Chapter Seven: Questions 1& 2:
(a) What are generally accepted accounting principles (GAAP)?
Generally acceptable principles (GAAP) refers to a standardized framework that offers guidelines on financial accounting, and it is used in any jurisdiction. GAAP consists of rules, standards and conventions that accounting professional adhere to in the summarizing and recording of transactions as well as in the computation of financial statements and records. The GAAP guidelines are alternatively, referred to as accounting standards (Weygandt, 2009).
(b)What bodies provide authoritative support for GAAP?
GAAP is supported by various entities including the Governmental Accounting Standards Board. This board was set up in 1984 to foresee the setting up of financial reporting and accounting standards for all local and state government agencies. Another body that supports GAAP is American Institute of Certified Public Accountants (AICPA). AICPA represents the accounting profession nationwide is the establishment of rules and standards. AICPA also develops standards for auditing the offering of other services by CPAs. The third body that provides support for GAAP is the (FASB) the financial accounting Standards Board, which is a non-profit, private body which assists in the development and upholding of GAAP within the U.S (Weygandt, 2009).
What elements comprise the FASB’s conceptual frame-work?
FASB’S conceptual framework is made up of the following eleven concepts realization, money measurement, going concern, duals aspect, entity, cost, materiality, matching, accounting period, conservation and consistency.
Chapter 8: Exercise E8-5.
E8-5 Listed below are five procedures followed by The Beat Company.
1. Several individuals operate the cash register using the same register drawer.
2. Monthly bank reconciliation is prepared by someone who has no other cash responsibilities.
3. Ellen May writes checks and also records cash payment journal entries.
4. One individual orders inventory, while a different individual authorizes payments.
5. Unnumbered sales invoices from credit sales are forwarded to the accounting department every four weeks for recording.
Instructions
Indicate whether each procedure is an example of good internal control or of weak internal control. If it is an example of good internal control, indicate which internal control principle is being followed. If it is an example of weak internal control, indicate which internal control principle is violated. Use the table below.
|
Procedure
|
Internal control strength (weak or strong).
|
Related internal control principle.
|
|
Procedure one.
|
Weak internal control
|
The principle of establishment of responsibility
|
|
Procedure two.
|
Strong Internal control measure
|
Principle of independence (independent internal verification).
|
|
Procedure three.
|
Weak internal control
|
The principle of segregation of duties
|
|
Procedure four.
|
Strong Internal control
|
Principle of segregation of duties
|
|
Procedure five.
|
Strong internal control
|
Principle of independent internal verification
|
Exercise E15-1
Horizontal analysis denotes an accounting method of analyzing series of data on various items within financial statements over a period of time by assessing their respective increases or decreases in both amount and percentages.
Horizontal Analysis of Financial information from Blevins Incorporation as per a horizontal analysis for 2009 using 2008 as the base year:
| |
December 31, 2009
|
December 31, 2008
|
Increase or decrease
|
Percentage change
|
|
Current assets
|
$125,000
|
$100,000
|
$25000
|
25%
|
|
Plant assets (net)
|
396,000
|
330,000
|
66000
|
20%
|
|
Current liabilities
|
91,000
|
70,000
|
21000
|
30%
|
|
Long-term liabilities
|
133,000
|
95,000
|
38000
|
40%
|
|
Common stock, $1 par
|
161,000
|
115,000
|
46000
|
40%
|
|
Retained earnings
|
136,000
|
150,000
|
-14000
|
9.3%
|
| |
|
|
|
|
Exercise E15-2 Operating data for Gallup Corporation and a vertical analysis schedule of the financial statement. Vertical analysis is a technique that shows each financial item as a percentage of a certain base amount.
| |
2009
|
|
2008
|
|
| |
Amount
|
Percentage
|
Amount
|
Percentage
|
|
Sales
|
$750,000
|
100%
|
$600,000
|
100%
|
|
Cost of goods sold
|
465,000
|
62%
|
390,000
|
65%
|
|
Selling expenses
|
120,000
|
16%
|
72,000
|
12%
|
|
Administrative expenses
|
60,000
|
8%
|
54,000
|
9%
|
|
Income tax expense
|
33,000
|
4.4%
|
24,000
|
4%
|
|
Net income
|
72,000
|
9.6%
|
60,000
|
10%
|
Exercise E15-11 Scully Corporation’s comparative balance sheets:
SCULLY CORPORATION-Balance Sheets
| |
2008
|
2007
|
|
Cash
Accounts receivable
Inventory
Land
Building
Accumulated depreciation
Total
Accounts payable
Common stock
Retained earnings
Total
|
$ 4,300
21,200
10,000
20,000
70,000
(15,000)
$110,500
$ 12,370
75,000
23,130
$110,500
|
$ 3,700
23,400
7,000
26,000
70,000
(10,000)
$120,100
$ 31,100
69,000
20,000
$120,100
|
Scully’s 2008 net sales were $100,000, cost of goods sold was $60,000, and the net income was $15,000.
Computed ratios for 2008
(a) Current ratio=Current assets/Current liabilities.
35500/35500=1 (2008)
34100/51100=0.65 (2007)
(b) Acid-test ratio= (cash+ accounts receivable + short term investment)/current liabilities
25500/35500=0.7 (2008)
27100/51100=0.5 (2007)
(b) Receivables turnover=net credit sales/average net receivables (2008 net receivables+2007 net
receivables/2)
21200/ (21200+23400/2)
21200/11300=1.9
(d) Inventory turnover=cost of goods sold/average inventory
21200/10000=2.12(2008)
23400/7000=3.3 (2007)
(e) Profit margin=net income/net sales
(21200-12370)/21200=0.4 (2008)
(23400-31100)23400=-0.3(2007)
(f) Asset turnover=net sales/average assets
21200/ (110500+120100)/2=0.2
(g) Return on assets=net income/average assets
8830/115300=0.1
(h) Return on common stockholders’ equity=Net income/average common stockholder’s equity
(21200-12370)/75000=0.1(2008)
(23400-31100)/69000=0.1(2007)
(i)Debt to total assets ratio=Total debts/total assets
110500/110500=1(2008)
120100/120100=1(2007)
References
Weygandt, J.J. (2009). Financial Accounting. John Wiley and Sons Publishers.
James Robinson is the Author and the Managing Director of MeldaResearch.Com a globally competitive top essay writing service which is the premiere provider of Essay Writing Services, Research Paper Writing Services at Term Paper Writing Services at very affordable cost. For 9 years, she has helped a number of students in different academic subjects.