Exercises of Financial Accounting

CHAPTER 1
Answers to these questions .
1. Which of the following does not describe accounting?
a. Language of business.
b. Is an end rather than a means to an end.
c. Useful for decision making.
d. Used by business, government, nonprofit organizations, and individuals.
2. To understand and use accounting information in making economic decisions, you must
understand:
a. The nature of economic activities that accounting information describes.
b. The assumptions and measurement techniques involved in developing accounting
information.
e. Which information is relevant for a particular type of decision that is being made.
d. All of the above.
3. Purposes of an accounting system include all of the following except:
a. Interpret and record the effects of business transactions.
b. Classify the effects of transactions to facilitate the preparation of reports.
c. Summarize and communicate information to decision makers.
d. Dictate the specific types of business transactions that the enterprise may engage in.
4. External users of financial accounting information include all of the following except:
a. Investors.
b. Labor unions.
e. Line managers.
d. General public.
5. Objectives of financial reporting to external investors and creditors include preparing
information about all of the following except:
a. Information used to determine which products to produce.
b. Information about economic resources, claims to those resources, and changes in both
resources and claims.
~. Information that is useful in assessing the amount, timing, and uncertainty of future
cash flows.
d. Information that is useful in making investment and credit decisions.
6. Financial accounting information is characterized by all of the following except:
a. It is historical in nature.
b. It results from inexact and approximate measures.
c. It is factual, so it does not require judgment to prepare.
d. It is enhanced by management's explanation.
7.Which of the following is not a user of management accounting information?
a. Store manager.
b. Chief executive officer.
e. Creditor.
d. Chief financial officer.
8.Characteristics of management accounting information include all of the following except:
a. It is audited by a CPA.

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 Exercises of Financial Accounting

b. It must be timely.
e. It is oriented toward the future.
d. It measures efficiency and effectiveness.
9. The primary standard-setting body in the United States with responsibility for determining
generally accepted accounting principles is the:
a. General Accounting Office.
b. Financial Accounting Standards Board.
c. Institute of Internal Auditors.
d. Institute of Management Accountants.
10.The code of ethics of the Institute of Management Accountants includes requirements in
which of the following areas?
a. Competence.
b. Objectivity.
c. Confidentiality.
d. All of the above.
11.A major focus of this course is the process of financial reporting.
a. What is meant by the term financial reporting?
b. What are the principal accounting reports involved in the financial reporting process? In
general terms, what is the purpose of these reports?
c. Do all business entities engage in financial reporting? Explain.
d. How does society benefit from the financial reporting process?
12. Generally accepted accounting principles play an important role in financial reporting.
a. What is meant by the phrase “generally accepted accounting principles”?
b. What are the major sources of these principles?
c. Is there a comprehensive list of generally accepted accounting principles ?Explain.
d. What types of accounting reports are prepared in conformity with generally accepted
accounting principles?
13.Describe the roles of the following organizations in establishing generally accepted accounting
principles:
a. The FASB
b. The AICPA
c. The SEC
From which of these organizations can you most easily obtain financial information about publicly
Owned companies?

DISCUSSION QUESTIONS
1. What do we mean when we say that accounting is a means rather than an end?
2, Accounting is sometimes described as the language of business. What is meant by this
description?
3. What kinds of organizations, in addition to businesses, use accounting information?
4. What is the primary distinction between financial accounting and managerial accounting?
5. Describe the relationship among the accounting process, accounting information, decision
makers, and economic activities.

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 Exercises of Financial Accounting

6. What are some examples of nonfinancial information that is often wanted by users of ac-
counting information?
7. What is an accounting system and what is the primary objective of such a system?
8. What do we mean when we say that an accounting system needs to be "cost-effective"?
9. What are the three basic functions of every accounting system?
10. Who designs and installs accounting systems?
11. Generally describe and give several examples of external users of accounting information.
12. What are the two primary external groups to which financial accounting information is
directed?
13. What do we mean when we say that investors and creditors are interested in a company's
"cash flow prospects"?
14. When you invest your savings in a company, what is the difference between the return on
your investment and the return of your investment?
15. Going from general to specific, what are the three primary objectives of financial account-
ing information?
16. What are the three primary financial statements with which we communicate financial ac-
counting information?

CHAPTER 2
1. Assets and liabilities are important elements of a company’s financial position.
a. Define assets. Give three examples of assets other than cash that might appear in the balance
sheet of(1)American Airlined and(2)a professional sports team, such as the Boston Celtics
b. Define liabilities. Give three examples of liabilities that might appear in the balance sheet
of(1)American Airlines and (2)a professional sports team, such as the Boston Celtics.

2. The night manager of Majestic Limousine Service, who had no accounting background,
prepared the following balance sheet for the company at February 28,2002.The dollar amounts
were taken directly from the company’s accounting records and are correct. However, the balance
sheet contains a number of errors in its headings, format, and the classification of assets,
liabilities, and owners’ equity.

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 Exercises of Financial Accounting

MAJESTIC LIMO
Manager’s Report&P.M Thursday
Assets Owners’ Equity
Capital Stock $100,000 Account Receivable $78,000
Retainer Earnings 62,000 Notes Payable 288,000
Cash $69,000 Supplies 14,000
Building 80,000 Land 7,000
Automobiles 165,000 Accounts Payable 26,000
$476,000 $476,000

Prepare a corrected balance sheet. Include a proper heading.

3. The balance sheet items of the Perez Company as of December 31,2002,follow in random
order. You are to prepare a balance sheet for the company, using a similar sequence for assets
as in the illustrated balance sheet on page 51.You must compute the amount for Retained
Earning.

Land $90,000 Office Equipment $10,200

Accounts Payable 43,800 Building 210,000
Accounts Receivable 56,700 Capital Stock 75,000
Cash 36,300 Note payable 213,600
Retained Earnings ?

