Module 3

Constructing Financial Statements

and Analyzing Transactions
Learning Objectives – coverage by question
Multiple Essay
True/False Exercises Problems
Choice Questions
LO1 Analyze
and record
transactions
using the
1-6 1-8 1-4 1-4 1-2
financial
statement
effects
template.
LO2 Prepare
and explain
accounting
1-2
adjustments
7-12 9-16 4-9 & 1,3
and their
5
financial
statement
effects.
LO3 Explain
and construct
13 17-19 9-10 6 1,4
the trial
balance.
LO4
Construct
financial
- 20-21 11-13 6-8 1,5
statements
from the trial
balance.
LO5 Describe
the closing 14-15 22-25 14 9-10 1,6
process

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-1
Module 3: Constructing Financial Statements and Analyzing Transactions

True/False
Topic: Financial statement effects template
LO: 1
1. The financial statement effects template captures the effects of transactions on all four
financial statements.

Answer: True
Rationale: The balance sheet accounts are all on the right side of the template and the income
statement accounts on the left. In addition, the cash column provides the statement of cash flows,
and the two equity columns can be used to construct the statement of shareholders’ equity.

Topic: Journal Entries

LO: 1
2. Assets, expenses and dividends increase with debits.

Answer: True
Rationale: Assets increase with debits and equity decreases with debits. Therefore, expenses
and dividends decrease equity – they are debits.

Topic: Journal Entries

LO: 1
3. Increases are recorded on the left side of asset T-accounts and on the right side of liability T-
accounts.

Answer: True
Rationale: Debits increase assets and credits increase liabilities.

Topic: Financial statement effects of transactions

LO: 1
4. When shareholders contribute capital to a company, earned capital increases because the
company has earned the shareholders’ trust and their investments.

Answer: False
Rationale: When shareholders contribute capital to a company, contributed, not earned, capital
increases.

Topic: Financial statement effects of transactions

LO: 1
5. Revenues and expenses affect the income statement but not the balance sheet.

Answer: False
Rationale: Revenue and expense recognition increases retained earnings on the balance sheet.

Cambridge Business Publishers, ©2010

3-2 Financial Accounting for MBAs, 4th Edition
Topic: Financial statement effects of transactions
LO: 1
6. Revenue is typically recorded as earned when cash is received because that is when the
company can measure the revenue objectively.

Answer: False
Rationale: Revenue is recorded when it is earned regardless of when cash is received.

Topic: Financial statement effects of transactions

LO: 2
7. Expenses that are paid in advance are held on the balance sheet until the end of the
accounting period when they are transferred to the income statement with accounting
adjustments.

Answer: False
Rationale: Expenses paid in advance include prepaid insurance, inventory and fixed assets. All
of these items end up on the income statement when they are used up, not necessarily at the end
of the accounting period.

Topic: Accrual Accounting

LO: 2
8. Accrual accounting recognizes revenues only when cash is received and expenses only when
cash is paid.

Answer: False
Rationale: Accrual accounting refers to the recognition of revenue when earned and the
matching of expenses when incurred. The recognition of revenues and expenses does not,
necessarily, relate to the receipt or payment of cash.

Topic: Accrual Accounting

LO: 2
9. The journal entry for recording sales revenue that has been earned is to debit accounts
receivable if cash will be received later, or debit unearned revenue if cash was received in
advance.

Answer: True
Rationale: If cash is received later, the debit is to accounts receivable. If the cash is received
before revenue is earned then the appropriate debit is to unearned revenue.

Topic: Accounting Adjustments

LO: 2
10. The journal entry for recording cost of sales is to debit cost of sales expense and credit the
inventory account.

Answer: True
Rationale: The journal entry for recording cost of sales is to debit cost of sales expense and
credit inventory. When the cash is paid for the inventory does not affect the expense.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-3
Topic: Accounting Adjustments
LO: 2
11. Accounting scandals happen when managers abuse the accounting adjustment process.

Answer: False
Rationale: Accounting scandals can happen with improperly recorded transactions or with
improper accounting adjustments. As well, even if managers abuse the adjustment process, it is
not the case that a scandal always ensues.

Topic: Accounting Adjustments

LO: 2
12. Companies make adjustments to more accurately reflect items on the income statement and
the balance sheet.
Answer: True
Rationale: Adjustments ensure that performance and position are accurately portrayed in the
financial statements.

Topic: Trial Balance

LO: 3
13. Companies typically prepare two trial balances – one after recording all the transactions and
one after recording all the accounting adjustments.

Answer: True
Rationale: An unadjusted and an adjusted trial balance are both part of the accounting cycle.

Topic: Closing Accounts

LO: 5
14. A company closes all of its accounts in order to zero out the balances so that next period
starts with a fresh slate.

Answer: False
Rationale: A company closes its temporary accounts only. Balance sheet accounts are never
closed out – they have cumulative balances.

Topic: Closing Accounts

LO: 5
15. To close revenue accounts, a company must debit Retained Earnings because Revenue has
a credit balance and debits must equal credits.

Answer: False
Rationale: Revenue does have a credit balance. Therefore, to close Revenue, the company
debits Revenue and credits Retained earnings.

Cambridge Business Publishers, ©2010

3-4 Financial Accounting for MBAs, 4th Edition
Multiple Choice
Topic: Financial statement effects – Sales on account
LO: 1
1. Sales on account would produce what effect on the balance sheet?
a. Increase Revenue
b. Increase non-cash assets (Accounts receivable)
c. Decrease non-cash assets (Inventory)
d. a and b
e. a and b and c

Answer: b
Rationale: Revenue is not on the balance sheet (answer a is incorrect). Inventory is not always
decreased – think of service revenue (answer b is incorrect).

Topic: Financial statement effects – Collection of a receivable

LO: 1
2. Cash collected on accounts receivable would produce what effect on the balance sheet?
a. Increase liabilities and decrease equity
b. Decrease liabilities and increase equity
c. Increase assets and decrease assets
d. Decrease assets and decrease liabilities
e. None of the above

Answer: c
Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease
in accounts receivable, both asset accounts. There is no impact on profit and on equity.

Topic: Financial statement effects – Inventory purchase

LO: 1
3. How would a purchase $100 of inventory on credit affect the income statement?
a. It would increase liabilities by $100
b. It would decrease liabilities by $100
c. It would increase non-cash assets by $100
d. Both a and c
e. None of the above

Answer: e
Rationale: There is no income statement effect of an inventory purchase.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-5
Topic: Financial statement effects – Inventory purchase
LO: 1
4. During fiscal 2007, Kenneth Cole Productions recorded inventory purchases on credit of
$289.2 million. The financial statement effect of these purchase transactions, would be a (an):
a. Increase liabilities (Accounts payable) by $289.2 million
b. Decrease cash by $289.2 million
c. Increase expenses (Cost of goods sold) by $289.2 million
d. Decrease non-cash assets (Inventory) by $289.2 million
e. Both a and d

Answer: a
Rationale: Purchases do not involve cash or expenses (b and c are incorrect). Non-cash assets
increase not decrease (d is incorrect).

Topic: Financial statement effects – Cost of goods sold – Numerical calculation required
LO: 1
5. During fiscal 2007, Kenneth Cole Productions recorded inventory purchases on credit of
$289.2 million. Inventory at the start of the year was $46.3 million and at the end of the year was
$48 million. Which of the following describes how these transactions would be entered on the
financial statement effects template?
a. Increase liabilities (Accounts payable) by $287.5 million
b. Increase expenses (Cost of goods sold) by $289.2 million
c. Increase expenses (Cost of goods sold) by $287.5 million
d. Decrease non-cash assets (Inventory) by $1.7 million
e. Both a and c

Answer: c
Rationale: Cost of goods sold is purchases less the increase in inventory = $287.5 (c is correct)
Liabilities increase by $289.2 when the inventory was purchased (not $287.5) so a is incorrect.
Inventory decreases during the year by $1.7million but not because of a transaction being
entered (d is incorrect).

