Survey of Accounting 4th Edition Edmonds Solutions Manual 1

SURVEY OF ACCOUNTING 4TH EDITION EDMONDS
SOLUTIONS MANUAL
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ANSWERS TO QUESTIONS - CHAPTER 5
1. Accounts receivable are the expected future receipts that arise

when a company permits its customers to buy now and pay later.
The amounts are usually small with a short term to maturity.
Notes Receivable have longer terms to maturity and are usually
for larger amounts. The note specifies the maturity date, interest
rate, and other credit terms.
2. The net realizable value is the amount expected to be collected

from accounts receivable. It is the face value of receivables less
an allowance for estimated uncollectible accounts.
3. Allowance for Doubtful Accounts is a contra asset account.
4. Estimating uncollectible accounts expense improves the

accuracy of financial statements by (1) reporting expected
realizable value of receivables (i.e., future cash flows) and (2)
presenting a better matching of expenses with related revenues.
This provides a better measure of managerial performance.
5. When using the allowance method, uncollectible accounts

expense is matched with current revenues. A company does not
know which accounts will not be collectible at the time a sale is
made; consequently, in order to record the expense currently, an
estimate is used.
6. The most common format for reporting accounts receivable on

the balance sheet is gross receivables less the allowance for
doubtful accounts. This format allows the users to see both the
total amount owed by the customers and the amount the
company expects to collect.
5-1
7. The practice of reestablishing a previously written off account,
then recording its collection as a payment on account, reflects a
complete record of account activity. Such a record provides an
accurate picture of the source of cash flows and improves the
portrayal of the customer’s credit history.
8. Factors for use in estimating uncollectible accounts include:

(1) the percentage of uncollectible accounts from years past.
(2) adjustment for new circumstances that are anticipated to be
experienced in the future.
(3) industry averages or experiences of similar businesses.
(4) examination of current accounts and company credit policies.
9. Recognizing uncollectible accounts expense reduces accounts

receivable on the asset side and reduces retained earnings on the
equity side.
10. A write-off of an uncollectible account when the allowance

method is used has no effect on the accounting equation because
the allowance account, a contra asset account, is reduced and the
accounts receivable account, on the asset side, is also reduced.
11. The recovery of an uncollectible account when the allowance

method is used does not affect the income statement. Only
accounts receivable, cash, and allowance for doubtful accounts
are affected. Cash flow from operations increases as a result of
the collection.
12. The primary advantage of using the allowance method is that it

improves the accuracy of the financial statements. It matches the
expected expense with the revenue produced in the period.
13. If the company is an established business, it will examine its

credit history; that is, the actual write-offs for the previous year as
a percentage of sales. A new business must rely on trade
publications and others experienced in the industry to determine
an appropriate percent. This percent is then adjusted at least
annually to reflect current conditions.
14. The percent of receivables is a more accurate measure because it
5-2
uses the actual receivables and the amount of time they have
been outstanding. Those receivables that have been outstanding
for a longer time are less likely to be collected.
15. An aging of accounts receivable schedule classifies all

receivables by their due date. When using an aging schedule for
estimating uncollectible accounts, accounts receivable is divided
into categories based on due dates. Different percentages are
then applied to each category. For instance a higher percentage
would be applied to the group of accounts that is more than 90
days past due than to the group that is only 30 days past due.
16. A promissory note is a legal document that sets forth credit terms
such as interest rate, payment amounts, and maturity date.
Promissory notes are commonly used when credit extended is for
a large amount or for a long period of time.
17. a. Maker: The borrower or debtor.

b. Payee: The person to whom the note is made
payable.
c. Principal: The amount of money loaned by the payee
to the borrower.
d. Interest: The economic benefit earned by the payee
for loaning the principal to the maker.
e. Maturity date: The date on which the maker must repay
the principal and any unpaid interest.
f. Collateral: Assets belonging to the maker assigned as
security for the note.
18. Interest is computed as:

Principal x Annual interest rate x Time outstanding
19. Accrued interest is interest that has been earned/incurred but not
yet collected/paid.
20. The matching concept matches revenue and expenses to the

period in which they are earned or incurred. By accruing interest,
the interest is recognized in the period it is earned or incurred
regardless of when the cash is collected or paid.
5-3
21. Liquidity refers to how quickly assets are expected to be
converted to cash during normal operations. Cash is listed first
on a balance sheet and other items are then listed in the order of
expected conversion to cash.
22. The adjusting entry for accrued interest is generally recorded

when financial statements are prepared. At this time the
accounts are adjusted to reflect the interest that has been
earned/incurred, but not yet collected/paid.
23. Big Corp. would report interest revenue of $360 for 2014
computed as follows:
$12,000 x 6% x 6/12 = $360.
Big Corp. will collect $12,720 total cash when the note matures;
principal of $12,000 and one year’s interest of $720.
24. When Big Corp. collects the $12,720, $12,000 will be reported as
inflow from investing activities, and $720 will be reported as
inflow from operating activities.
25. It is generally beneficial to accept major credit cards because the

business then avoids the risk of bad debts as well as the cost of
maintaining credit records. It may also attract more customers.
26. The acceptance of major credit cards enables a business to avoid

the cost of uncollectible accounts and the clerical costs of
maintaining accounts receivable records. In addition, the
business avoids the implicit cost of lost opportunities due to
delayed cash flows.
27. (1) First In, First Out - The inventory cost flow method that
assumes that the first items purchased are the first items
sold for the purpose of computing cost of goods sold and
inventory.
(2) Last In, First Out - The inventory cost flow method that
assumes that the last items purchased are the first items
sold for the purpose of computing cost of goods sold and
inventory.
5-4
(3) Weighted Average - The inventory cost flow method that
allocates cost between cost of goods sold and inventory
based on an average cost per unit.
(4) Specific Identification - The inventory cost flow method that

assigns cost to cost of goods sold based on the specific
cost of each unit sold.
28. One advantage of the specific identification method is that both

the inventory account and cost of goods sold reflect the actual
amounts on hand and sold. This method is usually required for
high cost items such as automobiles, boats, etc. One
disadvantage of this method is that recordkeeping can become
burdensome for high-volume, lower-priced items.
29. FIFO allocates the cost of the first units purchased to the first
units sold; consequently, in a period of rising prices, this would
produce a higher net income. This may be an advantage for the
purpose of financial reporting if reporting a higher profit is
desired. However, this is a disadvantage for tax reporting
because a higher profit means paying more tax. FIFO also tends
to best match physical flow for most products.
30. LIFO allocates the cost of the last units purchased to the first
units sold; consequently, in a period of rising prices, this would
produce a lower net income. This may be a disadvantage for the
purpose of financial reporting if reporting a higher profit is
desired. However, for tax reporting, a lower profit means paying
less tax. LIFO also matches current cost with current revenues.
31. In an inflationary period, i.e., a period where prices are

consistently rising, FIFO will produce the highest amount of
income. This is true because the items purchased first (and at the
lowest cost) are the items that are deemed sold first whose cost is
charged to expense. The highest cost items remain in the asset
account inventory. Since the lowest cost items have been
expensed, net income will be higher than it would be assuming a
LIFO flow.
5-5
32. In an inflationary period, FIFO will produce the largest amount of
total assets. (Refer to the discussion for Question 31.) The
unsold items, inventory, are the highest cost items.
Consequently, assuming rising prices, FIFO flow produces a
higher inventory amount than would be the case under a LIFO
flow.
33. Flow of costs refers to the assumption that is made for the
purpose of determining the cost of inventory items that are sold
when preparing financial statements. The cost flow assumption
that a business makes may have nothing to do with the actual
flow of inventory into and out of the business. The physical flow
of goods refers to the actual timing of when goods are sold. For
example, a grocery store may use a FIFO cost flow assumption
for financial statement purposes and this may reflect the physical
flow of some inventory items but not others. The grocer will put
the newer items at the back on the shelf and pull the oldest items
to the front for the customer to purchase (FIFO) but the customer
may look for the freshest item at the back of the shelf (e.g. milk) to
purchase (LIFO).
34. In a world where there is no income tax, the choice of cost flow
method would not affect the statement of cash flows because it is
simply allocating some of the cost of inventory purchased to
expense and the remainder to assets. The statement of cash
flows is affected when cash is received for goods sold and when
cash is paid for goods purchased. However, most businesses do
face income tax consequences. In that situation, the difference in
tax paid based on each cost flow assumption would cause a
difference in the cash flow statement. In a period of rising prices,
LIFO would produce a smaller cash outflow for the payment of
tax, because a smaller amount of income tax would be paid on a
smaller amount of income.
35. Key Company (first year of operations):
Beginning inventory $ -0-
Merchandise purchased 1,000 units @ $25 25,000
5-6
Cost of Goods Sold 850 units @ $25 21,250
Ending Inventory 150 units @ $25 3,750
Cost of goods sold will be the same for all methods because all
items were purchased for the same cost. Consequently, it will not
make any difference whether the first unit sold is assumed to be
the first or last purchased. Weighted average will also be the
same.
36. The amount of cost of goods sold for Key Company will be
different using different cost flow assumptions because the units
purchased during the second year have a different cost than
those purchased the previous year.
Beginning inventory 150 units @ $25 $ 3,750