4. Compute the missing amounts in the following table:

Assets=liabilities+Owners’ Equity
a.$558,000 $342,000 ?
b. ? 562,500 $375,000
c.307,500 ? 142,500

5. The following cases relate to the valuation of assets. Consider each case independently.
a. World Travel Agency has office supplies costing $1,700 on hand at the balance sheet
date supplies were purchased from a supplier that does not give cash refunds. World Wide’s
management believes that the company could sell these supplies for no more than $500
If it were to advertise them for sale. However, the company expects to use these supplies and
To purchase more when they are gone. In its balance sheet, the supplies were valued at $500.
b. Nofford Corporation purchased land in 1955 for $20,000. In 2002, it purchased a similar parcel
of land for $300,000. In its 2002 balance sheet, the company presented these two parcels of land at
a combined amount of $320,000.
c. At December 30, 2002, Lenier, Inc., purchased a computer system from a mail-order supplier

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 Exercises of Financial Accounting

for $14,000. The retail value of the system--according to the mail-order supplier—was $20,000.
On January 7, however, the system was stolen during a burglary. In its December 31,2002,balance
sheet, Lenier showed this computer system at $14,000 and made no reference to its retail value or
to the burglary. The December balance sheet was issued in February of 2003.
In each case, indicate the appropriate balance sheet amount of the asset under generally accepted
Accounting principles. If the amount assigned by the company is incorrect, briefly explain the
accounting principles that have been violated. If the amount is correct, identify the accounting
principles that justify this amount.

6. Omega Communications was organized on December 1 of the current year and bad the
following account balances at December 31,listed in tabular form:

Assets = liabilities
+Owners’
Equity
Cash + Land + Building+Office = Notes + Accounts +Capital Equipment
Payable Payable Stock

Balance$37,000 $95,000 $125,000 $51,250 $80,000 $28,250 $200,000

Early in January, the following transaction were carried out by Omega Communications:
1. Sold capital stock to owners for $25,000.
2. Purchased land and a small office building for a total price of $90,000,of
which$35,000 was the value of the land and $55,000 was the value of the building.
Paid $22,500 in cash and signed a note payable for the remaining$67,500
3. Bought several computer systems on credit for $8,500(30-day open account)
4. Obtained a loan from Capital Bank in the amount of $10,000.Signed a note payable.
5. Paid the $28,250 account payable owed as of December31.
Instructions
a. List the December 31balances of assets, liabilities, and owners ’equity in tabular form
shown.
b. Record the effects of each of the five transactions in the format illustrated on page 53.
Show the totals for all columns after each transaction.

7. The items making up the balance sheet of Patterson Truck Tental at December 31 are listed
below in tabular form similar to the illustration of the accounting equation on page 53.

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 Exercises of Financial Accounting

Assets = liabilities +Owners’

Equity
Cash + Accounts + Trucks +Office = Notes + Accounts +Capital
Receivable Equipment Payable Payable Stock

Balance$9,500 $8,900 $58,000 $3,800 $20,000 $5,200 $55,000

During a short period after December31,Patterson Truck Rental had the following transactions:
1. Bought office equipment at a cost of $2,700 Paid cash
2. Collected$4,000 of accounts receivable.
3. Paid$3,200of accounts payable.
4. Borrowed$10,00from a band, Signed a note payable for that amount.
5. Purchased two trucks for $30,500.Paid$15,000cash and signed a note payable for the balance .
6. Sold additional stock to investors for $20,000.
Instructions
a. List the Dexember31balances of assets, liabilities, and owners’ equity in tabular form as
shown above.
b. Record the effects of each of the six transactions in the tabular arrangement illustrated above.
Show the totals for all columns after each transaction.

8. HERE COME THE CLOWNS! is the name of traveling circus. The ledger accounts of the
business at June 30,2002,are listed here in alphabetical order:

Accounts Payable $26,100 Notes Payable $180,000

Accounts Receivable 7,450 Notes Receivable 9,500
Animals 189,060 Props and Equipment 89,580
Cages 24,630 Retained Earning 27,230
Capital Stock 310,000 Salaries Payable 9,750
Cash ? Tents 63,000
Costumes 31,500 Trucks&Wagons 105,840

Instructions
a. Prepare a balance sheet by using these items and computing the amount of Cash at June
30,2002.Organize your balance sheet similar to the one illustrated on page 42.(After
“Accounts Receivable,” you may list the remaining assets in any order.)Include a proper
balance sheet heading.
b. Assume that late in the evening of June 30,after your balance sheet had been prepared, a
fire destroyed one of the tents, which had cost$14,300.The tent was not insured. Explain
what changes would be required in your June 30 balance sheet to reflect the loss of this
asset.
9. Shown below in random order is a list of balance sheet items for Smoky Mountain Farms at
September 30,2002:

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 Exercises of Financial Accounting

Land $550,000 Fences and Gates $33,570

Barns and Sheds 78,300 Irrigation System 20,125
Note Payable 530,000 Cash 16,710
Accounts Receivable 22,365 Livestock 120,780
Citrus Trees 76,650 Farm Machinery 42,970
Accounts Payable 77,095 Retained Earnings ?
Property Taxes Payable 9,135 Wages Payable 1,820
Capital Stock 250,000

Instructions

a. Prepare a balance sheet by using these items and computing the amount for retained earnings.
Use a sequence of assets similar to that illustrated on page 42.(After “Barns and Sheds” you
may list the remaining assets in any order )Include a proper heading for your balance sheet.
c. Assume that on September 30,immediately after this balance sheet was prepared, a
tornado completely destroyed one of the barns. This barn bad a cost of $23,800,and was
not insured against this type of disaster. Explain what changes would be required in your
September 30 balance sheet to reflect the loss of this barn.

CHAPTER 3

1. Record the following selected transactions in general journal form for Thompson
Engineering,Inc. Include a brief explanation of the transaction as part of each journal entry.
Oct.1 The company issued 5,000additional shares of capital stock at $20 per share.
Oct.4 The company purchased computer equipment. The equipment cost $45,000,of which
$15,000 was paid in cash; a note payable was issued for the balance
Oct.12 Issued a check for $11,000 in full payment of a note payable to West Milton State Bank.
Oct.19 Purchased office supplies on account for $300.Payment is not due until November10
Oct.25 Collected a $12,000 account receivable from the Lewisburg School District
Oct.30 Declared and paid a $6,000 cash dividend to stockholders

2. Total assets and total liabilities of Reco Plumbing,Inc., as shown by its balance sheets at the
beginning and end of the year, were as follows:

Beginning of Year End of Year

Assets $300,000 $335,000
Liabilities 100,000 110,000
Compute the net income or net loss from operations for the year in each of the following

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 Exercises of Financial Accounting

independent cases:
a. No dividends were declared or paid during the year and no additional capital
stock was issued
b. No dividends were declared or paid during the year, but additional capital stock
was issued in the amount of $20,000
c. Dividends of $10,000 were declared and paid during the year, No additional capital
stock was issued.
d. Dividends of $15,000 were declared and paid during the year, and additional capital
stock was issued in the amount of $30,000.
e. No dividends were declared or paid during the year ,but additional capital stock was
issued in the amount of $35,000.