Cambridge Business Publishers, ©2010

3-6 Financial Accounting for MBAs, 4th Edition
 Topic: Financial statement effects – Accounts receivable collection
LO: 1
6. During fiscal 2007, E. I. DuPont de Nemours and Company recorded cash of $28,893 million
from customers for accounts receivable collections. Which of the following financial statement
effects template entries captures this transaction?

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+28,893
-28,893
a. +28,893
(AR)
= (Retained +28,893 – = +28,893
earnings)
-28,893
b. +28,893
(AR)
= – =
+28,893
+28,893
c. (AR)
= (Retained +28,893 – = +28,893
earnings)
+28,893
d. -28,893
(AR)
=

Answer: b
Rationale: Collecting cash from customers increases cash and decreases accounts receivable.
There is no income statement effect.

Topic: Financial statement effects of equity transactions – Numerical calculations required.

LO: 1
7. During fiscal 2008, Black & Decker Corporation reported Net income of $293.6 million and paid
dividends of $101.8 million. Which of the following describes how these transactions would affect
Black and Decker’s equity accounts? (in millions)
a. Increase contributed capital by $293.6 and decrease earned capital by $101.8
b. Decrease contributed capital by $101.8 and increase earned capital by $293.6
c. Increase contributed capital by $191.8
d. Increase earned capital by $191.8
e. None of the above

Answer: d
Rationale: Net income increases earned capital and dividends decrease earned capital. The net
effect is an increase to earned capital.

Topic: Financial statement effects of equity transactions – Numerical calculations required.

LO: 1
8. Kay’s Bakery, Inc. began operations in October 2009. The owner contributed cash of $5,000
and a delivery truck with fair value of $7,000 to the company. Which of the following describes
how these transactions would affect the company’s equity accounts? (in millions)
a. Increase contributed capital by $12,000
b. Increase earned capital by $12,000
c. Increase contributed capital by $5,000 and earned capital by $7,000
c. Increase earned capital by $5,000 and contributed capital by $7,000
e. None of the above

Answer: a
Rationale: Cash and equipment have both been contributed by the owner – this represents
contributed capital.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-7
 Topic: Accounting adjustment – Accrue wages
LO: 2
9. An accrual of wages expense would have what effect on the balance sheet?
a. Decrease liabilities and increase equity
b. Increase assets and increase liabilities
c. Increase liabilities and decrease equity
d. Decrease assets and decrease liabilities
e. None of the above

Answer: c
Rationale: An accrual of wages expense increase wages payable (a liability) and decreases
retained earnings, resulting from the decrease in net income.

Topic: Accounting adjustments – Cost of goods sold – Numerical calculation required

LO: 2
10. At the end of fiscal 2009, Brady’s Greenhouse counted inventory and determined that
inventories of $14,290 were on hand. The 2009 unadjusted trial balance showed a balance in the
Inventory account of $15,000. Inventory at the start of the year was $17,220. Which of the
following accounting adjustments should Brady’s Greenhouse record?

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
-710
-710 +710
a. (Inventory)
= (Retained – (COGS)
= -710
earnings)
-2,220
-2,220 +2,220
b. (Inventory)
= (Retained – (COGS) = -2,220
earnings)
-2,930
-2,930 +2,930
c. (Inventory)
= (Retained – (COGS) = -2,930
earnings)
d. No
accounting
=
adjustment is
required.

Answer: a
Rationale: Unadjusted balance of $15,000 must be decreased to actual inventory on hand of
$14,290. This requires a decrease to inventory and an increase in COGS.

Cambridge Business Publishers, ©2010

3-8 Financial Accounting for MBAs, 4th Edition
Topic: Accounting adjustment – Supplies inventory – Numerical calculations required
LO: 2
11. During its first three months of operations, Kay’s Bakery, Inc. purchased supplies such as
plates, napkins, bags, and cutlery for $1,500 and recorded this as an expense. Supplies on hand
at the end of the first quarter, amount to $400. To prepare financial statement for the first quarter,
the company must record which of the following accounting adjustments?
a. Increase Supplies expense by $400 and decrease Supplies inventory by $400
b. Increase Supplies expense by $1,100 and decrease Supplies inventory by $1,100
c. Increase Supplies inventory by $400 and decrease Supplies expense by $400
d. Increase Supplies inventory by $1,100 and decrease Supplies expense by $1,100
e. None of the above

Answer: c
Rationale: Supplies on hand are $400, these must be recorded with an increase to supplies
inventory of $400.

Topic: Recognition of costs as expense

LO: 2
12. As inventory and PPE assets on the balance sheet are consumed, they are reflected:
a. As a revenue on the income statement
b. As an expense on the income statement.
c. As a cash flow outflow on the Statement of Cash flows.
d. Both b and c
e. Assets are never consumed.

Answer: b
Rationale: As assets are consumed (used up), their cost is transferred into the income statement
as an expense. The cash outflow occurred when the assets were originally purchased and not
when they are used up.

Topic: Accounting adjustment for depreciation expense

LO: 2
13. A company records an adjusting journal entry to record $15,000 depreciation expense.
Which of the following describes the entry?
a. Debit Property Plant and Equipment and Credit Depreciation expense
b. Debit Depreciation expense and Credit Property Plant and Equipment
c. Debit Property Plant and Equipment and Credit Cash
d. Debit Depreciation expense and Credit Cash

Answer: b
Rationale: Depreciation is an expense which decreases retained earnings – it is a debit. Property
plant and equipment is being used up and thus its balance is decreasing on the balance sheet – it
requires a credit.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-9
Topic: Accounting adjustments
LO: 2
14. Which account is least likely to appear in an accounting adjustment?
a. Interest expense
b. Cost of goods sold
c. Cash
d. Sales

Answer: c
Rationale: Cash is hardly ever in need of adjustment. An exception occurs when there has been a
fraud and cash is missing. Then, the cash account needs to be adjusted to reflect its lower
balance.

Topic: Calculating net income from transactions – Numerical calculations required

LO: 2
15. During the month of March 2010, Weaver World, a tax-preparation service, had the following
transactions.
 Billed $74,000 in revenues on credit
 Received $41,000 from customers’ accounts receivable
 Incurred expenses of $33,500 but only paid $19,425 cash for these expenses
 Prepaid $5,555 for computer services to be used next month
What was the company’s accrual basis net income for the month?
a. $16,020
b. $10,465
c. $40,500
d. none of the above

Answer: c.
Rationale:
Revenues (earned) $74,000
Expenses (incurred) $33,500
Net income $40,500

Topic: Calculating operating cash flow from transactions – Numerical calculations required
LO: 2
16. During the month of March 2010, Weaver World, a tax-preparation service, had the following
transactions.
 Billed $74,000 in revenues on credit
 Received $41,000 from customers’ accounts receivable
 Incurred expenses of $33,500 but only paid $19,425 cash for these expenses
 Prepaid $5,555 for computer services to be used next month
What was the company’s net cash flow from operations for the month?
a. $16,020
b. $10,465
c. $74,000
d. none of the above

Answer: a
Rationale:
Revenues (cash receipts) $41,000
Expenses ($19,425+$5,555) $24,980
Cash from operating activities $16,020

Cambridge Business Publishers, ©2010

3-10 Financial Accounting for MBAs, 4th Edition
Topic: Trial balance components
LO: 3
17. Which of the following would not be included in a trial balance?
a. Net income
b. Accounts receivable
c. Contributed Capital
d. Depreciation expense
e. None of the above – they are all included on the trial balance.

