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B6013 Accounting 1 Financial Accounting Spring 2012 Professor Alon Kalay

Problem Set #3 Due on February 7, 2012 Question 1: Question 2: DEF A Cruel World Question 1: The DEF Company The DEF Company had started its operations in 1994. The balance sheet for December 31, 1994, showed the following accounts balances (there were no other accounts listed): Accounts receivables 45, Advances from customers 40, Accumulated depreciation 10, Paid in capital 500, Retained earnings 57, Property plant and equipment (gross) 200, Inventory 75, Accounts payable 40, Cash 309, Prepaid rent (?). During 1995 the following transactions occurred: 1. DEF purchased $375 worth of inventory on account. 2. Payments on Accounts payable were $365. 3. Cash sales were $260; credit sales were $360. 4. Ending inventory was $59. 5. Depreciation expense was $20. 6. Collections from customers (not including cash sales) were $312. 7. The Prepaid rent had expired during the year. 8. DEF hired one employee, who worked for the entire year at $4 per month. At the end of the year DEF owes its employee $6. 9. Dividend of $24 was declared and paid during 1995. 10. On the last day of the year, DEF gave a loan of $50 to its twin sister company, ABC. 11. Advances from customers account remained intact during 1995.

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Required: a. What was the balance of the Prepaid rent account on December 31, 1994? b. Record journal entries for all transactions occurred during 1995. (You may use T accounts.) c. Prepare an Income Statement for the year ended December 31, 1995. d. Prepare a Balance Sheet for December 31, 1995. e. Prepare a Statement of Cash Flows for the year ended December 31, 1995. Question 2: A Cruel World 1 You are given two consecutive balance sheets, an income statement, and a few facts for A Cruel World Inc. Balance Sheets (years 0 and 1) Cash Accounts Receivables Inventory Property, Plant and Equipment (net) Total Assets Accounts Payable Bonds Payable Total Liabilities Common Stock Retained Earnings Total Shareholders' Equity Total Liabilities and Equity Year 0 3,000 2,000 3,000 12,000 20,000 7,000 5,000 12,000 3,000 5,000 8,000 20,000 Year 1 3,000 4,000 4,000 11,000 22,000 5,000 6,000 11,000 4,000 7,000 11,000 22,000

Income Statement (year 1) Sales 20,000 Costs of Goods Sold (8,000) Wage Expense (4,000) Depreciation Expense (2,000) Interest Expense (1,000) Net Income Before Tax 5,000 Tax Expense (2,000) Net Income 3,000

Based on a problem by SGRyan.

Facts All property, plant and equipment that is retired or sold is fully depreciated. Purchases of property, plant and equipment were made in cash. Interest expense increases the Interest Payable Account. Required: a. Construct the Statement of Cash Flows for A Cruel World in year 1 using the direct method. b. Construct the supporting schedule to the Statement of Cash Flows which reconciles net income to cash flow from operations for A Cruel World in year 1. (That is, calculate cash flow from operations using the indirect method.) c. State what is possible (with the data at hand) to know about cash purchases of inventory for A Cruel World in year 1.