3. Environmental Services, Inc., performs various tests on wells and septic systems. A few of the
company's business transactions occurring during August are .described below:
1. On August 1, the company billed customers $2,500 ori account for services rendered.
Customers are required to make full payment within 30 days.
2. On August 3, purchased testing supplies costing $3,800, paying $800 cash and charging the
remainder on the company's 30-day account at Penn Chemicals. The testing supplies are expected
to last several months.
3. On August 5, returned to Penn Chemicals $100 of testing supplies that were not needed. The
return of these supplies reduced by $100 the amount owed to Penn Chemicals.
4. On August 17, the company issued an additional 2,500 shares of capital stock at $8 per share.
The cash raised will be used to purchase new testing equipment in September.
5. On August 22, the company received $600 cash from customers it had billed on August 1.
6. On August 29, the company paid its outstanding account payable to Penn Chemicals.
7. On August 30, a cash dividend totaling $6,800 was declared and paid to the company's
stockholders.
Instructions
a. Prepare an analysis of each of the above transactions. Transaction l serves as an example of
the form of analysis to be used.
1.(a) The asset Accounts Receivable was increased. Increases in assets are recorded by debits.
Debit Accounts Receivable, $2,500.
2.(b) Revenue has been earned. Revenue increases owners' equity. Increases in owners' equity are
recorded by credits. Credit Testing Service Revenue, $2,500.
b. Prepare journal entries, including explanations, for the above transactions.
c. How does the realization principle influence the manner in which the August 1 billing to
customs is recorded in the accounting records?
d . How does the matching principle influence the manner in which the August 3 purchase of
testing supplies is recorded in the accounting records?

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 Exercises of Financial Accounting

4. Weida Surveying, Inc., provides land surveying services. During September, its transactions
included the following:
Sept. 1 Paid rent for the month of September, $4,400.
Sept.3 Billed Fine Line Homes $5,620 for surveying services. The entire amount is due on
or before September 28. (Weida uses an account entitled Surveying Revenue when
billing clients.)
Sept.9 Provided surveying services to Sunset Ridge Developments for $2,830. The entire
amount was collected on this date.
Sept.4 Placed a newspaper advertisement in the Daily Item to be published in the September
20 issue. The cost of the advertisement was $165. Payment is due in 30 days.
Sept.25 Received a check for $5,620 from Fine Line Homes for the amount billed on September
3.
Sept.26 Provided surveying services to Thompson Excavating Company for $1,890. Weida
collected $400 cash, with the balance due in 30 days.

CHAPTER 4
1. Sweeney & Associates, a large marketing firm, adjusts its amounts at the end of each month.
The following information is available:
a. A bank loan had been obtained on December 1. Accrued interest on the loan at December 31
amount to $1,200. No interest expense has yet been recorded.
b. Depreciation of the Finn’s office building is based on an estimated life of 25 years. The building
was purchased in 1998 for $330,000
c. Accrued, but unbilled, revenue during December amounts to $64,000.
d. On March 1, the firm paid $1,800 to renew a 12-month insurance policy The entire amount was
recorded as Prepaid Insurance.
e. The firm received $14,000 from the King Biscuit Company in advance of developing a six-
month marketing campaign. The entire amount was initially recorded as Unearned Revenue.
AtDecember 31, $3,500 had actually been earned by the firm.
f. The company's policy is to pay its employees every Friday. Since December 31 fell on a
Wednesday, there was an accrued liability for salaries amounting to $2,400.
g. Record the necessary adjusting journal entries on December 31, 2002 .
h. By how much did Sweeney & Associates' net income increase or decrease as a result of the
adjusting entries performed in part a? (Ignore income taxes.)

2. Ventura Company adjusts its accounts monthly and closes its accounts on December 31. On
October31, 2002, Ventura Company signed a note payable and borrowed $120,000 from a bank
for a period of six months at an annual interest rate of 9%.
a. How much is the total interest expense over the life of the note? How much is the monthly
interest expense? (Assume equal amounts of interest expense each month.)
b. In the company's annual balance sheet at December 31, 2002, what is the amount of the liability

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 Exercises of Financial Accounting

to the bank?
c. Prepare the journal entry to record issuance of the note payable on October 31, 2002.
d. Prepare the adjusting entry to accrue interest on the note at December 31, 2002.
e. Assume the company prepared a balance sheet at March 31, 2003. State the amount of the
liability to the bank at this date.

3. Florida Palms Country Club adjusts its accounts monthly and closes its accounts annually. Club
members pay their annual dues in advance by January 4. The entire amount, is initially credited
to Unearned Membership Dues. At the end of each month, an appropriate portion of this amount
is credited to Membership Dues Earned. Guests of the club normally pay green fees before
being allowed on the course. The amounts collected are credited to Green Fee Revenue at the
time
of receipt. Certain guests, however, are billed for green fees at the end of the month. The
following information is available as a source for preparing adjusting entries at December 31:
1, Salaries earned by golf course employees that have not yet been recorded or paid amount to
$9,6OO.
2. The Tampa University golf team used Florida Palms for a tournament played on December 30
of the current year. At December 31, the $ 1,800 owed by the team for green fees had not yet
been recorded or billed.
3.Membership dues earned in December, for collections received in January, amount to $106,000.
4.Depreciation of the country club's golf carts is based on an estimated life of 15 years. The
carts had originally been purchased for $180,000. The straight-line method is used.
(Note: The clubhouse building was constructed in 1925 and is fully depreciated.)
5. A 12-month bank loan in the amount of $45,000 had been obtained by the country club on
November 1. Interest is computed at an annual rate of 8%. The entire $45,000, plus all of the
interest accrued over the 12-month life of the loan, is due in full on October 31 of the
upcoming year. The necessary adjusting entry was made on November 30 to record the first
month of accrued interest expense. However, no adjustment has been made to record interest
expense accrued in December.
6. A one-year property insurance policy had been purchased on March 1. The entire premium of
$7,800 was initially recorded as Unexpired Insurance.
7. In December, Florida Palms Country Club entered into an agreement to host the annual tour-
nanent of the Florida Seniors Golf Association. The country club expects to generate green
fees of $4,500 from this event.
8. Unrecorded Income Taxes Expense accrued in December amounts to $19,000. This amount
will not be paid until January 15.
Instruction
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation). If no adjusting entry is required, explain why.
b. Four types of adjusting entries are described on pages 134-135. Using these descriptions,
identify the type of each adjusting entry prepared in part a above.
c. Although Florida Palms' clubhouse building is fully depreciated, it is in excellent physical
condition. Explain how this can be.