Answer: a
Rationale: Net income is not an account, it is a sum of all income and expense accounts.
Therefore, it would not appear on a trial balance.

Topic: Trial balance

LO: 3
18. The unadjusted trial balance for Fitness World for December 31, 2008 reported Supplies
inventory of $530. The adjusted trial balance reported Supplies inventory of $0. Which of the
following is a plausible explanation for this difference?
a. The Supplies inventory account was closed so that next period’s account will begin afresh.
b. Supplies inventory should never appear on a trial balance, so the error was fixed.
c. Supplies expense had not been properly recorded during the period.
d. Supplies had been erroneously excluded from the unadjusted trial balance, so they were
added.
e. None of the above.

Answer: c
Rationale: Supplies had been used up during the period and an accounting adjustment was
required to reflect that fact.

Topic: Trial balance

LO: 3
19. Companies prepare unadjusted trial balances:
a. To detect transactions that were posted to the wrong accounts.
b. To ensure that debits = credits in each account.
c. To help prepare financial statements
d. To detect all accounting errors
e. Both c and d

Answer: c
Rationale: a is incorrect because posting to an incorrect account will still yield a trial balance that
balances. B is incorrect because each account only has one balance, either debit or credit and
the two do not need to match. D is incorrect because there are many accounting errors that will
not be detected by a trial balance, for example, posting the incorrect amounts or posting to
incorrect accounts.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-11
Topic: Items involved in preparing income statement from trial balance
LO: 4
20. Which of the following trial balance items would not be involved in preparing the income
statement?
a. Depreciation expense
b. Accumulated depreciation
c. Rent expense payable
d. Interest income
e. b and c.

Answer: e
Rationale: Accumulated depreciation and rent expense payable are both balance sheet accounts.

Topic: Preparing statement of cash flows

LO: 4
21. A statement of cash flows usually does not include which of the following?
a. Net income
b. Increase in accounts receivable
c. Contributed Capital
d. Depreciation expense
e. All of the above.

Answer: c
Rationale: Contributed capital is a balance sheet account and is not included in the statement of
cash flows. Changes in the contributed capital account would be included, however.

Topic: Closing entries

LO: 5
22. Which of the following accounts would not appear in a closing entry?
a. Net income
b. Depreciation expense
c. Cost of goods sold
d. Inventory
e. Both a and d

Answer: e
Rationale: Net income (answer a) is not a trial balance account so it is not closed. Inventory
(answer d) is a balance sheet (permanent) account, which is never closed. Therefore, the correct
answer is e.

Topic: Closing entries – Dividends – Numerical calculation required

LO: 5
23. During 2008, Nike Inc, reported Net income of $1,883.4 million. The company declared
dividends of 23% of Net income. The closing entry for dividends would include which of the
following?
a. Credit Dividends expense for $433.182 million
b. Credit Dividends expense for $1,450.218 million
c. Debit Net income for $1,450.218 million
d. Debit Retained earnings for $433,182
e. Both a and d

Answer: d
Rationale: Dividends are not an expense and net income is not involved in dividends.

Cambridge Business Publishers, ©2010

3-12 Financial Accounting for MBAs, 4th Edition
Topic: Closing entries
LO: 5
24. Which of the following accounts would not appear in a closing entry?
a. Interest expense
b. Accumulated depreciation
c. Cost of goods sold
d. Dividends
e. Both d and c

Answer: b
Rationale: Accumulated depreciation is a balance sheet (permanent) account, which is never
closed.

Topic: Closing entries – Inventory and Cost of goods sold

LO: 5
25. During fiscal 2007, Kenneth Cole Productions reported Cost of goods sold of $287.4 million.
Inventory at the start of the year was $46.3 million and at the end of the year was $48 million.
Which of the following describes the closing entry that the company will make for these accounts?
a. Credit inventory $1.7 million ($48 million - $46.3 million)
b. Credit inventory $48 million
c. Credit Cost of goods sold $287.4 million
d. Both a and c
e. None of the above

Answer: c
Rationale: Cost of goods sold is a temporary account that must be closed. Inventory accounts are
never closed – they are permanent accounts.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-13
 Exercises
Topic: Using the Financial Statements Effects Template – Balance sheet and income statement
LO: 1
1. Record the following transactions in the financial statements effects template below.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Purchase
$5,000 of
= – =
inventory on
credit
Sell all
inventory for
= – =
$9,000 on
account
Collect $2,000
cash for
= – =
accounts
receivable
Pay $3,000
cash toward
= – =
accounts
payable

Answer:
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Purchase
$5,000 of +5,000 +5,000
= – =
inventory on (Inventory) (AP)
credit
Sell all +9,000
inventory for +4,000
+9,000 – +5,000
(AR)
= (Retained = +4,000
$9,000 on -5,000 earnings)
(COGS)
account (Inventory)
Collect $2,000
cash for –2,000
+2,000 = – =
accounts (AR)
receivable
Pay $3,000
cash toward
–3,000 = –3,000 – =
accounts (AP))
payable

Cambridge Business Publishers, ©2010

3-14 Financial Accounting for MBAs, 4th Edition
 Topic: Using the Financial Statements Effects Template – Balance sheet only
LO: 1
2. Record the following transactions in the financial statements effects template below.
a) Founder contributes $6,000 in cash in exchange for common stock
b) Obtain $9,000 short-term bank loan.
c) Purchase equipment costing $7,000 for cash
d) Purchase inventory costing $1,000 on account

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
a) = – =
b) = – =
c) = – =
d) = – =

Answer:
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+6,000
a) +6,000 = (Common – =
Stock)
+9,000
b) +9,000 = (Note – =
payable)

c) -7,000 +7,000 = – =
(Equipment)

d) +1,000 = +1,000 – =
(Inventory) (AP)

Topic: Inferring transactions from reported financial statements

LO: 1
3. The 2007 income statement and balance sheet for Kohl’s Corporation shows the following
items (in thousands):
Net sales $16,473,734
Cost of merchandise sold 10,459,549
Merchandise inventories 2,855,733

Prepare the journal entries to record Net sales and Cost of goods sold for Kohls’ for 2007.

Answer:
Debit Cash 16,473,734
Credit Net sales 16,473,734
To record sales for the year (Kohl’s is a cash and carry department store, thus no credit sales.

Debit Cost of merchandise sold 10,459,549

Credit Merchandise inventories 10,459,549
To record cost of merchandise sold expense for the year.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-15
 Topic: Using the Financial Statements Effects Template – Numerical calculations required
LO: 1, 2
4. Record the following transactions in the financial statements effects template below.
a) Company receives $1,000 from the sale of gift certificates.
b) Customers used $950 gift certificates. The cost of the inventory sold is $650.
c) The balance of the gift certificates expire unused.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
a) = – =
b) = – =
c) = – =

Answer:
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+1,000
a) +1,000 = (Unearned – =
revenue)

-950 +300 +650

b) -600 = +950 – (Cost of
= +300
(Unearned (Retained
(Inventory) goods
revenue) earnings) sold)
-50 +50
c) = (Unearned (Retained +50 – = +50
revenue) earnings)

Cambridge Business Publishers, ©2010

3-16 Financial Accounting for MBAs, 4th Edition
Topic: Preparing accounting adjustments and closing entries – Numerical calculations required
LO: 2, 5
5. The balance sheet of Santa Fe Promotion includes the amounts shown below. Analysis of the
company’s records reveals the following transactions during 2009, the company’s first year of
operations:
Cash received from customers, recorded as service revenue $207,650
Purchase of supplies for cash, expensed $ 29,000
Cash paid for salaries, expensed $ 85,400

Analysis of the company’s balance sheet accounts reveals that at year end, supplies on hand
total $5,300, employees have earned $8,000 but have not yet been paid, and on the last day of
the fiscal year, customers paid deposits of $14,700 for future promotions (this is included in total
cash received from customers, above).

