ACC1002X Financial Accounting

Semester 2 of Academic Year 2015-2016

SOLUTIONS to Optional Questions
CHAPTER 2: 2-32, 2-45, 2-52, 2-67

2-32
1.

On the cash basis, Yanktons net income would be as follows:

Revenue (cash received)
$190,000*
Expenses
175,000
Net income
$15,000
* Beginning receivables + Credit sales Cash collections = Ending receivables
$60,000 + 240,000 Cash collections = $110,000
$60,000 + 240,000 110,000 = Cash collections = $190,000

2.

On an accrual basis, Yanktons net income would be as follows:

Revenue (sales)
$240,000
Expenses
175,000
Net income
$ 65,000

3.

The $65,000 net income on the accrual basis is generally the most relevant for assessing
Yanktons performance. It gives credit for all $240,000 of sales because, provided the
accounts receivable are likely to be received (which is one criterion for the accrual
recognition of revenue), Yankton has created value from all the sales, not just those for
which cash has been received.

Page 1 of 6

2-45
1 and 2. See Exhibit 2-45 on the following page.
3.

R. J. SEN CORPORATION
Income Statement
For the Month Ended June 30, 20X0
(In Thousands of Dollars)
Accrual Basis

Sales
Deduct: Cost of
goods sold
Net income

$115,000

60,000
$ 55,000

Cash Basis
Revenue (cash collected
from customers*)
Expenses (cash disbursed
for merchandise)
Net cash used by
operating activities

$ 45,000
85,000
$(40,000)

*The entire revenue is cash sales. If any cash had been collected from credit customers during
June, it would be added here.
The accrual basis provides a better measure of the economic accomplishments and efforts of the
entity. The cash basis is inferior because it fails to recognize revenue as earned (the sales on
credit), and it often recognizes expenses before they help generate revenues (for example,
inventory acquired but not sold). Note that the June 28 acquisition of inventory on open account
is irrelevant under both the accrual and cash basis.

Page 2 of 6

EXHIBIT 245
R. J. SEN CORPORATION
Analysis of Transactions for June, 20X0
(In Thousands of Dollars)

Description of Transactions
1.
2.
3a.
b.
4.

Original investment
Acquisition of inventory
Sales for cash and credit
Cost of inventory sold
Acquisition of inventory

Cash
+100
85
+ 45

+ 60

Assets
Accounts
Inven
+ Receivable + tories

+85
+70

+70

60
+34
+59

Liabilities and Stockholders Equity

Accounts
Paidin
= Payable
+ Capital + Retained Earnings
=
=
=
=
=
=

+100
+115 (sales revenue)
60 (cost of goods sold expense)
+34
+34

189

+100

+ 55

189

R. J. SEN CORPORATION
Balance Sheet
June 30, 20X0
(In Thousands of Dollars)
Assets
Cash
Accounts receivable
Merchandise inventory

$ 60,000
70,000
59,000

Total Assets

$189,000

Liabilities and Stockholders Equity

Liabilities:
Accounts payable
$ 34,000
Stockholders equity:
Paidin capital
$100,000
Retained earnings
55,000
155,000
Total Liab & S.E.
$189,000

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2-52
1.

See Exhibit 2-52 on the following page.

2.
NESTL S.A.
Statement of Earnings
For the Month of January 2009
(In Millions of CHF)
Sales
Deduct expenses:
Cost of goods sold
Selling and administrative expenses
Depreciation
Total expenses
Net Loss

CHF750
CHF500
290
30
820
CHF (70)

NESTL S.A.
Balance Sheet
January 31, 2009
(In Millions of CHF)
Assets
Cash
CHF 5,541
Receivables
13,422
Inventories
8,842
Property, plant, and equipment 21,067
Other assets
56,449
Total Assets
CHF105,321

Liabilities and
Stockholders Equity
Accounts payable
Income taxes payable
Other liabilities
Stockholders equity

CHF 12,608
0
37,867
54,846

Total Liab & S.E.

CHF105,321

Page 4 of 6

EXHIBIT 252
NESTL S.A.
Analysis of Transactions for January 2009
(In Millions of CHF)
Assets

Description
Balances, January 1
1a. Sales
1b. Cost of inventory
sold
2. Collection of
receivables
3. Depreciation
expense
4. Selling and
administrative
expense
5. Selling and
administrative
expense
6. Paid income taxes
Balances,
January 31

Cash
+5,835
+ 350

Receiv+ ables
+13,442
+ 400

=
Liabilities and Owners Equity
Property,
Inc.
Other
InvenPlant, &
Other
Accts. Taxes
Liabi+ tories + Equip. + Assets = Pay. + Pay. + lities +
Owners Equity
+9,342

+21,097 +56,499

= +12,608 +824 +37,867

=

500
=
+ 420

420

=
=

30

240

-50

+5,541

30 (depreciation
expense)
(selling &
240 admin. exp.)

824
+13,422

+8,842
105,321

+21,067 +56,449

=
=
= +12,608

+54,916
+ 750 (sales revenue)
500 (cost of goods
sold expense)

(selling &
-50 admin. exp.)
824
+ 0 +37,867

+54,846

105,321

Page 5 of 6

2-67
This solution is based on the Annual Report for fiscal year 2011, provided on Time Warners
website.
1.

Time Warner recognizes revenues from magazine subscriptions on the magazines cover
date. Subscriptions paid in advance are put into a deferred revenue account. Revenue
from magazines sold by the copy in stores and newsstands is recognized when shipped,
less an estimated amount for returns.

2.

Unearned revenue (or deferred revenue) represents amounts received in advance from
customers. Time Warner has not yet provided goods or services to customers.
Therefore, they have a liability. The dollar amount of unearned revenue is $1,084 million
included with current liabilities and another $549 million included with long-term
liabilities. This means that most subscriptions will be fulfilled in the next year, but there
are some subscriptions that are for more than one year. These accounts are found on the
balance sheet.

3.

Revenue categories are subscription, advertising, content, and other. Total revenue is
$28,974 million; total expenses and non-operating items are $26,088 million, resulting in
a net income of $2,882.

4.

Like all large companies, Time Warner uses the accrual method. This is perhaps most
clear from the terms Receivables and Prepaid expenses among the assets and Accounts
payable, Deferred revenue, and Accrued liabilities among the liabilities on the balance
sheet. It is also evident from the use of revenues rather than cash receipts and
expenses rather than cash outlays on the income statement.

5.

Time Warner is clearly a profit-seeking organization. This is evident from the income
statement, where it shows not only net income (loss) but also income per common share.
On the balance sheet, it is evident from the shareholders equity section. It is also clear
from the presence of income taxes.

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