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 Exercises of Financial Accounting

4. Enchanted Forest, a large campground in South Carolina, adjusts its accounts monthly and
closes its accounts annually on December 31. Most guests of the campground pay at the time
they check out, and the amounts collected are credited to Camper Revenue. The following
information is available as a source for preparing the adjusting entries at December 31:
1).Enchanted Forest invests some of its excess cash in certificates of deposit (CDs) with its
local bank. Accrued interest revenue on its CDs at December 31 is $400. None of the interest
has yet been received. (Debit Interest Receivable.)
2)A six-month bank loan in the amount of $12,000 had been obtained on September 1. Interest
is to be computed at an annual rate of 8.5% and is payable when the loan becomes due.
3)Depreciation on buildings owned by the campground is based on a 25-year life. The original
cost of the buildings was $600,000. The Accumulated Depreciation: Buildings account has a
credit balance of $310,000 at December 31, prior to the adjusting entry process. The straight
line method of depreciation is used.
4)Management signed an agreement to let Boy Scout Troop 538 of Lewisburg, Pennsylvania,
use the campground in June of next year. The agreement specifies that the Boy Scouts will
pay a daily rate of $15 per campsite, with a clause providing a minimum total charge of $1,475.
5)Salaries earned by campground employees that have not yet been paid amount to $1,250.
6)As of December 31, Enchanted Forest has earned $2,400 of revenue from current campers
who will not be billed until they check out. (Debit Camper Revenue Receivable.)
7)Several lakefront campsites are currently being leased on a long-term basis by a group of
senior citizens. Six months rent of $5,400 was collected in advance and credited to Unearned
Camper Revenue on October 1 of the current year.
8)A bus to carry campers to and from town and the airport had been rented the first week of
December at a daily rate of $40. At December 31, no rental payment has been made, although
the campground has had use of the bus for 25 days.
9)Unrecorded Income Taxes Expense accrued in December amounts to $8,400. This amount
will not be paid until January 15.
Instructions
a. For each of the above numbered paragraphs, prepare the necessary adjusting entry (including
an explanation). If no adjusting entry is required, explain why.
b. Four types of adjusting entries are described on pages 134-135. Using these descriptions,
identify the type of each adjusting entry prepared in part a above.
c. Indicate the effects that each of the adjustments in part a will have on the following six total
amounts in the campground's financial statements for the month of December. Organize your
answer in tabular form, using the column headings shown below. Use the letters I for
increase, D for decrease, and NE for no effect. Adjusting entry 1) is provided as an example.

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 Exercises of Financial Accounting

Income Statement Balance Sheet

Net Owners’
Adjustment Revenue-Expenses=Income Assets=Liabilities+Equity
1 I NE I I NE I

d. What is the amount of insert expense recognized for the entire current year on the
$12,000 bank loan obtained September 1?
e. Compute the book value of the campground’s buildings to be reported in the current
year’s December 31 balance sheet.(Refer to paragraph 3 on the preceding page)

CHAPTER 5
1. Golf World sold merchandise to Mulligans for $10,000,offering terms of 1/15,n/30.Mulligans
paid for the merchandise within the discount period. Both companies use perpetual inventory
systems.
a. Prepare journal entries in the accounting records of Golf World to account for this sale and the
subsequent collection. Assume the original cost of the merchandise to Golf World had
been$6,500
b. Prepare journal entries in the accounting records of Mulligans to account for the purchase and
subsequent payment. Mulligans records purchases of merchandise at net cost.
c. Assume that because of a change in personnel, Mulligans failed to pay for this merchandise
within the discount period. Prepare the journal entry in the accounting records of Mulligans to
record payment after the discount period.

2. Shown below is selected information from the recent annual reports of three well-known
retailers(Dollar amounts are stated in millions)

Kmart Nordstrom Toy”R”Us

Net sales $31,437 $ ? $9,232
Cost of goods sold $24,390 3,082 ?
Gross profit ? 1,371 ?
Gross profit rate ?% ?% 30.6%

a. Fill in the missing amounts and percentages.(Round dollar amounts to the nearest million, and
percentages to the nearest tenth of 1 percent)
b. Base on these data, comment on the relative sales volume and gross profit margins of Kmart
and Toys”R”Us. Are these data consistent with your knowledge (or impression) of these two
retailers?

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 Exercises of Financial Accounting

3. Lamprino Appliance uses a perpetual inventory system. The following are three recent
merchandising transactions:
June 10 Purchased 10 televisions from Mitsu Industries on account. Invoice price,$300 per
unit, for a total of $3,000. The terms of purchase were 2/10, n/30.

June 15 Sold one of these televisions for $450 cash.

June 20 Paid the account payable to Mitsu Industries within the discount period.
Instructions
a. Prepare journal entries to record these transactions assuming that Lamprino records purchases
of merchandise at:
1. Net cost
2. Gross invoice price
b. Assume that Lamprino did not pay Mitsu Industries within the discount period but instead paid
the full invoice price on July 10. Prepare journal entries to record this payment assuming that
the original liability had been recorded at:
1. Net cost
2. Gross invoice price
c. Assume that you are evaluating the efficiency of Lampion’s bill-paying procedures. Which
accounting method--net cost or gross invoice price--provides you with the most useful in-
formation? Explain.
4. The following is a series of related transactions between Siogo Shoes and Sole Mates, a chain
of Retail shoe stores:
Feb. 9 Siogo Shoes sold Sole Mates 100 pairs of hiking boots on account, terms 1/10, n/30.
The cost of these boots to Siogo Shoes was $60 per pair, and the sales price was $100
per pair.
Feb. 12 United Express charged $80 for delivering this merchandise to Sole Mates. These charges
were split evenly between the buyer and seller, and were paid immediately in
cash
Feb. 13 Sole Mates returned 10 pairs of boots to Siogo Shoes because they were the wrong
size. Siogo Shoes allowed Sole Mates full credit for this return.

Feb. 19 Sole Mates paid the remaining balance due to Siogo Shoes within the discount period.

