the recently purchased merchandise is issued first. The LIFO uses actual purchase cost. Thus, if merchandise has been purchased at several different costs, the inventory (stock) will have several different cost prices. The cost of goods sold for a given sales transaction may involve several different cost prices.
Characteristics
• This is alternatively used method for determining values of cost of goods sold and closing stock.
• In the LIFO method recent available purchase costs are transferred to cost of goods sold. That means the cost of goods sold has a higher value and the profitability of the organization becomes lower.
• As the current stock is valued at oldest prices, the current assets of the company have the oldest assessed values.
Hill Company adjusts its accounts at the end of each month. Prepare the adjusting entries required at December 31 based on the following information.
a. A bank loan had been obtained on December 1. Accrued interest on the loan at December 31 amounts to Rs. 1,050. No interest expense has yet been recorded.
Answer
Interest Expense A/C 1050
Accrued interest A/C 1050
b. Depreciation of the office equipment is based on an estimated life of five years. The balance in the office equipment account is Rs. 24,000; no change has occurred in the account during the year.
Depreciation expense 4800
To accumulated deprecation 4800
c. Interest revenue earned on US government bonds during December amounts to Rs. 750. This accrued interest revenue has not been recorded or received as of December 31.
Interest Receivable on Bonds A/C 750 Interest Income on Bonds A/C 750
OR
Accrued interest 750
Interest income 750
d. On December 31, an agreement was signed to lease a truck for 12 months beginning January 1 at a rate of 35 cents per mile. Usage is expected to be 2,000 miles per month, and the contract specifies a minimum payment equivalent to 18,000 miles a year.
Accrued lease rent 630,000
Lease rent 630,000
e. The company’s policy is to pay all employees up-to-date each Friday. Since December 31 fell on Monday, there was a liability to employees at December 31 for one day’s pay amounting to Rs. 2,800.
Salary Expense 2800
Salary Payable 2800
On 15, 2001, ABC Company sold 1,000 printers to another company. Immediately prior to this sale, the perpetual inventory records of the company for the printers included the following cost layers.
On march 29,1998 Global co. purchased new equipment costing 100,000. Its estimated life is 5 years and Paper copy from vu thirty nine dot com residual value 10,000. For income tax purpose this is classified as a 5-year property and has a depreciation rate
rate of 40%. (5)
Required :
Compute annual depreciation expense for each year until equipment is fully depreciated using 200% declining method, with half year convention.(limit the depreciation expense to year 2003)
QUESTION:
Complete the table :
sales Beginning inventory Net purchases Ending inventory Cost of good sold Gross profit Operating expenses Net income
300,000 95,000 130,000 44000 ? 119,000 90000 ? 600,000 90,000 340,000 ? 330,000 ? ? 25000
Calculate Net cash flow from from operating activities using Direct method. (5)
Rs.
a- Cash received from customers -b- Interest and dividend received -c- Proceed from sale of Plant -d- Cash paid to suppliers&Employees -e- Cash paid for purchase of Investment -f- Cash paid for purchase of Treasury Stock