Question

4. During 2018 Fox Co. collected $250,000 in accounts receivable, while performing services with invoices totaling $280,000. Also during 2018, Fox paid $120,000 to buy resources, using $100,000 of these resources in their operations. In December 2018, Fox declared dividends of $40,000, paying $10,000 of them now and the rest to be paid in 2019. What is the change in Retained Earnings that Fox will report for 2018? a. 120,000 b. 180,000 c. 90,000 d. 140,000

5. A new company, in its 1st physical count, included $1,000,000 more inventory than it actually owned. What is the effect of this error on its 2nd Year Net Income (NI) and on its Stockholders' Equity (SE) at the end of its 2nd Year, respectively? (Key for Answers: O = Overstated, U = Understated, and C = Correct) a. NI=O & SE=O b. NI=U & SE=C c. NI=C & SE=C d. NI=U & SE=U e. NI=O & SE=C.

6. Which inventory method generally results in the highest cash flows, after taxes? a. Last in first out (LIFO) b. First in first out (FIFO) c. Weighted-average d. Choice of inventory methods do not effect earnings per share.

7. At year-end, the following information is available from the Fox Co. Adjusted Trial Balance (Accounts are in random order, but assume Normal Account Balances): Equipment $200,000 Accumulated Depreciation $ 100,000 Accounts Payable 80,000 Cost of Goods Sold 120,000 Loss on Truck Sale 20,000 Depreciation Expense 40,000 Dividends 70,000 Cash 10,000 Salaries Expense 60,000 Sales 650,000 Retained Earnings 140,000 Accounts Receivable 120,000 Based on this info, what is Fox’s Net Income for the year? a. 310,000 b. 410,000 c. 340,000 d. 430,000

8. For these 4 accounts, which answer would decrease each account: Sales Allowance for Doubtful Accounts Premium on Bond Payable Cost of Sales a. Credit Credit Credit Debit b. Debit Debit Debit Credit c. Debit Credit Debit Credit d. Credit Debit Debit Debit e. None of the above answers are completely correct.

Answer 1

• All working forms part of the answer
• Question 4

Question 4
Invoices totalled = Service revenue	$                      280,000.00
Cost of resources used	$                      100,000.00
Net Income	$                      180,000.00
Dividends declared	$                      (40,000.00)
Change In retained earnings	$                      140,000.00
Correct Answer	Option 'd' $ 140,000

• Question 5

If ending inventory of Year 1 is overstated, the beginning inventory of Year 2 is overstated by default. This increases Cost of Goods Sold of Year 2 and hence, Net Income gets understated. However, Stockholder’s Equity will be correct by the end of Year 2 because in year 1 Equity would have been overstated and in year 2 the same will be understated, making overall Equity balance correct by the year 2 end.

Hence, Correct Answer = Option ‘b’ NI = Overstated, SE = Correct.

• Question 6

The correct answer is LIFO Option ‘a’

Generally, LIFO methods results in highest cash flows after taxes because inventory cost ten to increase over time and LIFO method values cost of Goods sold at latest increased prices. As a result, the cost of the goods sold gets inflated. Increased Cost of Goods Sold leads to lower gross margin and lower Net Income before tax. This makes the tax expenses Lesser.

• Question 7

Correct answer = Option ‘b’: $ 410,000

Only accounts that are to be considered for Income Statement preparation:

Sales		$                                     650,000.00
Cost of Goods Sold		$                                     120,000.00
Gross Profits		$                                     530,000.00
Loss on sale of trucks	$                         20,000.00
Depreciation expenses	$                         40,000.00
Salaries expenses	$                         60,000.00
Total Expenses		$                                     120,000.00
Net Income for the year		$                                     410,000.00
Correct Answer	Option 'b' $ 410,000

• Question 8

Accounts	Sales	Allowances for Doubtful Accounts	Premium on Bonds Payable	Cost of Sales
Nature	Revenue account	Contra Asset	Liability	Expenses
Decreased if	Debited	Debited	Debited	Credited
Correct Answer	Option 'b' Debit ; Debit : Debit ; Credit