ACCT 2111

Final Tutorial
 Recap - Common Midterm Mistakes & Corrections

➢ Use cash to figure out how to journalize almost any transaction: Debit Cash → Cash increases
(money comes in), Credit Cash → Cash decreases (money goes out). Applies similarly to asset accounts.
➢ Identify the receivables: Accounts receivable arise when a business sells goods or services on credit,
allowing customers to pay later. Notes receivable refer to written promissory notes that include a promise
to pay a specific amount at a future date.
➢ Prepaid Expense: record as assets until they are utilized. E.g., prepaid insurance, prepaid rent.
➢ Unearned Revenue: record as liability until we deliver the goods / perform the services.
➢ Accrued Revenue / Accrued Expense are not account names! They are the concepts.
➢ To record the consumption of Supplies: Dr. Supplies Expense, Cr. Supplies
Today’s Topics
Chapter 7: PPE and Intangibles
Chapter 9: Liabilities
Chapter 10: Shareholders’ Equity
Chapter 11: The Statement of Cash Flows
Chapter 12: Financial Statement Analysis
 Ch.7 PPE and Intangibles
➢ Property, plant and equipment (PPE), have three defining characteristics. They are:
1. Tangible
2. Used in business operations, and
3. Have useful lives greater than one year.

➢ How to determine the Cost of PPE? For Land, Land improvement, Buildings, Machinery and Equipment
➢ Measure and record depreciation
1. Straight Line Method
2. Double-declining Balance Method

3. Units of Production Method 👉👉👉👉👉👉👉

 Ch.7 PPE and Intangibles

➢ Account for PPE disposals

a) Disposing of a Fully Depreciated Asset for No Proceeds: Dr. A/D, Cr. Asset
b) Disposing of a Not Fully Depreciated Asset for No Proceeds: Dr. A/D, Dr. Loss on disposal, Cr. Asset
c) Selling a PPE: remove the Assets and its A/D, record your Cash received and Gain/Loss on Sale (if any)

➢ Recognition & Subsequent measurement of Intangible Assets

1. Record goodwill when it is purchased, at (Cost of purchasing – Market value of the acquired company’s net assets)
2. Perform impairment test. If the goodwill’s value has increased, there is nothing to record. But if goodwill’s value has
decreased, record an impairment of goodwill loss and write down the book value of the goodwill.
 Question #7

Assume B–1 Accounting Consultants purchased a building for €438,000 and depreciated
it on a straight-line basis over 40 years. The estimated residual value was €72,000. After
using the building for 20 years, B–1 realized that the building will remain useful for only
15 more years. Starting with the 21st year, B–1 began depreciating the building over the
newly revised total life of 35 years and decreased the estimated residual value to €13,800.
Record depreciation expense on the building for years 20 and 21.
Question #7 (answers)
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Year 20 Depreciation Expense

[(438,000 − 72,000) ÷ 40]…………… 9,150
Accumulated Depreciation — Building 9,150

Year 21 Depreciation Expense…………………… 16,080*

Accumulated Depreciation — Building 16,080

Depreciable cost: €438,000 − €72,000 = 366,000

Depreciation through year 20:
€366,000 ÷ 40 = 9,150
€9,150 × 20 = 183,000
Asset’s remaining depreciable book value:
€438,000 − 183,000 − 13,800 = 241,200
New estimated useful life remaining: 15 years
New annual depreciation: €241,200 ÷ 15 = €16,080
 Ch.9 Liabilities

➢ Liabilities
• Recognized on the Balance Sheet when it is probable that such an outflow will occur (1) and the amount of which can be
measured reliably (2).
• Current Liabilities: due within 12 months (short-term); Non-current Liabilities: due after 12 months (long-term).
• The current portion of long-term debt that is due within 12 months after the reporting date must be classified as a current
liability, even if the original loan term was long-term!
• Provisions are likely to affect the company’s finances but there is uncertainty about their value or timing. For example, the
exact amount of warranty expense cannot be known with certainty, so the business must estimate warranty expense related
liability. Dr. Warranty Expense, Cr. Warranty Payable.
• Contingent Liabilities disclosed in the notes but NOT recognized when the outflow of resources is possible but not
probable; not disclosed when the probability of a contingent loss to occur is remote.
 Ch.9 Liabilities