Prepare journal entries to adjust the account balances for revenue, supplies expense and salary
expense for the year end. Prepare closing entries.

Answer:
Debit Service revenue 14,700
Credit Unearned revenue 14,700
To record unearned revenue for deposits received from customers.

Debit Supplies inventory 5,300

Credit Unearned revenue 5,300
To record supplies on hand at year end.

Debit Salary expense 8,000

Credit Salaries payable 8,000
To record unpaid wages at year end.

Debit Service revenue 192,950

Credit Retained earnings 192,950
To close revenues at year end.

Debit Retained earnings 23,700

Credit Supplies expense 23,700
To close supplies expense at year end.

Debit Retained earnings 70,700

Credit Salaries expense 70,700
To close salaries expense at year end.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-17
Topic: Adjusting accounts – Numerical calculations required (More challenging, requires
decrease to expense account)
LO: 2
6. The unadjusted trial balance of Pepe’s Pizza for fiscal 2009, includes the following items:

Debit Credit
Inventory $23,900
Wages payable $ 400
Prepaid insurance 1,900
Taxes payable 0

Your analysis reveals additional information as follows:

 the cost of inventory items on hand is $11,600
 employee wages for the two weeks prior to year end were $3,900 and these will not be
paid until the 2010 fiscal year
 the unexpired portion of the company’s insurance policy at year end was $2,300
 the company’s tax accountant reports that the company will owe $27,000 for income
taxes for fiscal 2009.

Prepare journal entries for any required accounting adjustments.

Answer:
Debit Cost of goods sold 12,300
Credit Inventory 12,300
To record inventory used by year end

Debit Wages expense 3,500

Credit Salary payable 3,500
To record unpaid salaries at year end

Debit Prepaid insurance 400

Credit Insurance expense 400
To record prepaid insurance still available at year end

Debit Tax expense 27,000

Credit Taxes payable 27,000
To record taxes owing for the year.

Cambridge Business Publishers, ©2010

3-18 Financial Accounting for MBAs, 4th Edition
Topic: Adjusting accounts – Numerical calculations required (More challenging, requires
decrease to expense account)
LO: 2
7. The unadjusted trial balance of Chicken Express for December 31, 2009, includes the following
items:

Debit Credit
Prepaid rent $17,280
Accumulated depreciation - Van $2,750
Accumulated depreciation - Stoves 4,875
Gift certificates – unearned revenue 780

Your analysis reveals additional information as follows:

 The company prepaid rent of $1,440 per month on June 1, 2009.
 The company bought the van two years ago. The van cost $22,000 and is expected to
last eight years. The company’s policy is to record depreciation evenly over the asset’s
useful life.
 When purchased four years ago, the stoves had an expected life of 10 years. The
company’s policy is to record depreciation evenly over the asset’s useful life. No
depreciation has been recorded on the stoves during fiscal 2009.
 The company sells numbered gift certificates in $20 denominations. At year-end there
were 15 unredeemed gift certificates.

Prepare journal entries for any required accounting adjustments.

Answer:
Debit Rent expense 10,080
Credit Accumulated depreciation - Van 10,080
To record rent expense for seven months @ $1,440 per month.

Debit Depreciation expense 2,750

Credit Accumulated depreciation - Van 2,750
To record depreciation for the year on the van ($22,000 / 8 years = $2,750 per year).

Debit Depreciation expense 1,625

Credit Accumulated depreciation - Stoves 1,625
To record depreciation for the year on the ovens ($4,875 / 3 years to date = $1,625 per year).

Debit Gift certificates – unearned revenue 480

Credit Revenue 480
To adjust for gift certificates still outstanding = $20 × 15 = $300.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-19
Topic: Adjusting accounts – Numerical calculations required (More challenging, using T-account
to infer adjustments)
LO: 2
8. During the year ended December 31, 2008, Cabela’s, Inc. a retailer of outdoor equipment and
apparel, purchased merchandise inventory at a cost of $1,448,655 (in thousands). The following
T-account reflects information contained in the company’s 2006 and 2005 balance sheets (in
thousands). Calculate Cabela’s Cost of sales for 2008 and complete the T-account.

Inventory
2007 Balance
608,159

2008 Balance
517,657

Answer:
COGS = Beginning inventory $608,159 + purchases $1,448,655 - Ending inventory $200,877 =
1,539,157

Inventory
2007 Balance
608,159
Purchases Cost of sales
1,448,655 1,539,157
2008 Balance
517,657

Cambridge Business Publishers, ©2010

3-20 Financial Accounting for MBAs, 4th Edition
Topic: Adjusting accounts – Numerical calculations required (More challenging, using T-account
to infer adjustments)
LO: 2
9. During the year ended December 31, 2008, Cabela’s, Inc. a retailer of outdoor equipment and
apparel, purchased merchandise inventory at a cost of $1,448,655 (in thousands). Assume that
all inventory purchases were on account (on credit) and that accounts payable is only used for
inventory purchases. The following T-account reflects information contained in the company’s
2007 and 2008 balance sheets. Calculate the amount Sketchers paid in cash to its suppliers
during 2008 and complete the T-account.

Accounts Payable
2007 Bal.
281,391

2008 Bal.
189,766

Answer:
Payments on account = Beginning balance $281,391+ purchases $1,448,655 – Ending balance
$189,766 = $1,540,280

Accounts Payable
2007 Bal.
281,391
Payments Purchases
1,540,280 1,448,655
2008 Bal.
189,766

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-21
Topic: Understanding the Trial Balance
LO: 3
10. BloomFree is an organic floral shop. After its first quarter of operations, the company’s
accountant prepared the following trial balance, in alphabetical order. Indicate whether each line
on the trial balance is an income statement or balance sheet account.

Debits Credits Balance Sheet / Income Statement

Accounts payable $2,300
Accounts receivable $200
Bank loan for van 13,200
Cash 5,500
Common stock 1,000
Cost of goods sold 12,000
Delivery van 18,000
Gas for van 500
Tax expense 2,000
Insurance expense 1,000
Inventory 3,800
Prepaid insurance expense 1,000
Rent expense 1,500
Salaries expense 8,000
Sales 35,000
Taxes payable   2,000
Total $53,500 $53,500

Answer:
Debits Credits Balance Sheet / Income Statement
Accounts payable $2,300 Balance Sheet
Accounts receivable $200 Balance Sheet
Bank loan for van 13,200 Balance Sheet
Cash 5,500 Balance Sheet
Common stock 1,000 Balance Sheet
Cost of goods sold 12,000 Income Statement
Delivery van 18,000 Balance Sheet
Gas for van 500 Income Statement
Tax expense 2,000 Income Statement
Insurance expense 1,000 Income Statement
Inventory 3,800 Balance Sheet
Prepaid insurance 1,000 Balance Sheet
Rent expense 1,500 Income Statement
Salaries expense 8,000 Income Statement
Sales 35,000 Income Statement
Taxes payable   2,000 Balance Sheet
Total $53,500 $53,500

Cambridge Business Publishers, ©2010

3-22 Financial Accounting for MBAs, 4th Edition
Topic: Constructing financial statements from transaction data – Numerical calculations required
LO: 4
11. BloomFree is an organic floral shop. After its first quarter of operations, the company’s
accountant prepared the following trial balance, in alphabetical order. The accountant also tells
you that net income for the quarter was $10,000. Use the trial balance along with the net income
information to prepare a balance sheet for BloomFree.