Both companies use a perpetual inventory system

Instructions
a. Record this series of transactions in the general journal of Siogo Shoes. (The company records
sales at gross sales price.)
b. Record this series of transactions in the general journal of Sole Mates. (The company records
purchases of merchandise at net cost and uses a Transportation-in account to record
transportation charges on inbound shipments.)
c. Sole Mates does not always have enough cash on hand to pay for purchases within the dis
count period. However, it has a line of credit with its bank, which enables Sole Mates to easily
borrow money for short periods of time at an annual interest rate of 11%. (The bank charges

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 Exercises of Financial Accounting

interest only for the number of days until Sole Mates repays the loan.) As a matter of general
policy, should Sole Mates take advantage of 1/10, n/30 cash discounts even if it must borrow the
money to do so at an annual rate of 11%? Explain fully--and illustrate any sup-
porting computations.

CHAPTER 6
1. Explain how each of the following item is reported in a complete set of financial statements,
including the accompanying note.(In one or more cases ,the item may not appear in the financial
statement.)The answer to the first item is provided as an example.
a. Cash equivalents.
b. Cash in a special fund being accumulated as legally required for the purpose lf retiring a
specific long-term liability.
c. Compensating balances.
d. The allowance for doubtful accounts receivable.
e. The allowance for doubtful accounts receivable.
f. The accounts receivable turnover rate.
g. Realized gains and losses on investments sold during the period.
h. Proceeds from converting cash equivalents into cash.
i. Proceeds from converting investments in marketable securities into cash.

Example: a. Cash equivalents normally are not shown separately in financial statements. Rather,
they are combined with other types of cash and reported under the caption “Cash and Cash
Equivalents.” A note to the statements often shows the breakdown of this asset category.

2.Shown below are the net sales and the average amounts of accounts receivable of two beverage
companies in recent year:

(Dollars in Millions)
Average Accounts Net
Receivable Sales
Adolph Coors Company $147 $1,764
Anheuser-Busch Companies, Inc. 652 11,394
a. For each of these companies, compute:
1. The number of times that the average balance of accounts receivable turned over during
this fiscal year.(Round to the nearest tenth.)
2. The number of days (on average )that each company must wait to collect its accounts
receivable,(Round to the nearest day.)
b. Based on your computations in part a, which company’s account receivable appear to be the
more liquid asset? Explain briefly.

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 Exercises of Financial Accounting

3. The cash transactions and cash balances of Foster, Inc., for July were as follows:
1)The ledger account for Cash showed a balance at July 31 of $124,568.
2) The July bank statement showed a closing balance of $112,828.
3) The cash received on July 31 amounted to $18,000. It was left at the bank in the night
depository chute after banking hours on July 31 and therefore was not recorded by the bank on
the July statement.
4) Also included with the July bank statement was a debit memorandum from the bank for $50
representing service charges for July.
5) A credit memorandum enclosed with the July bank statement indicated that a non-interest-
bearing note receivable for $5,000 from Rene Manes, left with the bank for collection, had
been collected and the proceeds credited to the account of Foster, Inc.
6) Comparison of the paid checks returned by the bank with the entries in the accounting records
revealed that check no. 821 for $519, issued July 15 in payment for office equipment, had
been erroneously entered in Foster's records as $915.
7) Examination of the paid checks also revealed that three checks, all issued in July, had not yet
been paid by the bank: no. 811 for $314; no. 814 for $625; no. 823 for $175.
8) Included with the July bank statement was a $200 check drawn by Howard William, a customer
of Foster, Inc. This check was marked "NSE' It, had been included in the deposit of July 27
but had been charged back against the company s account on July 31.
Instructions
a. Prepare a bank reconciliation for Foster, Inc., at July 31.
b. Prepare journal entries (in general journal form) to adjust the accounts at July 31. Assume that
the accounts have not been closed.
e. State the amount of cash that should be included in the balance sheet at July 31.
d. Explain why the balance per the company's bank statement is often larger than the balance
shown in its accounting records.

4. Shining Star, a Hollywood Publicity firm, uses the balance sheet approach to estimate
uncollectible accounts expense. At year-end an aging of the accounts receivable produced the
following
classification:

15
 Exercises of Financial Accounting

Not yet due $400,000

1-30 days past due 210,000
31-60 days past due 80,000
61-90 days past due 15,000
Over 90 days past due 25,000
Total $730,000
On the basis of past experience, the company estimated the percentages probably uncollectible
for the above five age groups to be as follows: Group 1, 1%; Group 2, 3%; Group 3, 10%;Group
4, 20%; and Group 5, 50%.
The Allowance for Doubtful Accounts before adjustment at December 31 showed a credit
balance of $10,400.
Instructions
a. Compute the estimated amount of uncollectible accounts based on the above classification by
age groups.
b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper
amount.
c. Assume that on January 10 of the following year, Shining Star learned that an account
receivable that had originated on September 1 in the amount of $7,500 was worthless because
of the bankruptcy of the client, April Showers. Prepare the journal entry required on January
10 to write off this account.
d. The finn is considering the adoption of a policy whereby clients whose outstanding accounts
become more than 60 days past due will be required to sign an interest-bearing note for the
full amount of their outstanding balance. What advantages would such a policy offer?

CHAPTER 7
1. Newmans, a chain of retail stores, uses FIFO. The following are selected data from the
company’s most recent financial statements(dollar amounts are in thousands):

Cost of goods sold $60,000

Income before income taxes 15,000
Income taxes expense(and payments) 6,000
Net income 9,000
Net cash provided by operating activities 10,000
A note to the financial statement disclosed that had Newmans been using LIFO, the cost of goods
sold would have been$64,000.
(The company’s income taxes expense amount to 40%of income before taxes; assume income
taxes are paid in cash in the same year they are recognized as expense.)
a. Explain how LIFO can result in higher cost of goods sold. Would you expect the LIFO
method to result in the company’s inventory being shown at a greater amount?
b. Assuming that Newmans had been using LIFO, compute the following amounts for the
current year. Show supporting computations, with dollar amounts in thousands.
1. Income before income taxes

16
 Exercises of Financial Accounting

2. Income taxes expense(which are equal to cash payments)

3. Net income
4. Net cash provided by operating activities.

2. When Laura Rapp arrived at her store on the morning of January 29,she found empty shelves
and display racks; thieves had broken in during the night and stolen the entire inventory. Rapp’s
accounting records showed that she had inventory costing$50,000 on January1.From January 1 to
January29, she had made net sales of $70,000,and net purchases of $80,000.The gross profit
during the past several years had consistently averaged 35%of net sales. Rapp wishes to file an
insurance claim for the theft loss.
a. Using the gross profit method, estimate the cost of Rapp’s inventory at the time of the theft.
b. Does Rapp use the periodic inventory method or does she account for inventory using the
perpetual method? Defend your answer..

