Principles of Accounting

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CHAPTER 5
Short Exercises SE1 – SE10, Exercises E3 and E5, and Problems P2 and P3. SE1.
1. Objective
2. Qualitative
3. Objective
4. Qualitative
5. Objective
SE2.
1. Full disclosure
2. Materiality
3. Cost benefit
4. Conservatism
5. Consistency
SE3.
1. Property, plant and equipment
2. Current liability
3. Current liability
4. Not included
5. Owner’s Equity
6. Current Asset
7. Intangible Asset
8. Current Asset
9. Investment

SE4.
Balance Sheet
May 31, 2011
Assets
Current Assets
Cash$200
Accounts Receivable$1100
Merchandise Inventory$600
Total Current Assets$1900
Investments$500
Property Pant Equipment$3000
Less Accumulated Depreciation$700
$2300
Intangible Assets
Franchise$200
$__4900_______

Liabilities
Current Liabilities$800
Accounts Payable$100
Total Current Liabilities$900
Long Term Liabilities
Notes Payable $400
Total Liabilities $1300
Owner’s Equity
Owners Capital$3600
Total Owners Equity$3600
Total Liabilities & Owner’s Equity$4900------

SE5.
1. Operating Expenses
2. Other revenues & Expenses
3. Not
4. Net Sales
5. Cost of goods sold
6. Operating expenses
7. Other revenues and expenses
8. None
SE6.
Income Statement
For year ended May 31, 2011
Revenues
Net Sales$2400
Interest Income$90
$2490
Costs & Expenses
Cost of goods sold$840
Selling Expenses$555
General Expenses$450
Interest Expense$210
Total Costs & Expenses$2055
Net Income$435-----------
SE7.
Income Statement
For the Year Ended May 31, 2011
Net Sales$2400
Cost of goods sold$840
Gross Margin$1560
Operating Expenses
Selling Expenses$555
General Expenses$450
Total Operating Expenses$1005
Income from Operations$555
Other Revenues & Expenses
Interest Income$90
Less Interest Expense$210
Excess of other expenses more than revenue$120
Net Income$435-------
SE8.
Current Assets=$4,000 + $2,000+10,000+12,000=$28,000
Working Capital=Current Assets-Current Liabilities
$21,000=$28,000-$7,000
Current Ratio= Current Assets = $28,000 = 4.0
Current Liabilities $7,000

SE9.
1. Profit Margin = Net Income = $ 40,000 = 15.4%
Net Sales $260,000
2. Asset Turnover = ___Net Sales = $260,000 = 1.2 times Average Total Assets $220,000

3. Return on Assets =____Net Income____ = $_40,000_ = 18.2% Average Total Assets $220,000

4. Debt to Equity Ratio = Total Liabilities__ = $60,000__ = 33.3% Owner’s Equity $180,000

5. Return on Equity =________Net Income____ = $40,000__ = 25% Average Owners Equity $160,000

SE 10.
6.0profit marginsX3.2times=19.2% return on assets
If the debt to equity ratio is =50% then owner’s equity is 2/3 of total assets. Return on assets divided by 2/3 = return of equity
19.2% divided by 2/3=28.8%
E3.
1. G9. B17.E
2. F10. G18. D
3. H11. G19.A
4. G12. C20. F
5. F13. B21. F
6. D14. D22.C
7. G15. A
8. F16. F

E5.
1. D5. F9. A13. E
2. B6. C10. H14. A
3. A7. B11.A15. C
4. E8. A12. H16. H

P2
Doug’s Tools Corporation
Income Statements
For the Year Ended July 31, 2012 & 2011
| 2012| %| 2011| %|
Net Sales| $464,200| 100 | $388,466| 100 |
Costs of Goods Sold| $243,880| 52.5| $198788| 51.2|
Gross Margins| $220,320| 47.5| $189,678| 48.8|
Operating Expenses| | | | |
Selling Expenses| 95,160| 20.5| 55,644| 14.3|
General & Administration Expenses | 90,840| 19.6| 49,286| 12.7| Total Operating Expenses| 186,000| 40.1| 104,930| 27.0| Income from Operations|...
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