Debits Credits
Accounts payable $2,300
Accounts receivable $200
Bank loan for van 13,200
Cash 5,500
Common stock 1,000
Cost of goods sold 12,000
Delivery van 18,000
Gas for van 500
Tax expense 2,000
Insurance expense 1,000
Inventory 3,800
Prepaid insurance 1,000
Rent expense 1,500
Salaries expense 8,000
Sales 35,000
Taxes payable   2,000
Total $53,500 $53,500

Answer:

BloomFree
Balance Sheet
Cash $5,500 Accounts payable $2,300
Accounts receivable 200 Taxes payable 2,000
Inventory 3,800 Total current liabilities 4,300
Prepaid insurance 1,000 Bank loan for van 13,200
Total current assets 10,500 Total liabilities 17,500

Delivery van 18,000 Common stock 1,000

Total assets $28,500 Retained earnings 10,000
Total equity 11,000
Total liabilities and
equity $28,500

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-23
Topic: Constructing financial statements from transaction data – Numerical calculations required
LO: 4
12. Big Green Company made $32,000 in net income during September 2009, its first month of
business. It sold its product on credit and billed its customers $60,000 for September sales. The
company collected $4,000 of these receivables in September. Company employees earned
September wages (the company’s only expense), but those are not paid until the first of October.
Complete the following financial statements for the end of September 2009.

Income Statement Balance sheet

Sales $ Cash $
Wages expense Accounts receivable
Net Income $ Total assets $

Wages payable $
Retained earnings
Total liabilities and
$
equity

Answer:
Income Statement Balance sheet
Sales $ 60,000 Cash $ 4,000
Wages expense 28,000 Accounts receivable 56,000
Net income $ 32,000 Total assets $ 60,000

Wages payable $ 28,000

Retained earnings 32,000
Total liabilities and
$ 60,000
equity

Cambridge Business Publishers, ©2010

3-24 Financial Accounting for MBAs, 4th Edition
Topic: Constructing financial statements from transaction data – Numerical calculations required
LO: 4
13. Copy Corner began operations in March with cash and common stock of $6,000. The
company made $97,000 in net income its first month. It performed print jobs for customers and
billed these customers $150,000. The company collected half of its receivables by the end of the
month. The company had cost of goods sold of $27,000 paid for in cash and $1,000 inventory left
over at the end of the month. Copy Corner employees earned wages but those are not paid until
the first of April. Complete the following statements for the end of March.

Income Statement Balance sheet

Sales $ Cash $
Cost of Sales Accounts receivable
Wages expense Inventory
Net Income $ Total assets $

Wages payable $
Retained earnings
Total liabilities and
$
equity

Answer:
Income Statement Balance sheet
Sales $150,000 Cash $53,000
Cost of Sales 27,000 Accounts receivable 75,000
Wages expense 26,000 Inventory 1,000
Net Income $97,000 Total assets $124,000

Wages payable $26,000

Common stock 6,000
Retained earnings 97,000
Total liabilities and
equity $123,000

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-25
Topic: Preparing closing entry from income statement
LO: 5
14. The 2008 income statement of Snap-On Incorporated includes the amounts shown below.
The company paid dividends of $69.7 (in millions). Prepare the closing entries for the company
for 2008.

(in millions)
Net sales 2,853.3
Cost of goods sold 1,568.7
Other operating expenses 933.1
Interest expense, net 34.3
Operating income from financial services 37.3
Income tax expense 117.8

Answer:
Debit Net sales 2,853.3
Debit Operating income from financial services 37.3
Credit Cost of goods sold 1568.7
Credit Other operating expenses 933.1
Credit Interest expense 34.3
Credit Income taxes 117.8
Credit Retained earnings 236.7
To close temporary (income statement) accounts for the year.

Debit Retained earnings 69.7

Credit Dividends 69.7
To close dividends for the year.

Cambridge Business Publishers, ©2010

3-26 Financial Accounting for MBAs, 4th Edition
 Problems
Topic: Use template to record transactions and accounting adjustments – Numerical calculations
required
LO: 1, 2
1. Britt’s Bike’s began operations in May 2009 and had the following transactions.
a) Owner invested $20,000 cash and a truck worth $6,000 in exchange for stock.
b) Paid rent expense of $4,000.
c) Purchased $50,000 of bicycle inventory on credit.
d) Sold bicycles for cash of $84,500. The cost of the bikes sold was $30,000.
e) Sold and invoiced bicycles to a client for $15,900. The cost of the bikes sold was $8,000.
f) Bought promotional materials and plane tickets for Tour de France, for $15,000 in cash and
recorded the entire amount as Advertising expense.
g) Paid $4,000 in cash for supplies to do bike repairs.
h) Collected $10,000 from accounts receivable
i) Paid for bikes purchased on credit in c above
j) Paid cash dividends of $500.
k) Recorded revenue for $1,000 received from customer.

Required:
Record each transaction a) through k) in the financial statements effects template, below .
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
a) = – =
b) = – =
c) = – =
d) = – =
e) = – =
f) = – =
g) = – =
h) = – =
i) = – =
j) = – =
k) = – =

At the end of May, the following information is available.

i. At the end of May, $3,200 supplies remained on hand.
ii. Rent paid in transaction b is rent for May and June.
iii. The expenditures in transaction f relate to a major ad campaign that will occur in June during
the Tour de France.
iv. The truck is expected to be used for five years (60 months).
v. The deposit in transaction k is for a bike to be built and delivered in July.

Required:
Record any accounting adjustments required for items i. through v., in the financial statement
effects template, below.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-27
 Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
i. = – =
ii. = – =
iii. = – =
iv. = – =
v. = – =

Answer:
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+6,000 = +26,000
a) +20,000 (Common – =
(Equipment)
Stock)
-4,000 +4,000
b) -4,000 = (Retained – (Rent = -4,000
earnings) exp.)

c) +50,000 = +50,000 – =
(Inventory) (AP)

-30,000 +54,500
d) +84,500 = (Retained +84,500 – +30,000 = +54,500
(Inventory) (COGS)
earnings)
+15,900
(AR) +7,900 +8,000 =
e) = (Retained +15,900 – +7,900
-8,000 earnings)
(COGS)
(Inventory)
-15,000 +15,000
f) -15,000 = (Retained – (Advert. = -15,000
earnings) exp.)

g) -4,000 +4,000 = – =
(Supplies)

h) +10,000 -10,000 = – =
(AR)

i) -50,000 = -50,000 – =
(AP)

j) -500 = -500 – =
(Dividend)
+1,000
k) +1,000 = (Retained +1,000 – = +1,000
earnings)

Cambridge Business Publishers, ©2010

3-28 Financial Accounting for MBAs, 4th Edition
 Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
-800 +800
i. = – (Supplies = -800
(Supplies)
exp.)
+2,000 +2,000 -2,000
ii. (Prepaid = (Retained – (Rent = +2,000
rent) earnings) exp.)
+15,000 +15,000 -15,000
iii. (Prepaid = (Retained – (Advert. = +15,000
advert.) earnings) exp.)