Merchandise purchased 1,500 units @ $27 40,500
Total 1,650 $44,250
Units sold 1,500
FIFO: 150 units @ $25 $ 3,750

1,350 units @ $27 36,450
Cost of Goods Sold 1,500 $40,200
LIFO 1,500 units @ $27 $40,500

Cost of Goods Sold $40,500
Weighted Average: Total Cost  Total Units = Cost per unit

44,250  1,650 = $26.82 per unit
Cost of Goods Sold: 1,500 units @ $26.82 = $40,230
37. It may be advantageous to use FIFO for financial statement

purposes because it produces the smallest cost of goods sold
and consequently, the highest gross margin and net income. It
also produces the largest amount of assets. However, a larger
net income produces a higher income tax expense, so LIFO would
be more desirable strictly from an income tax perspective in that
the cost of goods sold would be higher, and consequently the net
income and income tax paid will be lower. Since each cost flow
5-7
method is desirable for a specific group of users, the cost flow
assumptions chosen must be the best for the overall business. A
part of that consideration is the ease of applying each method.
38. In an inflationary period, for a business subject to income tax,

LIFO would produce the larger amount of cash flow because the
lower net income (higher cost of goods sold) would result in a
smaller amount of income tax being paid.
39. A deflationary period, i.e., a period of falling prices, would

produce results opposite of those for an inflationary period. FIFO
would produce the lowest amount of net income, because the
goods purchased first would cost more than the goods purchased
last. This would cause a larger amount of cost to be expensed
resulting in a lower net income. LIFO would produce the highest
net income.
5-8
SOLUTIONS TO EXERCISES - CHAPTER 5
EXERCISE 5-1
a.
Michelle’s Accounting Service

Horizontal Statements Model
Balance Sheet Acct. Titles

Event Assets = Equity for R/E
Cash + Acct. Rec.  Allow. Ret. Ear.
2014
1. NA 96,000 NA 96,000 Svc. Rev.
2. 80,000 (80,000) NA NA
3. (32,000) NA NA (32,000) Sal. Exp.
4. NA NA 1,600 (1,600) Uncoll. Accts. Exp.
Bal. 48,000 + 16,000  1,600 = 62,400
b.

Income Statement
For the Year Ended December 31, 2014
Service Revenue $96,000

Operating Expenses
Salaries Expense $32,000
Uncollectible Accounts Expense 1,600
Total Operating Expenses (33,600)
Net Income $62,400
5-9
EXERCISE 5-1 b. (cont.)

Balance Sheet
As of December 31, 2014
Assets
Cash $48,000
Accounts Receivable $16,000
Less: Allowance for Doubtful Accounts (1,600) 14,400
Total Assets $62,400
Liabilities $ -0-
Stockholders’ Equity
Retained Earnings $62,400
Total Stockholders’ Equity 62,400
Total Liabilities and Stockholders’ Equity $62,400

Statement of Cash Flows
Cash Flows From Operating Activities:

Inflow from Customers $80,000
Outflow for Expenses (32,000)
Net Cash Flow from Operating Activities $48,000
Cash Flows From Investing Activities -0-
Cash Flows From Financing Activities -0-
Net Change in Cash 48,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $48,000
5-10
EXERCISE 5-2
Event Assets = Liab. + Equity Rev. – Exp. = Net Inc. Cash Flow
1. + = NA + + +  NA = + NA
2. +/ = NA + NA NA  NA = NA + OA
3.  = NA +  NA  + =  NA
4. +/ = NA + NA NA  NA = NA NA
5-11
EXERCISE 5-3
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance $ 4,000
Plus: Revenue on Account 21,000
Less: Write-off (180)
Less: Ending Balance (4,500)
Collections of Accounts Rec. $20,320
b. Analyze the Allowance for Doubtful Accounts account:
Allowance for Doubtful Accounts

Beginning Balance $150
Less: Write-off (180)
Less: Ending Balance (250)
Uncollectible Accounts $280
Expense
5-12
EXERCISE 5-4
a.
Balance Sheet Acct. Titles for

Event Assets = Equity Retained Earnings
2014
1. NA 45,000 NA 45,000 Service Rev.
2. 32,000 (32,000) NA NA
3. NA NA 450 (450) Uncoll. Accts.
Exp.
Bal. 32,000 + 13,000  450 = 44,550
Balance Sheet Acct. Titles for

