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ACCT 5111

Corporate Financial Reporting

2021/22 Term 2

Midterm Examination

Section A Multiple-Choice Questions (10 Questions, 2.5 points each)

Please write down the best answer for each Multiple Choice question on the Table below

MC Answer Table

1) Which statement best describes the purpose of closing entries:

a. To continue recording the effects of transactions which began in one year and will be completed in another year.

b. To compute net income or net loss for the year.

c. To prepare the books for the posting process and taking a trial balance.

d. To eliminate the balances in the revenue and expense accounts so they have zero balances at the beginning of the next fiscal year.

e. To eliminate the need for preparing adjustments.

2) Employees were paid $10,000 on June 9, 2015 for five days work through Friday, June 3. What adjusting entry was necessary at the company’s year-end, Tuesday, May 31, 2015, as a result of this?

a. Debit Wages Expense and credit Cash for $10,000

b. Debit Wages Expense and credit Shareholders’ equity for $6,000.

c. Debit Wages Payable and credit Wages Expense for $6,000.

d. Debit Wages Expense and credit Wages Payable for $4,000.

3) What is a compensating balance?

a. Savings account balances.

b. Margin accounts held with brokers.

c. Temporary investments serving as collateral for outstanding loans.

d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

4) What is the normal journal entry when writing-off an account as uncollectible under the allowance method?

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.

c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

5) When an adjusting entry that recognizes accrued interest revenue is recorded,

a. assets increase and liabilities increase.

b. shareholders’ equity increases and liabilities decrease.

c. assets decrease and liabilities decrease.

d. shareholders’ equity and assets increase

6) Many ratios require an average be used for the balance sheet numbers because the

a. income statement refers to a point in time.

b. accountants may have made errors in the financial statements.

c. balance sheet numbers are a point in time and are being compared to an income statement number that covers a period of time.

d. income statement numbers represent a point in time and are being compared to a balance sheet number that covers a period of time.

7) If the market value of inventory is less than its cost, then application of the lower-of-cost-or-market rule would:

a. increase earnings and decrease the current ratio.

b. decrease earnings and increase the current ratio.

c. decrease earnings and decrease the current ratio.

d. cause no change to earnings or the current ratio.

8) In a period of falling prices which inventory method generally provides the lowest reported inventory?

a. Average cost.

b. FIFO.

c. LIFO.

d. Specific identification.

9) Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition

b. An addition

c. A betterment

d. A replacement

10	On May 1, James Corporation had total assets of $877,000. During May, the company completed the following transactions:
	▪		Barry, an owner in the firm, donated equipment to James Corporation. The equipment has a value of $6,700 at the time it was acquired by the firm.
	▪		Purchased a building for $78,000 and signed a note for the purchase.
	▪		Purchased 41,500 of supplies for cash.
	After these transactions were recorded, total assets would have a balance of:
	A	$963,200
	B	$963,000
	C	$945,700
	D	$961,700

Section B Questions (75 points)

1) At the beginning of the current period, XYZ carried 1,000 units of its product with a unit cost of $20. A summary of purchases during the current period follows (18 points):

		Units	Unit Cost
Beginning Inventory		1,000	20
Purchases:	#1	1,500	22
	#2	1,000	24
	#3	1,200	26

During the current period, Chen sold 2,500 units.

a. Assume that XYZ uses the first-in, first-out method. Compute both cost of goods sold for the current period and the ending inventory balance. (2 marks)

1000*20+1500*22+1500*22+1000*24+12000*26=108200 total available

COGs=20000+33000=53000

The Ending inventory=108200-53000=55200

b. Assume that XYZ uses the last-in, first-out method. Compute both cost of goods sold for the current period and the ending inventory balance. (2 marks)

Cogs = 31200+24000+300*22 = 61800

The ending inventory= 1000*20+1200*22=46400

c. Assume that XYZ uses the average cost method. Compute both cost of goods sold for the current period and the ending inventory balance. (2 marks)

COGs= 1000*20+1500*22+1000*24+1200*26/ (1000+1500+1000+1200) =108200/4700= 23.0213*2500(units)=57553.25

The ending inventory= 108200 - 57553.25=50646.75

d.  Which of these three inventory costing methods would you choose to:

1.  Minimize income taxes for the period? Explain. (2 marks)

when the COGS is the largest, the tax will be the lowest. Therefore, I will choose the LIFO method.

