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Reading 33: Understanding the Balance Sheet - LOS d ~ Q1-3

Q1. Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?

Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less.
Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.

          Characteristic #1            Characteristic #2

 

A)  No                                           No

B)  Yes                                          No

C)  No                                           Yes

Q2. Firebird Company reported the following financial information at the end of 2007:

 

in millions

Merchandise inventory

$240

Minority interest

70

Cash and equivalents

275

Accounts receivable

1,150

Accounts payable

225

Property & equipment

2,160

Accrued expenses

830

Current portion of long-term debt

120

Long-term debt

1,570

Retained earnings

4,230

Calculate Firebird’s current assets and working capital.

          Current assets                             Working capital

 

A)                                                      $1,665 million        $420 million

B)                                                     $1,665 million        $490 million

C)                                                     $1,735 million        $490 million

Q3. Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:

Performed services on credit

$150,000

Purchased office equipment for cash

10,000

Recognized salaries expense

54,000

Purchased paint supplies on on credit

25,000

Consumed paint supplies

20,000

Paid salaries

50,000

Collected accounts receivable

157,000

Recognized straight-line depreciation expense

2,000

Paid accounts payable

15,000

Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.

          Working capital               Change in cash

 

A) $414,000                                  $82,000

B) $416,000                                  $82,000

C) $416,000                                  $80,000

答案和详解如下:

Q1. Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?

Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less.
Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.

          Characteristic #1            Characteristic #2

 

A)  No                                           No

B)  Yes                                          No

C)  No                                           Yes

Correct answer is A)

A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services.

Q2. Firebird Company reported the following financial information at the end of 2007:

 

in millions

Merchandise inventory

$240

Minority interest

70

Cash and equivalents

275

Accounts receivable

1,150

Accounts payable

225

Property & equipment

2,160

Accrued expenses

830

Current portion of long-term debt

120

Long-term debt

1,570

Retained earnings

4,230

Calculate Firebird’s current assets and working capital.

          Current assets                             Working capital

 

A)                                                      $1,665 million        $420 million

B)                                                     $1,665 million        $490 million

C)                                                     $1,735 million        $490 million

Correct answer is B)

Current assets are equal to $1,665 ($275 cash and equivalents + $1,150 accounts receivable + $240 inventory). Working capital (current assets minus current liabilities) is equal to $490 ($1,665 current assets – $225 accounts payable – $830 accrued expenses – $120 current portion of long-term debt).

Q3. Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:

Performed services on credit

$150,000

Purchased office equipment for cash

10,000

Recognized salaries expense

54,000

Purchased paint supplies on on credit

25,000

Consumed paint supplies

20,000

Paid salaries

50,000

Collected accounts receivable

157,000

Recognized straight-line depreciation expense

2,000

Paid accounts payable

15,000

Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.

          Working capital               Change in cash

 

A) $414,000                                  $82,000

B) $416,000                                  $82,000

C) $416,000                                  $80,000

Correct answer is B)

Transaction

Amount

Working capital

Cash

Performed services on credit

$150,000

Increase A/R

< >>

Purchased PP&E for cash

10,000

Decrease cash

-$10,000

Recognized salaries expense

54,000

Increase A/P

 

Purchased paint supplies on on credit

25,000

Increase inventories, increase A/P

 

Consumed paint supplies

20,000

Decrease inventories

< >>

Paid salaries

50,000

Decrease cash, decrease A/P

-$50,000

Collected accounts receivable

157,000

Increase cash, decrease A/R

+$157,000

Recognized straight-line depreciation expense

2,000

< >>

< >>

Paid accounts payable

15,000

Decrease cash, decrease A/P

-$15,000

The change in cash was $82,000 ($157,000 collections – $10,000 from equipment purchase – $50,000 salaries paid – $15,000 for payables).

Working capital at the end of 20X7 is $416,000 ($350,000 beginning working capital + $150,000 increase in accounts receivable from services – $10,000 office equipment purchase – $54,000 salaries expense accrual – $20,000 consumed supplies).

§   Purchasing $25,000 of paint supplies on credit has no net effect on working capital (current assets and current liabilities increase). Consuming $20,000 of these supplies reduces working capital (current assets decrease).

§   Salary expense reduces working capital by $54,000 when recognized (current liabilities increase). Paying $50,000 of these salaries has no net effect on working capital (current assets and current liabilities decrease).

§   Collecting accounts receivable has no net effect on working capital (one current asset increases and another decreases).

§   Recognizing depreciation does not affect working capital.

§   Paying accounts payable has no net effect on working capital (current assets and current liabilities decrease).

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