➢ Evaluate a company’s debt-paying abilities

• Debt ratio

(1) Measure of an entity’s indebtedness; (2) A debt ratio below 50% is considered low

• Times-Interest-Earned Ratio

Measures the number of times that operating income can cover interest expense.
 Question #9
The following transactions of Lovely Melody Music Company occurred during 20X0 and 20X1:

Record the transactions in Lovely Melody Music Company’s journal.

Explanations are not required.
Question #9 (answers)
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
20X0
Mar. 3 Inventory…………………………………… 35,000
Note Payable, Short-term…………… 35,000

May 31 Cash………………………………………… 75,000

Note Payable, Short-term…………… 15,000
Note Payable, Long-term…………… 60,000

Sept. 3 Note Payable, Short-term……………… 35,000

Interest Expense (35,000 × .10 × 6/12) 1,750
Cash…………………………………… 36,750

Dec. 31 Warranty Expense (198,000 × .015)… 2,970

Warranty Payable 2,970

Dec. 31 Interest Expense

(75,000 × .08 × 7/12)…………………… 3,500
Interest Payable……………………… 3,500

20X1
May 31 Note Payable, Short-term……………… 15,000
Interest Payable…………………………… 3,500
Interest Expense (75,000 × 0.08 × 5/12).. 2,500
Cash [15,000 + (75,000 × .08)].... 21,000
 Ch.10 Shareholders’ Equity

➢ Issuance Price = Par Value: Dr. Cash Cr. Ordinary shares

➢ Issuance Price > Par Value: Dr. Cash Cr. Ordinary shares
Cr. Additional Paid-in Capital or Share Premium

A company’s return to equity holders

1) Market Capitalization = Current Share Price * Total Number of
Shares Outstanding
2) Book Value per =
Ordinary Share
3) Earnings per share =
➢ Treasury Shares, a company’s own shares that it had issued and later
reacquired (purchased back)
4) Return on Equity =
➢ When purchased: Dr. Treasury shares Cr. Cash * Average = (beginning + ending balance) / 2
➢ When sold at higher price later: Dr. Cash Cr. T/S Cr. APIC or Share Premium
 Question #10 - MCQ
(1) A company purchased 100 shares of its ordinary shares at $50 per share. It then sells 40 of the treasury shares at $56 per
share. The entry to sell the treasury shares includes a
a. credit to Cash for $2,240.
b. debit to Retained Earnings for $240.
c. credit to Retained Earnings for $600.
d. credit to Additional Paid-in Capital, Treasury Shares for $240.
e. credit to Treasury Shares for $2,240.

(2) Which of the following statements is not true about a 3-for-1 stock split?
a. Total shareholders’ equity increases.
b. The market price of each share will decrease.
c. Retained Earnings remains the same.
d. A shareholder with 10 shares before the split owns 30 shares after the split.
e. Par value is reduced to one-third of what it was before the split.
 Question #10 - MCQ (answers)
(1) A company purchased 100 shares of its ordinary shares at $50 per share. It then sells 40 of the treasury shares at $56 per
share. The entry to sell the treasury shares includes a
a. credit to Cash for $2,240. Dr. Cash ($56*40) 2,240

b. debit to Retained Earnings for $240. Cr. Treasury Shares ($50*40) 2,000
Cr. Additional Paid-in Capital, T/S 240
c. credit to Retained Earnings for $600.
d. credit to Additional Paid-in Capital, Treasury Shares for $240.
e. credit to Treasury Shares for $2,240.