Event Assets = Equity Retained Earnings
2015
Bal. 32,000 13,000 450 44,550
1. NA (320) (320) NA
2. NA 65,000 NA 65,000 Service Rev.
3. 66,000 (66,000) NA NA
4. NA NA 650 (650) Uncoll. Accts. Exp.
Bal. 98,000 + 11,680  780 = 108,900
b. (1) Net Income for 2014: $44,550 ($45,000  $450)

(2) Net Cash Flow from Operating Activities: $32,000
(3) Balance of Accounts Receivable, 12/31/2014: $13,000
(4) Net Realizable Value of Accounts Receivable, 12/31/2014:
$12,550 ($13,000  $450)
c. (1) Net Income for 2015: $64,550 ($65,000  $450)

(2) Net Cash Flow from Operating Activities: $66,000
(3) Balance of Accounts Receivable, 12/31/2015: $11,680
(4) Net Realizable Value of Accounts Receivable, 12/31/2015:
$10,900 ($11,680  $780)
5-13
5-14
EXERCISE 5-5
Event Assets = Liab. + Stk. Equity Rev. – Exp. = Net Inc. Cash Flow
Cash A. Rec. All for DA = + Ret. Earn.
1. NA + NA NA + + NA + NA
2. +  NA NA NA NA NA NA + OA
3. NA   NA NA NA NA NA NA
4. NA NA + NA  NA +  NA
5-15
EXERCISE 5-6
2015 transactions:
1. Uncollectible accounts written off: $ 2,900
2a. Reinstated previously written off accounts: 200
2b. Collected reinstated accounts: 200
3. Sales on account: 210,000
4. Collections of accounts receivable: 215,000
5. Uncollectible Accounts Expense (210,000 x 1%): 2,100
a.
Acct.
Event Assets = Liab. + Equity Title/Re
Cash + A. Rec.  Allow. = + Ret. Earn.
Bal. 76,000 3,200
1. NA (2,900) (2,900) NA NA
2a. NA 200 200 NA NA
2b. 200 (200) NA NA NA
3. NA 210,000 NA NA 210,000 Rev.
4. 215,000 (215,000) NA NA NA
5. NA NA 2,100 NA (2,100) Uncoll. Exp
Bal. 68,100 2,600 207,900
b. (1) Allowance for Doubtful Accounts, 12/31/15: $ 2,600

(2) Accounts Receivable, 12/31/15 68,100
(3) Net Realizable Value ($68,100 – $2,600): 65,500
c. Uncollectible Accounts Expense 2015 ($210,000 x 1%): $2,100
d. The recovery of previously written off accounts will cause two asset
exchange transactions. First, reinstate the accounts receivable; +
Accounts Receivable, +Allowance for Doubtful Accounts. Second,
record the collection of the accounts receivable; +Cash, – Accounts
Receivable.
5-16
EXERCISE 5-7
Accounts Receivable Allowance for Doubt. Accts.

Sales on account 320,000 Est. 3,200
Coll. (295,000) Chg. Off (1,400)
Chg. Off (1,400) Bal. 1,800
Bal. 23,600
a. $23,600 (see above)
b. $1,800
c. $3,200 ($320,000 x 1%)
d. $23,600  $1,800 = $21,800
5-17
EXERCISE 5-8
a.
Sales on Account $500,000
Less: Ending Balance of Accounts Receivable (72,000)
Collections of Accounts Receivable $428,000
b. Sales on Account $500,000 x 1% = $5,000 of Uncollectible Accounts

Expense
c. Accounts Receivable Ending Balance $72,000

Less: Allowance for Doubtful Accounts (5,000)
Net Realizable Value of Accounts Receivable $67,000
5-18
PROBLEM 5-8 (cont.)
d.
Clayton Repair Co.

Effect of Events on Financial Statements
Event Assets = Liab. + S. Equity Rev.  Exp. = Net Inc. Cash Flows
Cash + Acct. Rec.  Allow. = NA + Ret. Earn.
1. NA + 500,000  NA = NA + 500,000 500,000  NA = 500,000 NA
2. 428,000 + (428,000)  NA = NA + NA NA  NA = NA 428,000 OA
3. NA + NA  5,000 = NA + (5,000) NA  5,000 = (5,000) NA
Totals 428,000 + 72,000  5,000 = -0- + 495,000 500,000  5,000 = 495,000 428,000
5-19
EXERCISE 5-9
a.
Acct.
1. NA 86,000 NA NA 86,000 Rev.
2. 72,000 (72,000) NA NA NA
3. (39,000) NA NA NA (39,000) Sal. Exp.
4. NA NA 1,6251 NA (1,625) Uncoll. Exp
Bal. 33,000 + 14,000  1,625 = + 45,375
Number of days Amount Percent Likely to Allowance Balance