-100 -100 +100

iv. = (Retained – (Dep’n. = -100
(Truck)
earnings) exp.)
+1,000 -1,000
v. = (Unearned (Retained -1,000 – = -1,000
Revenue) earnings)

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-29
Topic: Use Journal Entries to Record Transactions – Numerical calculations required
LO: 1, 2
2. Prepare journal entries to record each of the following transactions (a through k).
Britt’s Bike’s began operations in May 2009 and had the following transactions.
a) Owner invested $20,000 cash and a truck worth $6,000 in exchange for stock.
b) Paid rent expense of $4,000.
c) Purchased $50,000 of bicycle inventory on credit.
d) Sold bicycles for cash of $84,500. The cost of the bikes sold was $30,000.
e) Sold and invoiced bicycles to a client for $15,900. The cost of the bikes sold was $8,000.
f) Bought promotional materials and plane tickets for Tour de France, for $15,000 in cash and
recorded the entire amount as Advertising expense.
g) Paid $4,000 in cash for supplies to do bike repairs.
h) Collected $10,000 from accounts receivable
i) Paid for bikes purchased on credit in c above
j) Paid cash dividends of $500.
k) Recorded revenue for $1,000 received from customer.

At the end of May, the following information is available.

Required: Prepare journal entries for any accounting adjustments required for items i. through v.
i. At the end of May, $3,200 supplies remained on hand.
ii. Rent paid in transaction b is rent for May and June.
iii. The expenditures in transaction f relate to a major ad campaign that will occur in June during
the Tour de France.
iv. The truck is expected to be used for five years (60 months).
v. The deposit in transaction k is for a bike to be built and delivered in July.

Answer:
Transaction journal entries:
a)
Debit Cash 20,000
Debit Truck (PPE) 6,000
Credit Common stock 26,000
To record initial investment by owner.

b)
Debit Rent expense 4,000
Credit Cash 4,000
To record rent paid.

c)
Debit Inventory 50,000
Credit Accounts payable 50,000
To record inventory purchased on account

d)
Debit Cash 84,500
Credit Sales 84,500
Debit Cost of goods sold 30,000
Credit Inventory 30,000
To record cash sale and cost of sale.

Cambridge Business Publishers, ©2010

3-30 Financial Accounting for MBAs, 4th Edition
e)
Debit Accounts receivable 15,900
Credit Sales 15,900
Debit Cost of goods sold 8,000
Credit Inventory 8,000
To record sale on account.

f)
Debit Advertising expense 15,000
Credit Cash 15,000
To record promotional expenses.

g)
Debit Supplies inventory 4,000
Credit Cash 4,000
To record supplies purchased.

h)
Debit Cash 10,000
Credit Accounts receivable 10,000
To record cash collected from customers.

i)
Debit Accounts payable 50,000
Credit Cash 50,000
To pay suppliers for bikes purchased earlier on account.

j)
Debit Dividends 500
Credit Cash 500
To record dividends paid to owner.

k)
Debit Cash 1,000
Credit Sales 1,000
To record cash received from customer.

Accounting adjustments:
i)
Debit Supplies expense 800
Credit Supplies 800
To record supplies used.

ii)
Debit Prepaid rent 2,000
Credit Rent expense 2,000
To record prepaid June rent.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-31
 iii)
Debit Prepaid advertising 15,000
Credit Advertising expense 15,000
To record prepaid Tour de France promotional expense.

iv)
Debit Depreciation expense 100
Credit Equipment (or Accum. Depn) 100
To record depreciation expense on truck.

v)
Debit Sales 1,000
Credit Unearned revenue 1,000
To record deposit from customer.

Topic: Using the Financial Statements Effects Template – Numerical calculations required
LO: 1
3. Record the following transactions for McDouglas Pet Foods, Inc. in the financial statements
effects template below (in thousands).
a) Sell stock in company for $7,000
b) Obtain long-term bank loan of $5,000.
c) Purchase manufacturing equipment for $3,400 cash.
d) Rent manufacturing and warehousing space and pay $700 in advance for the year.
e) Manufacture $5,000 of inventory. Of the total, $4,000 was the cost of raw materials purchased
on credit. The balance was wages to manufacturing employees paid in cash.
f) Sell half of the inventory manufactured, for $5,650 on account.
g) Pay $3,500 to creditors.
h) Make loan payment of $800 of which interest is $80 and the rest is principal.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
a) = – =
b) = – =
c) = – =
d) = – =
e) = – =
f) = – =
g) = – =
h) = – =

Cambridge Business Publishers, ©2010

3-32 Financial Accounting for MBAs, 4th Edition
 Answer:
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+7,000
a) +7,000 = (Common – =
stock)

b) +5,000 = +5,000 – =
(Loan)

c) -3,400 +3,400 = – =
(Equipment)

d) -700 +700 = – =
(Prepaid rent)

e) -1,000 +5,000 = +4,000 – =

(Inventory) (AP)
+5,650 +2,500
(AR) +3,150 (Cost of
f) = (Retained +5,650 – = +3,150
-2,500 earnings)
goods
(Inventory) sold)

g) -3,500 = -3,500 – =
(AP)

-720 -80 +80

h) -800 = (Retained – (Interest = -80
(Loan)
earnings) expense)

Topic: Preparing journal entries to record transactions – Numerical calculations required

LO: 1
4. Prepare journal entries to record the following transactions for McDouglas Pet Foods, Inc. (in
thousands).
a) Sell stock in company for $7,000
b) Obtain long-term bank loan of $5,000.
c) Purchase manufacturing equipment for $3,400 cash.
d) Rent manufacturing and warehousing space and pay $700 in advance for the year.
e) Manufacture $5,000 of inventory. Of the total, $4,000 was the cost of raw materials purchased
on credit. The balance was wages to manufacturing employees paid in cash.
f) Sell half of the inventory manufactured, for $5,650 on account.
g) Pay $3,500 to creditors.
h) Make loan payment of $800 of which interest is $80 and the rest is principal.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-33
Answer:
a)
Debit Cash 7,000
Credit Common stock 7,000
To record owner’s contribution.

b)
Debit Cash 5,000
Credit Bank loan 5,000
To record cash received from bank.

c)
Debit Equipment (PPE) 3,400
Credit Cash 3,400
To record purchase of equipment.

d)
Debit Prepaid expenses 700
Credit Cash 700
To record rent paid in advance for the year.

e)
Debit Inventory 5,000
Credit Accounts payable 4,000
Credit Cash 1,000
To record raw materials purchased on credit and wages paid to manufacture inventory.

f)
Debit Accounts receivable 5,650
Credit Sales 5,650
Debit Cost of goods sold 2,500
Credit Inventory 2,500
To record sale on account and cost of sales.

g)
Debit Accounts payable 3,500
Credit Cash 3,500
To record payment on account.

h)
Debit Interest expense 80
Debit Bank loan 720
Credit Cash 800
To record payment of loan: interest and principal.

Cambridge Business Publishers, ©2010

3-34 Financial Accounting for MBAs, 4th Edition
Topic: Assessing Financial Statement Effects of Transactions and Adjustments – Numerical
calculations required
LO: 2
5. You have been hired by MacPeters CAD, a small engineering and drafting firm, to help prepare
a set of financial statements for the bank for the year ending October 31. You have reviewed all
the transactions for the year and find the following information that has not been recorded in the
company’s books.
1) During October, MacPeters CAD provided $1,900 of CAD services to clients who will be billed
in early November. The firm uses the account Fees Receivable to reflect amounts due but not yet
billed.
2) The firm paid $2,400 cash on October 15 for a series of radio commercials to run during
October and November. One-third of the commercials have aired by October 31st. The $2,400
payment was recorded in the Prepaid advertising account.
3) Starting October 1, all maintenance work on MacPeters CAD’s computer and printing
equipment is handled by PC Guru under an agreement whereby MacPeters CAD pays a fixed
monthly charge of $800. MacPeters CAD paid six months’ service charge of $4,800 cash in
advance on October 1, and increased its Prepaid expenses account by $4,800.
4) Starting October 16, MacPeters CAD rented 800 square feet of storage space from a
neighboring business. The monthly rent of $0.80 per square foot is due in advance on the first of
each month. Nothing was paid in October, however, because the neighbor agreed that
MacPeters CAD could pay the rent for October with the November 1 rent payment.
5) MacPeters CAD invested $10,000 cash in securities on October 1 and earned interest of $200
on these securities by October 31. No interest will be received until January.
6) Monthly depreciation on the equipment is $145. No depreciation has been recorded yet.
7) Weekly salaries for a five-day week total $6,250, payable on Fridays. October 31 of the current
year is a Tuesday.
8) A bill for work done during August and September has not yet been sent because the client is
out of the country. The bill totals $2,075.
9) MacPeters CAD has $40,000 of notes payable outstanding at October 31. Interest of $400 has
accrued on these notes by October 31, and will be paid when the notes mature in 2015.
10) MacPeters CAD received a deposit from a client for a job that will be begun in December. The
$2,000 deposit was recorded as Sales.