(2) Which of the following statements is not true about a 3-for-1 stock split?
a. Total shareholders’ equity increases. ❑ A 3-for-1 stock split means that for every one share an

b. The market price of each share will decrease. investor owns, they will receive three shares in return.
❑ An increase in the number of shares authorized, issued and
c. Retained Earnings remains the same.
outstanding. Decreases the market price of the share.
d. A shareholder with 10 shares before the split owns 30 shares after the split. ❑ No accounts affected.

e. Par value is reduced to one-third of what it was before the split.

 Question #10 - LQ

Journalize the following assumed transactions of Golden Threads Productions:

What was the overall effect of these transactions on Golden Threads’ shareholders’ equity?
Question #10 – LQ (answers)
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Mar. 17 Cash (5,000 × $7)………………………….. 35,000

Share Capital (5,000 × $1.50)………… 7,500
Additional Paid-in Capital……. 27,500
To issue share capital.

Apr. 20 Treasury Shares (1,400 × $16).. 22,400

Cash…………………………………….... 22,400
To purchase treasury shares.

Aug. 8 Cash (1,000 × $17)………………………….. 17,000

Treasury Shares (1,000 × $16) 16,000
Additional Paid-in Capital ……………….. 1,000
To sell treasury shares.

Overall effect on shareholders’ equity

($35,000 − 22,400 + 17,000) — $29,600 increase
 Ch.11 The Statement of Cash Flows

Major classes of Cash

Receipts and Cash
Payments on the Statement
of Cash Flows 👉

How do Balance Sheet items

show the impacts of e.g., Long-term Debt

Operating, Investing, and

e.g., PPE, Long-term
Financing Cash Flows? investments e.g., Shares, Dividends Paid
 Ch.11 Cash Flows

Indirect Method Direct Method (Less used)

Prepare A Cash Flow Statement | Indirect Method (10 mins video tutorial!)
Note: The Operating Activities section is where the Indirect and Direct methods differ.
Both methods yield identical net cash flow from operating activities but present the Link: [Link]
information differently.
Starting Point Begins with Net Income Lists major classes of gross cash receipts
(from Income and payments (e.g., cash from customers,
Statement). cash paid to suppliers).
Approach Reconciles net income to Directly reports actual cash inflows and
net cash flow by outflows from operating activities.
adjusting for non-cash
items and changes in
working capital.
Complexity Easier and less time- More complex and data-intensive –
consuming – uses data requires detailed cash transaction
already in financial records.
statements.
Transparency Less transparent – users More transparent – provides clearer
see adjustments, not information about the sources and uses
actual cash movements. of cash.
Template (using Indirect Method)
 Ch.11 Cash Flows
➢ Evaluate a Company’s Ability to Generate Cash Flows

❑ Free Cash Flows

Evaluation: The amount of cash available from operations after paying for capital expenditures (typically investments in
new PPE). It evaluates how much cash a company can “free up” for new opportunities.

❑ Cash Realization Ratio

Evaluation: Measures amount of net profit reflected in actual cash generated from operations (CFO). The company’s
cash conversion ability! A number greater than 1 is considered a good ability to realize cash from profits.
 Question #11
The Income Statement and additional data of Norton Travel Products, Inc., follow:

Additional data:
a. Acquisition of PPE was €180,000. Of this amount, €145,000
was paid in cash and €35,000 by signing a note payable.
b. Proceeds from sale of land totaled €49,000.
c. Proceeds from issuance of shares totaled €34,000.
d. Payment of long-term note payable was €16,000.
e. Payment of dividends was €9,000.
f. From the Balance Sheets:

Requirements
1. Prepare Norton’s Statement of Cash Flows for the year
ended December 31, 20X6, using the indirect method.
2. Evaluate Norton’s cash flows for the year, including its free
cash flow and cash realization ratio. In your evaluation,
review all three categories of cash flows and give the
reason for your evaluation.
 Norton Travel Products, Inc.
Statement of Cash Flows
Year Ended December 31, 20X6
Cash flows from operating activities:
Net income…………………………………………... 32,600
Adjustments to reconcile net income to Evaluation:
net cash provided by operating activities:
Depreciation……………………………………... 33,000 Free Cash Flow = net cash provided by operating activities –
Decrease in accounts receivable……………. 16,000
cash payments for investments in PPE = 105,700 - 145,000 =
Decrease in inventory………………………….. 39,000
Increase in prepaid expenses………………… (900) (39,300)
Increase in accounts payable………………… 15,000
Decrease in accrued liabilities……………….. (29,000) 73,100 Cash realization ratio = Ratio of CFO/Net Profit = 105,700/
Net cash provided by operating activities…. 105,700 32,600 = 3.24

Cash flows from investing activities:

Acquisition of PPE……………………………….... (145,000) Norton’s cash flows look strong. Operations are the main source
Proceeds from sale of land……………………….. 49,000
Net cash used for investing activities………. (96,000) of cash. It was able to issue shares, pay dividends, and pay off a
long-term note payable. Its cash realization ratio is also strong.
Cash flows from financing activities:
Proceeds from issuance of shares……………… 34,000 Norton’s free cash flow is negative as it invested heavily in new
Payment of long-term note payable…………….. (16,000)
Payment of dividends …………………………….. (9,000) PPE. All of these signs are favorable.
Net cash provided by financing activities….. 9,000
Net increase in cash…………………………………… 18,700
Cash balance, December 31, 20X5………………….. 13,300
Cash balance, December 31, 20X6………………….. € 32,000

Noncash investing and financing activities:

Question #11
Acquisition of PPE by issuing note payable € 35,000 (answers)
 Ch.12 Financial Statement Analysis
➢ Basic (Horizontal and Vertical) Analysis of Financial Statement

❑ Horizontal Analysis

The study of percentage changes from year to year.

❑ Trend Analysis

A form of horizontal analysis. Trend percentages over a representative period.

❑ Vertical Analysis

All items reported as a percentage of the base. Balance sheet usually use total assets as base.
Ch.12 Financial Statement Analysis
Financial Ratios Analysis
(Efficiency & Financial Strength)
 Ch.12 Financial Statement Analysis

Financial Ratios
Analysis
(Profitability &
Investment)
 Question #12
Comparative financial statement data of Bloomfield Optical Mart follow:

Other information:
a) Market price of Bloomfield ordinary share: $82.20 at December 31, 20X6, and $52.96 at December 31, 20X5.
b) Ordinary shares outstanding: 20,000 during 20X6 and 18,000 during 20X5.
 Question #12
Requirements
1. Compute the following ratios for 20X6 and 20X5:
a. Current ratio
b. Inventory turnover
c. Times-interest-earned ratio
d. Return on assets
e. Return on common shareholders’ equity
f. Earnings per share
g. Price/earnings ratio

2. Decide whether (a) Bloomfield’s financial position improved or deteriorated during 20X6 and (b) the investment
attractiveness of Bloomfield’s ordinary shares appears to have increased or decreased.

3. How will what you have learned in this problem help in the evaluation of an investment?
 Question #12 (answers)
Req 1
 Question #12 (answers)
Req 2
(a) The company’s financial position improved during 20X6 as shown by increases in the current ratio, the
inventory turnover and in the times-interest-earned ratio.
(b) The ordinary share’s attractiveness increased during 20X6, as shown by the increase in the market price
of the ordinary share. This increase is consistent with the increase in return on assets, return on ordinary
shareholders’ equity, and earnings per share of ordinary share. The price/earnings ratio showed a slight
decline.

Req 3
This problem gives you practice in computing and evaluating several of the ratios used in investment
analysis. By analyzing the two-year trends in the ratios, you can see whether the company’s abilities to pay
its debts, sell its inventory, and generate profits have improved or deteriorated during this period.
Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually
signal an unattractive investment.
Thanks!
Keep cozy, stay healthy and be safe!