3. On January 15,2002,BassTrack sold 1,000Ace-5 fishing reels to Angler’s Warehouse

.Immediately prior to this sale, BassTrack’s perpetual inventory records for Ace-5 reels included
the following cost layers:

Purchase Date Quantity Unit Cost Total Cost

Dec.12,2001 600 $29 $17,400
Jan.9,2002 900 32 28,800
Total on hand 1,500 $46,200

Instructions
Note: We present this problem in the normal sequence of the accounting cycle—that is, journal
entries before ledger entries. However, you may find it helpful to work part b first.
a. Prepare a separate journal entry to record the cost of goods sold relating to the January 15 sale
of 1,000Ace-5 reels, assuming that Bass Track uses:
1. Specific identification (500 of the units sold were purchased on December 12,and the
remaining 500 were purchased on January9).
2. Average cost.
3. FIFO
4. LIFO
b. Complete a subsidiary ledger record for Ace-5 reels using each of the four inventory valuation
methods listed above. Your inventory records should show both purchases of this product, the
sale on January 15,and the balance on hand at December12,January9,and January 15.Use the
formats for inventory subsidiary records illustrated on pages 293-97 of this chapter.
c. Refer to the cost of goods sold figures computed in part a. For financial reporting purposes,

17
 Exercises of Financial Accounting

can the company use the valuation method that resulted in the lowest cost of goods sold if, for
tax purposes, it used the method that resulted in the highest cost of goods sold? Explain.

4. Between The Ears is a popular Internet music store(www.BTE.com)During the current year,
the company’s cost of goods available for sale amounted to $462,000.The retail sales value of this
merchandise amounted to $840,000.Sale for the year were$744,000.
Instructions
a. Using the retail method, estimate(1)the cost of goods sold during the year and (2)the
inventory at the end of the year
b. At year-end,BTE.com takes a physical inventory. The general manager walks through the
warehouse counting each type of product and reading its retail price into a tape recorder. From
the recorded information, another employee prepares a schedule listing the entire ending
inventory at retail sale prices. The schedule prepared for the current year reports ending
inventory at $84,480 at retail sales prices.
1. Use the cost ratio computed in part a to reduce the inventory counted by the general manager
from its retail value to an estimate of its costs.
2. Determine the estimated shrinkage losses(measured at cost )incurred by BTE.com during the
year.
3. Compute BTE.com’s gross profit for the year (Include inventory shrinkage losses in the cost
of goods sold.)
c. What controls might BTE.com implement to reduce inventory shrinkage?

CHAPTER 8
1. Strong Industries uses straight-line depreciation on all of its depreciable assets. The company
records annual depreciation expense at the end of each calendar year. On January 11, 2001,the
company purchased a machine costing $90,000. The machine's useful life was estimated to be 12
years with a residual value of $18,000. Depreciation for partial years is recorded to the nearest
full month.
In 2005, after almost 5 years Of experience with the machine, management decided to revise
its estimated life from 12 years to 20 years. No change was made in the estimated residual value
The revised estimate of the useful life was decided prior to recording annual depreciation expense
for the year ended December 31, 2005.
a. Prepare journal entries in chronological order for the above events, beginning with the purchase
of the machinery on January 11, 2001. Show separately the recording of depreciation expense in
2001 through 2005.
b. What factors may have caused the company to revise its estimate of the machine's useful life?

2. Bedford Bus Service traded in a used bus for a new one. The original cost of the old bus was
$52,000. Accumulated depreciation at the time of the trade-in amounted to $34,000. The new bus
costs $65,000 but Bedford was given a trade-in allowance of $12,000.
a. What amount of cash must Bedford pay to acquire the new bus?
b. Compute the gain or loss on the disposal for financial reporting purposes.

18
 Exercises of Financial Accounting

e. Explain how the gain or loss would be reported in the company's income statement.

3. Miller & Hiller, Inc., purchased a new machine on September 1, 2001, at a cost of
$108,000.The machine's estimated useful life at the time of the purchase was 5 years, and its
residual value was $8,000.
Instructions
a. Prepare a complete depreciation schedule, beginning with calendar year 2001, under each of
the methods listed below (assume that the half-year convention is used):
1.Straight-line. 2. 200% declining-balance.
3. 150% declining-balance.
b. Which of the three methods computed in part a is most common for financial reporting
purposes? Explain.
c. Assume that Miller & Hiller sell the machine on December 31, 2004, for $30,000 cash..
Compute the resulting gain or loss from this sale under each of the depreciation methods used in
part a. Does the gain or loss reported in the company s income statement have any direct cash
effects? Explain.

4. During the current year, Escola Developers disposed of plant assets in the following
transactions:
Feb. 10 Office equipment costing $26,000 was given to a scrap dealer at no charge. At the date
of disposal, accumulated depreciation on the office equipment amounted to $25,800.
Apr.1 Escola sold land and a building to Claypool Associates for $900,000, receiving
$100,000 cash and a 5-year, 9% note receivable for the remaining balance. Escola's
records showed the following amounts: Land, $50,000; Building, $550,000; Accumulated
Depreciation: Building (at the date of disposal), $250,000.
Aug.15 Escola traded in an old truck for a new one. The old truck had cost $26,000, and its
accumulated depreciation amounted to $18,000. The list price of the new truck was
$39,000, but Escola received a $10,000 trade-in allowance for the old truck and paid
only $29,000 in cash. Escola includes trucks in its Vehicles account.
Oct.1 Escola traded in its old computer system as part of the purchase of a new system. The
old system had cost $15,000, and its accumulated depreciation amounted to $11,000.
The new computer's list price was $8,000. Escola accepted a trade-in allowance of
$500 for the old computer system, paying $2,500 down in cash, and issuing a 1-year,
8% note payable for the $5,000 balance owed.
Instructions
a. Prepare journal entries to record each of the disposal transactions. Assume that depreciation
expense on each asset has been recorded up to the date of disposal. Thus, you need not up-
late the accumulated depreciation figures stated in the problem.
b. Will the gains and losses recorded in part a above affect the gross profit reported in Escola's
income statement? Explain.