Required:
Prepare accounting adjustments required at October 31 using the financial statement effects
template, below.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-35
 Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
1)
= – =
2)
= – =
3)
= – =
4)
= – =
5)
= – =
6)
= – =
7)
= – =
8)
= – =
9)
= – =
10)
= – =

Cambridge Business Publishers, ©2010

3-36 Financial Accounting for MBAs, 4th Edition
 Answer:
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+1,900 +1,900 +1,900
1) = (Retained – = +1,900
(AR) (Sales)
earnings)
-600 -600 +600
2) (Prepaid = (Retained – (Advert. = -600
advertising) earnings) exp.)

-800 -800 +800

(Maint-
3) (Prepaid = (Retained – = -800
enance
expenses) earnings)
exp)

+320 -320 +320

4) = (Retained – (Rent = -320
(AP)
earnings) exp.)

+200 +200 +200

5) = (Retained (Interest – = +100
(AR)
earnings) income)

-1,740 -1,740 +1,740

6) = (Retained – (Dep’n = -1,740
(PPE)
earnings) exp.)
+2,500 -2,500 +2,500
7) = (Wages (Retained – (Wages = -2,500
payable) earnings) exp.)

+2,075 +2,075 +2,075

8) = (Retained – = +2,075
(AR) (Sales)
earnings)
+400 -400 +400
9) = (Interest (Retained – (Interest = -400
payable) earnings) exp.)
+2,000 -2,000 -2,000 –
10) = (Unearned (Retained = -2,000
(Sales)
revenue) earnings)

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-37
 Topic: Preparing trial balance and income statement from financial statement effects template –
Numerical calculations required
LO: 3, 4
6. In December 2009, Milly Newton opened an organic dry-cleaning shop. The financial statement
effects template below shows transactions for the month (a through h) and accounting
adjustments (i through iv).
Required:
a) Prepare trial balance for December 31, 2009.
b) Prepare an income statement for Milly Newton’s first month of operations.
c) Prepare a balance sheet for December 31, 2009.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
+36,000 +42,000
a) +6,000 = (Common – =
(Equipment)
stock)

+1,200 -180 +180

b) -1,380 = (Retained – (Phone = -180
(Supplies)
earnings) expense)

c) +2,300 = +2,300 – =
(Equipment) (AP)
+400 +400
d) +400 = (Retained (Sales) – = +400
earnings)
+265
e) +265 = (Unearned – =
revenue)

f) -2,000 +2,000 = – =
(Equipment)
-1,500 +1,500
g) -1,500 = (Retained – (Wages = -1,500
earnings) exp.)
+2,650 +2,650
h) +2,650 = (Retained – = +2,650
(Sales)
earnings)

i) -2,100 = -2,100 – =
(AP)

-800 -800 +800

i. = (Retained – (Supplies = 8400
(Supplies)
earnings) exp.)

-1,000 -1,000 +1,000

ii. = (Retained – (Depr’n = -1,000
(Equipment)
earnings) exp.)
+50 -50 +50
iii. = (Wages (Retained – (Wages = -50
payable) earnings) exp.)
+600 -600 +600
iv. = (Rent (Retained – (Rent = -600
payable) earnings) exp.)

Cambridge Business Publishers, ©2010

3-38 Financial Accounting for MBAs, 4th Edition
Answer:
a.
Trial balance Debits Credits
Cash 2,335
Cleaning supplies 400
Equipment at cost 40,300
Accumulated depreciation 1,000
Accounts payable 200
Rent payable 600
Wages payable 50
Unearned revenue 265
Common stock 42,000
Sales 3,050
Salaries expense 1,550
Rent expense 600
Depreciation 1,000
Supplies expense 800
Phone expense 180
Totals 47,165 47,165
b.

Milly Newton Cleaners

Income Statement
For the month of December
Sales $3,050
Salaries expense 1,550
Rent expense 600
Depreciation 1,000
Supplies expense 800
Phone expense 180
Net loss -$1,080

c.
Milly Newton Cleaners
Balance Sheet
At December 31
Accounts payable and
Cash $ 2,335 accrued expenses $ 850
Cleaning supplies 400 Unearned revenue 265
Total current assets 2,735 Total current liabilities 1,115

Equipment at cost 40,300 Common stock 42,000

Less accumulated
depreciation -1,000 Retained earnings (deficit) -1,080
Equipment, net 39,300 Total equity 40,920
Total assets $42,035 Total liabilities and equity $42,035

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-39
Topic: Preparing financial statements from trial balance – Numerical calculations required
LO: 4
7. The December 27, 2008 adjusted trial balance of Cabela’s Incorporated shows the amounts
below. Prepare the company’s income statement and balance sheet for December 27, 2008.

Debits Credits
Accounts payable 189,766
Accounts receivable 213,014
Gift certificates (unredeemed) 184,834
Income tax expense 41,831
Inventories  517,657
Merchandise costs  1,540,214
Other current assets  133,439
Cash and cash equivalents  410,104
Contributed capital 272,626
Interest expense, net  22,804
Long-term liabilities 781,557
Other current liabilities 326,204
Property and equipment, net  1,121,852
Retained earnings  564,675
Selling, distribution, and administrative expenses  871,468
Total revenue  2,552,721
4,872,383 4,872,383

Cabela’s Incorporated
Income Statement
For the year ended
December 27, 2008
Total revenue  $2,552,721
Merchandise costs  1,540,214
Selling, distribution, and administrative expenses  871,468
Operating income 141,039
Interest expense, net  22,804
Income before tax 118,235
Income tax expense 41,831
Net income $ 76,404

Cambridge Business Publishers, ©2010

3-40 Financial Accounting for MBAs, 4th Edition
 Cabela’s Incorporated
Balance Sheet
At December 27, 2008

Cash and cash equivalents  $ 410,104 Accounts payable $ 189,766

Gift certificates
Accounts receivable 213,014 (unredeemed) 184,834
Inventories  517,657 Other current liabilities 326,204
Other current assets  133,439 Current liabilities 700,804
Current assets 1,274,214 Long-term liabilities 781,557
Total liabilities 1,482,361
Property and equipment, net  1,121,852
Contributed capital 272,626
Retained earnings  641,079
Total equity 913,705
Total assets $ 2,396,066 Total liabilities and equity $ 2,396,066

Topic: Preparing financial statements from trial balance – Numerical calculations required
LO: 4
8. The adjusted trial balance for The Washington Post Company for the year ended December
31, 2008, is as follows (in alphabetical order). Use the trial balance to prepare the income
statement and balance sheet for 2008.
Debits Credits
Accounts payable 544,920
Advertising revenue 1,083,084
Cash 390,509
Circulation revenue 901,898
Contributed capital 264,027
Deferred revenue 388,007
Depreciation and amortization expense 288,131
Dividends 82,161
Education revenue 2,331,580
Long-term assets 3,806,894
Operating expenses 3,999,241
Other current assets 961,031
Other equity 14,536
Other expenses, net 29,086
Other liabilities 1,356,141
Other revenue 145,018
Retained earnings 4,333,582
Tax expense 79,400
Treasury stock 1,697,268
11,348,257 11, 348,257