2.  Report the largest amount of income for the period? Explain. (2 marks)

In my opinion, I will choose the FIFO method since the amount of net income will become the largest when the sales is the COGs is decrease..

Using the method of big math accounting.

d. Assume that XYZ uses last-in, first-out method to account for its inventory. During an inflation period, how could Chen report a higher net income without switching to first-in, first out method? (2 marks)

Using the method of big math accounting.

f. assuming XYZ uses last-in, first out method and find the replace value of the ending balance of inventory is 40,000. Please make the corresponding entry, if necessary. (2 marks)

Loss value of inventory becomes the debit which is $6400, and the Inventory will become the credit which is also 6400 dollars.

Dr: The loss value of inventory 6400

Cr: inventory 6400

g. Please discuss what is big bath accounting and how to utilize the inventory related accounts to conduct big bath accounting (4 marks).

The big bath means the company's management team deliberately manipulates its income statement to make the bad results look worse, so as to make the future results look better. Try to manipulate the ending inventory and cog, so that the cog will be higher and the cog will be lower next year, so the net income will be better next year.

2) XYZ Company analyzes its accounts receivable at December 31, and arrives at the aged categories below along with the percentages that are estimated as uncollectible (14 points).

Age Group	Accounts Receivable	Estimated Loss %
0–30 days past due ................	$90,000	1%
31–60 days past due ...............	30,000	2
61–120 days past due ..............	20,000	5
121–180 days past due .............	8,000	10
Over 180 days past due .............	5,000	25

Assuming the existing balance of the allowance for uncollectible accounts is $700 on December 31, before any adjustments.

a. What amount of bad debts expense will XYZ report in its income statement for the year? (3 points)

Allowance for doubtful A/C(ending)= Allowance for doubtful A/C(beginning)+bad debt expense-write-off

900 + 600 + 1000 + 800 + 1250 -700 = 3850

b. What is the balance of gross accounts receivable and net realizable value of account receivable on its December 31 balance sheet? (2 points)

Receivable = 90000+30000+20000+8000+5000 = 153000

Net realizable value of account receivable = 153000 – 4550 = 148450

c. Suppose on February of next year, XYZ company finds out that 500 of account receivable turns into bad debt, please calculate the net realizable value. (2 points)

The net realizable value=148450-500=147950

d. Alternatively, suppose on February of next year, XYZ company finds out that 8000 of account receivable turns into bad debt, please make the related journal entry (suppose the company will replenish the allowance account by maintaining 1,000 balance after covering the bad debt) (3 points)

Dr: Bad debt expense 4450

Cr:Allowance for doubtful account 4450

Dr:Allowance for doubtful account 8000

Cr: Accounts receivable       8000

e. Please discuss what is cookie jar accounting and how to utilize the allowance of bad debt account to conduct cookie jar accounting (4 points).

It's part of the revenue that the company hides in order to report next quarter's results when it misses expectations, because accounting deliberately misleads investors, violating accepted reporting practices for public companies.

Q3 Accruals Accounting and Earnings Management

Stock Market Reaction to Earnings Announcements: Eastman Kodak and Intel

For its September quarter of 1998, Eastman Kodak, the imaging products manufacturer reported a net profit of $398 million, up 72% from one year earlier and in line with analysts’ expectations. However, when it was also revealed that its sales had fallen 10% to $3.4 billion, its stock price dropped 13%. Below is the partial cash flow statement for Eastman Kodak. (14 points)

a) Please identify 5 red flags about earnings quality from the above information and explain why (10 points)

b) Please calculate the accruals for each period. (4 points)