19
 Exercises of Financial Accounting

c. Explain how the financial reporting of gains and losses on plant assets differs from the financial
reporting of unrealized gains and losses on marketable securities discussed in Chapter 6.

CHAPTER 9
1. Glen Pool Club, Inc., has a $150,000 mortgage liability. The mortgage is payable in monthly
installments of $1,543, which include interest computed at an annual rate of 12% (1% monthly).
a. Prepare a partial amortization table showing the original balance of this loan, and the allocation
of the first two monthly payments between interest expense and the reduction in the mortgage’ s
unpaid balance. (Round to the nearest dollar.)
b. Prepare the journal entry to record the second monthly payment.
c. Will monthly interest increase, decrease, or stay the same over the life of the loan? Explain
your answer.

2. Mississippi Rail, Inc., issued $50 million of 10% bonds payable at face (par) value. The
company pays income taxes at an average rate of 40% of its taxable income.
Compute the company's annual after-tax cost of borrowing on this bond issue, stated as (a) a
total dollar amount and (b) a percentage of the amount borrowed.

4. During the fiscal year ended December 3t, Swanson Corporation engaged in the following
transactions involving notes payable:
Aug. 6 Borrowed $12,000 from Maple Grove Bank, signing a 45-day, 12% note payable.
Sept. 16 Purchased office equipment from Seawald Equipment. The invoice amount was
$18,000, and Seawald agreed to accept, as full payment, a 10%, three-month note for
the invoice amount.
Sept. 20 Paid Maple Grove Bank the note plus accrued interest.
Nov. 1 Borrowed $250,000 from Mike Swanson, a major corporate stockholder. The corporation
issued Swanson a $250,000, 15%, 90-day note payable.
Dec. 1 Purchased merchandise inventory in the amount of $5,000 from Gathman Corpo-
ration. Gathman accepted a 90-day, 14% note as full settlement of the purchase.
Swanson Corporation uses a perpetual inventory system.
Dee. 16 The $18,000 note payable to Seawald Equipment matured today. Swanson paid the
accrued interest on this note and issued a new 30-day, 16% note payable in the amount of
$18,000 to replace the note that matured.
Instructions i
a. Prepare journal entries (in general journal form) to record the above transactions. Use a 360
day year in making the interest calculations.
b. Prepare the adjusting entry needed at December 31, prior to closing the accounts. Use one en
try for all three notes (round to the nearest dollar.)

20
 Exercises of Financial Accounting

4. Blue Mountain Power Company obtained authorization to issue 20-year bonds with a face
value of $10 million. The bonds are dated May 1, 2002, and have a contract rate of interest of
10%.They pay interest on November 1 and May 1. The bonds were issued on August 1, 2002, at
100 plus three months' accrued interest.
Instructions
Prepare the necessary journal entries in general journal form on:
a. August 1, 2002, to record the issuance of the bonds.
b. November 1, 2002, to record the first semiannual interest payment on the bond issue.
c. December 31, 2002, to record interest expense accrued through year-end. (Round to the nearest
dollar.)
d. May 1, 2003, to record the second semiannual interest payment. (Round to the nearest dollar.)
e. What was the prevailing market rate of interest on the date that the bonds were issued? Explain.

CHAPTER 10
1. Hudson Creek Development Co. issued 20,000 shares of its $2 par value common stock in ex-
change for 300 acres of land. The land recently had been appraised at $450,000.
a. Record this transaction under each of the following assumptions:
l. Hudson is a closely held corporation. None of its shares have changed hands in several
years.
2. Hudson is a publicly owned corporation. Its stock currently is trading at $21.50 per share.
b. For each of your two journal entries, explain the reasoning behind the value that you assigned
to the land.

2. Cachet, Inc., engaged in the following transactions involving treasury stock:

Feb. 10 Purchased for cash 14,500 shares of treasury stock at a price of $30 per share.
June 4 Reissued 6,000 shares of treasury stock at a price of $33 per share.
Dec. 22 Reissued 4,000 shares of treasury stock at a price of $28 per share.
a. Prepare general journal entries to record these transactions.
b. Compute the amount of retained earnings that should be restricted because of the treasury stock
still owned at December 31. ~i
c. Does a restriction on retained earnings affect the dollar amount of retained earnings reported
in the balance sheet? Explain briefly.

21
 Exercises of Financial Accounting

3. Early in 1999, Sinclair Press was organized with authorization to issue 100,000 shares of $100
par value preferred stock and 500,000 shares of $1 par value common stock. Ten thousand shares
of the preferred stock were issued at par, and 170,000 shares of common stock were sold for $15
per share. The preferred stock pays an 8% cumulative dividend and is callable at $105.
During the first four years of operations (1999 through 2002), the corporation earned a total of
$1,025,000 and paid dividends of 75 cents per share in each year on its outstanding common stock
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2002. Include a
supporting schedule showing your computation of the amount of retained earnings reported.
(Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Are there any dividends in arrears on the company's preferred stock at December 31, 2002?
Explain your answer.
c. Assume that interest rates increase steadily from 1999 through 2002. Would you expect the
market price of the company's preferred stock to be higher or lower than its call price of $105
at December 21, 2002?

4. Early in the year Roger Gordon and several friends organized a corporation called Mobile
Communications, Inc. The corporation was authorized to issue 50,000 shares of $100 par value,
10%
cumulative preferred stock and 400,000 shares of $2 par value common stock. The following
transactions (among others) occurred during the year:
Jan. 6 Issued for cash 20,000 shares of common stock at $14 per share. The shares were is-
sued to Gordon and 10 other investors.
Jan. 7 Issued an additional 500 shares of common stock to Gordon in exchange for his ser-
vices in organizing the corporation. The stockholders agreed that these services were
worth $7,000.
Jan. 12 Issued 2,500 shares of preferred stock for cash of $250,000.
June 4 Acquired land as a building site in exchange for 15,000 shares of common stock. In
view of the appraised value of the land and the progress of the company, the directors
agreed that the common stock was to be valued for purposes of this transaction at $15
per share.
Nov. 15 The first annual dividend of $10 per share was declared on the preferred stock to be
paid December 20.
Dee. 20 Paid the cash dividend declared on November 15.
Dec. 31 After the revenue and expenses were closed into the Income Summary account, that
account indicated a net income of $106,500.
Instructions
a. Prepare journal entries in general journal form to record the above transactions. Include en-
tries at December 31 to close the Income Summary account and the Dividends account
b. Prepare the stockholders' equity section of the Mobile Communications, Inc., balance sheet at
December 31.