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-41
Answer:
a.
The Washington Post Company
Income Statement
For the year ended
December 31, 2008
Education revenue $2,331,580
Advertising revenue 1,083,084
Circulation revenue 901,898
Other revenue 145,018
Total revenue 4,461,580
Operating expenses 3,999,241
Depreciation and amortization expense 288,131
Operating profit 174,208
Other expenses, net 29,086
Income before tax 145,122
Tax expense 79,400
Net income $ 65,722

b.
The Washington Post Company
Balance Sheet
At December 31, 2008
Cash $ 390,509 Accounts payable $ 544,920
Other current assets 961,031 Deferred revenue 388,007
Current assets 1,351,540 Current liabilities 932,927

Long-term assets 3,806,894 Other liabilities 1,356,141

Total liabilities 2,289,068

Contributed capital 264,027

Retained earnings 4,317,143
Treasury stock -1,697,268
Other equity -14,536
Total equity 2,869,366

Total assets $5,158,434 Total liabilities and equity $5,158,434

Cambridge Business Publishers, ©2010

3-42 Financial Accounting for MBAs, 4th Edition
Topic: Preparing closing entry from trial balance – Numerical calculations required
LO: 5
9. The adjusted trial balance for The Washington Post Company for the year ended December
31, 2008, is as follows (in alphabetical order). Use the trial balance to prepare the closing entry
for the year.
Debits Credits
Accounts payable 544,920
Advertising revenue 1,083,084
Cash 390,509
Circulation revenue 901,898
Contributed capital 264,027
Deferred revenue 388,007
Depreciation and amortization expense 288,131
Dividends 82,161
Education revenue 2,331,580
Long-term assets 3,806,894
Operating expenses 3,999,241
Other current assets 961,031
Other equity 14,536
Other expenses, net 29,086
Other liabilities 1,356,141
Other revenue 145,018
Retained earnings 4,333,582
Tax expense 79,400
Treasury stock 1,697,268
11,348,257 11, 348,257

Answer:

Debit Education revenue 2,331,580

Debit Advertising revenue 1,083,084
Debit Circulation revenue 901,898
Debit Other revenue 145,018
Credit Operating expenses 3,999,241
Credit Depreciation and amortization expense 288,131
Credit Other expenses, net 29,086
Credit Tax expense 79,400
Credit Retained earnings 65,722
To close income statement accounts for the year.

Debit Retained earnings 82,161

Credit Dividends 82,161
To close dividends account for the year.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-43
Topic: Preparing closing entry from income statement – Numerical calculations required (More
challenging, requires determining debits and credits for certain items and requires students to
ignore subtotals)
LO: 5
10. The 2008 income statement of The Coca-Cola Company is as follows. Prepare the closing
entry for 2008 for the income statement temporary accounts.

The Coca-Cola Company

Income statement
For the year ended December 31, 2008
Net revenues 31,944
Cost of goods sold 11,374
GROSS PROFIT 20,570
Selling, general and administrative 11,774
Other operating charges 350
OPERATING INCOME 8,446
Interest income 333
Interest expense 438
Equity income (loss) (874)
Other income (loss) (28)
INCOME BEFORE INCOME TAXES 7,439
Income taxes 1,632
NET INCOME 5,807

Answer:
Debit Net sales 31,944
Debit Interest income 333
Credit Cost of goods sold 11,374
Credit Selling, general and administrative 11,774
Credit Other operating charges 350
Credit Interest expense 438
Credit Equity loss 874
Credit Other loss 28
Credit Income taxes 1,632
Credit Retained earnings 5,807
To close income statement temporary accounts for 2008.

Cambridge Business Publishers, ©2010

3-44 Financial Accounting for MBAs, 4th Edition
Essay Questions
Topic: Accounting cycle
LO: 1, 2, 3, 4, 5
1. Describe and explain the accounting cycle.

Answer: The accounting cycle is the steps a firm takes to record its transactions and prepare
financial statements. Transactions are first recorded in the accounting records. Each of these
transactions is, generally, the result of an external transaction, such as recording a sale to a
customer or the payment of wages to employees. Once all of the transactions have been
recorded during the accounting period, the company prepares an unadjusted trial balance to
ensure that the accounts balance. Then the company adjusts the accounting records to recognize
a number of events that have occurred, but which have not yet been recorded. These might
include the recognition of wage expense and the related wages payable for those employees who
have earned wages, but have not yet been paid, or the recognition of depreciation expense for
buildings and equipment. These adjustments are made at the end of the accounting period to
properly adjust the accounting records in preparation of financial statements. Once all
adjustments are made, the company prepares another “adjusted” trial balance. As the last step,
financial statements are prepared and the temporary accounts are closed.

Topic: Balance sheet components

LO: 1
2. What are the three broad groups that make up a balance sheet? Please list and define each.

Answer:
1. Assets – investments which are expected to produce revenues, either directly when the asset
is sold or indirectly, like a manufacturing plant that produces inventories for sale or a corporate
office building that housed employees supporting revenue generating activities of the company.
2. Liabilities – Are borrowed funds (accounts payable, accrued liabilities, and obligations to
lenders or bond investors).
3. Equity – Capital that has been invested by the shareholders, either directly via the purchase of
stock (net of any repurchases of stock from its shareholders by the company) or indirectly in the
form of retained earnings that have been reinvested into the business and not paid out as
dividends.

Topic: Need for accounting adjustments

LO: 2
3. Explain what accounting adjustments are and why firms use them.
Answer: Companies make adjustments to more accurately report their financial performance and
condition.

For example, employees might not have been paid for wages earned at the end of an accounting
period. Failure to recognize this labor cost would understate the company’s total liabilities because
wages payable would be too low), and would overstate net income for the period because wages
expense would be too low). Thus, neither the balance sheet nor the income statement would be
accurate.

© Cambridge Business Publishers, 2010

Test Bank, Module 3 3-45
Topic: Trial balance
LO: 3
4. Why do firms prepare a trial balance before making accounting adjustments for the period?

Answer: A trial balance is a listing of all accounts and their balances at a point in time. To prepare
a trial balance the company lists the accounts along with their balances. The trial balance lists
debits and credits separately. The purpose of a trial balance is to prove the mathematical equality
of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the
financial statements.

Topic: Statement of cash flows

LO: 4
5. Name and describe the two methods for preparing the operating section of the cash flow
statement.

Answer: there are two methods to display net cash flows from operating activities: the direct
method and the indirect method. Under the indirect method, the basic approach is to adjust net
income to arrive at net cash flows from operating activities. This indirect method involves listing
changes in working capital accounts (by comparing the opening and ending balances). The direct
method lists all cash revenues and expenses directly. Changes in balance sheet accounts are not
involved in this method. Both methods report the same net operating cash flow, the only
difference is in presentation.

Topic: Closing temporary accounts

LO: 5
6. Describe the closing process and explain why firms engage in this process.

Answer: The closing process refers to the ‘zeroing out’ of revenue, expense, and dividend accounts
(the temporary accounts) by transferring their ending balances to retained earnings. The closing
process is typically carried out via a series of journal entries that successively zero out each revenue
and expense account, transferring those balances to retained earnings. The result is that all income
statement accounts begin the next period with zero balances. The balance sheet accounts do not
need to be similarly adjusted because their balances carry over from period to period.

Cambridge Business Publishers, ©2010

3-46 Financial Accounting for MBAs, 4th Edition