Question

Question 1

How would a sale of $400 of inventory on credit affect the balance sheet if the cost of the inventory sold was $160?

		It would increase noncash assets by $400 and increase equity by $400
		It would decrease noncash assets by $160 and decrease equity by $160
		It would increase cash by $400 and increase equity by $400
		Both the first and the second choices, above happen simultaneously
Question 2

How would a purchase of inventory on credit affect the income statement?

		It would increase liabilities
		It would decrease retained earnings
		It would increase assets
		None of the above

Question 4

Which one of the following statement(s) is (are) most likely to be TRUE?

I. When shareholders contribute capital to a company, earned capital increases because the company has earned the shareholders’ investments.
II. Revenues and expenses affect the income statement but not the balance sheet.
III. Retained earnings articulate across time which means that last period’s retained earnings plus current period net income (or loss) is equal to the current period’s retained earnings.
IV. Revenue is typically recorded as earned when cash is received because that is when the company can measure the revenue objectively.

		I and III only
		II only
		IV only
		None of the above

Question 5

During fiscal year-end 2016, Kohl’s Corporation reports the following (in $ millions): net income of $556, retained earnings at the end of the year of $12,522 and retained earnings at the beginning of the year of $12,329. Assume that there were no other retained earnings transactions during fiscal 2016.

What dividends did the firm pay in fiscal year ended January 28, 2017?

		$ 683 million
		$ 1,669 million
		$ 363 million
		$ -0-

Answer 1

(1)

If inventory of the cost price of $160 is sold on credit for $400, it will have the following impacts:

Non-cash assets will increase by $400 in the form of accounts receivables.

Non-cash assets will decrease by $160 in the form of inventory.

Income of the business will increase by $240 (400 - 160). Hence equity will also increase by $240.

Hence,the correct option is (d)

(2)

When inventory is purchased on credit, it will have the following impacts:

Cost of production will increase.

Current liabilities will increase in the form of accounts payables.

But, the question is asking about its impact on the income statement. Hence none of the options (a),(b) and (c) are correct.

Hence, correct option is (d)

(4)

Earned capital is the net income earned by the business which is reinested in the business. Hnece, shareholders capital is not earned capital.Hence, statement I is incorrect.

Revenues and expenses are shown in the income statement only. In the balance sheet, assets and liabilities of the business are shown. Hence statement II is correct.

Current period's retained earnings = Previous period's retained earnings + Current period's net income - Dividend paid

Hence, statement III is incorrect.

Revenue is recorded as earned when the transaction of sale of goods takes place, it does not matter whether the cash has been received or not. Hence, statement IV is incorrect.

Hence, correct option is (b)

(5)

Retained earnings, begining	12,329
+ Net income of the current year	556
- Retained earnings, ending	-12,522
Hence, dividend paid during the current year	363

Hence, correct option is (c) i.e $363 million

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