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 Exercises of Financial Accounting

CHAPTER 11
1. Universal Cable Corporation has 1,000,000 shares of $1 par value capital stock outstanding on
January I. The following equity transactions occurred during the current year:
Apr. 30 Distributed additional shares of capital stock in a 2-for- 1 stock split. Market price of
stock was $35 per share.
June 1 Declared a cash dividend of 60 cents per share.
July 1 Paid the 60-cent cash dividend to stockholders,
Aug. 1 Declared a 5% stock dividend. Market price of stock was $19 per share.
Sept. 10 Issued shares resulting from the 5% stock dividend declared on August 1.
Dec. 1 Declared a 50% stock dividend. Market price of stock was $23 per share.
a. Prepare journal entries to record the above transactions.
b. Compute the number of shares of capital stock outstanding at year-end.
e. What is the par value per share of Universal Cable stock at the end of the year?
d. Determine the effect of each of the following on total stockholders' equity: stock split, decla
ration and payment of a cash dividend, declaration and distribution of a small stock dividend,
declaration and distribution of a large stock dividend.(Your answers should be either increase,
decrease, or no effect.)

2. Explain the immediate effects, if any, of each of the following transactions on a company's
earning per share:
a. Split the common stock 3-for-1.
b. Realized a gain from the sale of a discontinued operation.
c. Switched from an accelerated method of depreciation to the straight-line method, resulting in
a reduction in the Accumulated Depreciation account.
d. Declared and paid a cash dividend on common stock.
e. Declared and distributed a stock dividend on common stock.
f. Acquired several thousand shares of treasury stock.

3. At the beginning of the year, Exotic Adventures, Inc., has total stockholders' equity of
$840,000 and 40,000 outstanding shares of a single class of capital stock. During the year, the
corporation completes the following transactions affecting its stockholders' equity accounts:
Jan. 10 A 5% stock dividend is declared and distributed. (Market price, $20 per share.)
Mar. 15 The corporation acquires 2,000 shares of its own capital stock at a cost of $21.00 per
share,
May 30 All 2,000 shares of the treasury stock are reissued at a price of $31.50 per share,
July 31 The capital stock is split 2-for-1.
Dec. l5 The board of directors declares a cash dividend of $1.10 per share, payable on January15

23
 Exercises of Financial Accounting

Dec. 31 Net income of $260,400 (equal to $3.10 per share) is reported for the year ended
December 31.
Instructions
Compute the amount of total stockholders' equity, the number of shares of capital stock
outstanding, and the book value per share following each successive transaction. Organize your
solution as a three-column schedule with these separate column headings: (1) Total Stockholders’
Equity, (2) Number of Shares Outstanding, and (3) Book Value per Share.

4. The Mandella family decided early in 2001 to incorporate their family-owned vineyards under
the name Mandella Corporation. The corporation was authorized to issue 500,000 shares of a
single class of $10 par value capital stock. Presented below is the information necessary to prepare
the stockholders' equity section of the company's balance sheet at the end of 2001 and at the end
of 2002.
2001. In January the corporation issued to members of the Mandella family 150,000 shares of
capital stock in exchange for cash and other assets used in the operation of the vineyards. The
fair market value of these assets indicated an issue price of $30 per share. In December, Joe Man
della died, and the corporation purchased 10,000 shares of its own capital stock from his estate
at $34 per share. Because of the large cash outlay to acquire this treasury stock, the directors
decided not to declare cash dividends in 2001 and instead declared a 10% stock dividend to be
distributed in January of 2002. The stock price at the declaration date was $35 per share.(The
treasury shares do not participate in the stock dividend.) Net income for 2001 was $940,000.
2002. In January the corporation distributed the stock dividend declared in 2001, and in February,
the 10,000 treasury shares were sold to Maria Mandella at $39 per share. In June, the capital stock
was split 2-for-1. (Approval was obtained to increase the authorized number of shares to 1
million.) On December 15, the directors declared a cash dividend of $2 per share, payable in
January of 2003. Net income for 2002 was $1,080,000.
Instructions
Using the format illustrated on page 485, prepare the stockholders' equity section of the balance
sheet at:
a. December 31, 2001.
b. December 31, 2002.
Show any necessary computations in supporting schedules.

CHAPTER 12
1. During the current year, Grafton Labs made cash sales of $250,000 and credit sales of

24
 Exercises of Financial Accounting

$490,000.
During the year, accounts receivable decreased by $32,000
a. Compute for the current year the amounts of:
1. Net sales reported as revenue in the income statement.
2. Cash received from collecting accounts receivable
3. Cash received from customers
b. Write a brief statement explaining why cash received from customers differs from the
amount of net sales.

2. The general ledger of Nitro Tech provides the following information relating to purchases of
merchandise:
End of Year Beginning of Year
Inventory $820,000 $780,000
Accounts payable to merchandise suppliers 430,000 500,000

The company’s cost of goods sold during the year was $2,875,000.Compute the amount of cash
payments made during the year to suppliers of merchandise.

3. Among the transactions of Miyota Communications were the following:

a. Made payments on accounts payable to merchandise suppliers.
b. Paid the principal amount of a note payable to First Bank.
c. Paid interest charges relating to a note payable to First Bank.
d. Issued bonds payable for cash: management plans to use this cash in the near future to ex
pand manufacturing and warehouse capabilities.
e. Paid salaries to employees in the finance department.
f. Collected an account receivable from a customer.
g. Transferred cash from the general bank account into a money market fund.
h. Used the cash received in d, above, to purchase land and a building suitable for a manufac
turing facility.
i. Made a year-end adjusting entry to recognize depreciation expense.
j. At year-end, purchased for cash an insurance policy covering the next 12 months.
k. Paid the quarterly dividend on preferred stock.
L. Paid the semiannual interest on bonds payable.
m. Received a quarterly dividend from an investment in the preferred stock of another corporation
n. Sold for cash an investment in the preferred stock of another corporation.
o. Received cash upon the maturity of an investment in cash equivalents. (Ignore interest.)
Instructions
Most of the preceding transactions should be included among the activities summarized in a
statement of cash flows. For each transaction that should be included in this statement, indicate
whether the transaction should be classified as an operating activity, an investing activity, or a
financing activity. If the transaction should not be included in the current year's statement of cash

25
 Exercises of Financial Accounting

flows, briefly explain why not. (Assume that net cash flows from operating activities are
determined by the direct method.)

26