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Exercise 2-1 Effect of accruals on the financial statements
Valmont, Inc., experienced the following events in 2012, in its first year of operations.
1. Received $20,000 cash from the issue of common stock.
2. Performed services on account for $50,000.
3. Paid the utility expense of $12,500.
4. Collected $39,000 of the accounts receivable.
5. Recorded $9,000 of accrued salaries at the end of the year.
6. Paid a $5,000 cash dividend to the shareholders.
a. Record the events in general ledger accounts under an accounting equation. In the last column of the table, provide appropriate account titles for the Retained Earnings amounts.
b. Prepare the income statement, statement of changes in stockholder's equity, balance sheet, and statement of cash flows for the 2012 accounting period.
c. Why is the amount of net income different from the amount of net cash flow from operating activities?
Exercise 2-3 Effect of prepaid rent on the accounting equation and financial statements.
The following events apply to 2012, the first year of operations of Sentry Services.
1. Acquired $45,000 cash from the issue of common stock.
2. Paid $18,000 cash in advance for one-year rental contract for office space.
3. Provided services for $36,000 cash.
4. Adjusted the records to recognize the use of the office space. The one-year contract started on May 1, 2012. The adjustment was made as of December 32, 2012.
a. Write an accounting equation and record the effects of each accounting event under the appropriate general ledger account headings.
b. Prepare an income statement and statement of cash flows for the 2012 accounting period.
c. Explain the difference between the amount of net income and amount of net cash flow from operating activities.
Exercise 2-19 Closing the accounts
The following information was drawn from the accounting records of Kwon Company as of December 31, 2012, before the temporary accounts had been closed. The Cash balance was $4,000, and Notes Payable amounted to $2,000. The company had revenues of $6,000 and expenses of $3,500. The company's Land account had a $9,000 balance. Dividends amounted to $500. There was $6,000 of common stock issued.
a. Identify which accounts would be classified as permanent and which accounts would be classified as temporary.
b. Assuming that Kwon's beginning balance ( as of January 1, 2012) in the Retained Earnings account was $2,600, determine its balance after the nominal accounts were closed at the end of 2012.
c. What amount of net income would Kwon Company report on its 2012 income statement?
d. Explain why the amount of net income differs from the amount of the ending Retained Earnings balance.
e. What are the balances in the revenue, expense, and dividend accounts on January 1, 2013?
Exercise 2-22 Matching concept
Companies make sacrifices known as expenses to obtain benefits called revenues. The accurate measurement of net income requires that expenses be matched with revenues. In some circumstances matching a particular expense directly with revenue is difficult or impossible. In these circumstances, the expense is matched with the period in which it is incurred.
Distinguish the following items that could be matched directly with revenues from the items that would be classified as period expenses.
a. Sales commissions paid to employees.
b. Utilities expense.
c. Rent expense.
d. The cost of land that has been sold.
Exercise 2-25 Relation of elements to financial statements
Identify whether each of the following items would appear on the income statement (IS), statement of changes in stockholders' equity (SE), balance sheet (BS), or statement of cash flows (CF). Some items may appear on more than one statement; if so, identify all applicable statements. If an item would not appear on any financial statement, label it NA.
a. Prepaid rent.
b. Net income.
c. Utilities expense.
e. Cash flow from operating activities.
f. Service revenue.
g. Auditor's opinion.
h. Account's receivable.
i. Account's payable.
j. Unearned revenue.
l. Beginning cash balance.
m. Ending retained earnings.
n. Rent expense.
o. Ending cash balance.