Past Due be Uncollectible
Current $7,500 .01 $ 75
0-30 2,000 .05 100
31-60 1,500 .10 150
61-90 1,000 .30 300
Over 90 days 2,000 .50 1,000
Total $1,625
b.
Tyler Service Co.
Income Statement

Operating Expenses
Uncollectible Accounts Expense 1,625
Net Income $45,375
c. Net Realizable Value:

Less, Allowance for Doubtful Accounts (1,625)
Net Realizable Value $12,375
5-20
EXERCISE 5-10
a.
Faello, Inc. Accounting Equation 2014
Acct.
1. NA 80,000 NA NA 80,000 Rev.
2. 22,000 NA NA NA 22,000 Rev.
3. 65,000 (65,000) NA NA NA
4. (24,000) NA NA NA (24,000) Sal. Exp.
5. NA NA 750* NA (750) Uncoll. Exp
Bal. 63,000 + 15,000  750 = + 77,250
*$15,000 x 5% = $750
b.
Faello Inc.
Income Statement

Operating Expenses
Uncollectible Accounts 750
Expense
Net Income $ 77,250
Faello Inc.
Statement of Changes in Stockholders’ Equity
Beginning Retained Earnings $ -0-
Plus: Net Income 77,250
Ending Retained Earnings $ 77,250
Total Stockholders’ Equity $ 77,250
5-21
EXERCISE 5-10 b. (cont.)
Faello Inc.
Balance Sheet
Assets
Cash $ 63,000
Less: Allowance for Doubtful Accounts (750) 14,250
Total Assets $ 77,250
Liabilities $ -0-
Faello Inc.
Inflow from Customers $ 87,000
c. Accounts Receivable, 12/31/2014 $15,000

Less: Allowance for Doubtful Accounts, 12/31/2014 (750)
Net Realizable Value, 12/31/2014 $14,250
5-22
EXERCISE 5-10 (cont.)
d.
Faello, Inc. Accounting Equation - 2015
Acct.
Bal. 63,000 15,000 750 77,250
1. NA (620) (620) NA NA
2. NA 95,000 NA NA 95,000 Rev.
3. 15,000 NA NA NA 15,000 Rev.
4. 90,000 (90,000) NA NA NA
5. (35,000) NA NA NA (35,000) Sal. Exp.
Bal. 133,000 + 19,380  969 = -0- + 151,411
*Acct. Rec. Bal. $19,380 x 5% = $969 Ending Allowance for Doubful Accounts
Adjustment: Beg. Allowance for Doubtful Accounts $750 less write-off, $620 =
$130 balance before adjustment. Required balance $969 less balance before
adjustment $130 = $839 adjustment.
5-23
EXERCISE 5-10 d. (cont.)
Faello Inc.
Income Statement

Operating Expenses
Uncollectible Accounts Expense 839
Net Income $ 74,161
Faello Inc.
Beginning Retained Earnings $77,250
Ending Retained Earnings $151,411
Total Stockholders’ Equity $151,411
5-24
EXERCISE 5-10 d. (cont.)
Faello Inc.
Balance Sheet
Assets
Cash $133,000
Less: Allowance for Doubtful Accounts (969) 18,411
Liabilities $ -0-
Faello Inc.
Net Cash Flow from Operating Activities $ 70,000
Plus: Beginning Cash Balance 63,000
Accounts Receivable, 12/31/2015 $19,380

Less: Allowance for Doubtful Accounts, 12/31/2015 (969)
Net Realizable Value, 12/31/2015 $18,411
5-25
EXERCISE 5-11
Balance Sheet Income Statement Statement of

Date Assets = Equity Rev.  Exp. = Net Inc. Cash Flows
Cash + Note Rec. + Int. Rec. = Ret. Ear.
1. 9/1/14 (30,000) 30,000 NA NA NA NA NA (30,000) IA

2. 12/31/141 NA NA 600 600 600 NA 600 NA
3. 9/1/152 NA NA 1,200 1,200 1,20 NA 1,200 NA

0
9/1/15 31,800 (30,000) (1,800) NA NA NA NA 30,000 IA
1,800 OA
1$30,000 x 6% x 4/12 = $600

2$30,000 x 6% x 8/12 = $1,200
5-26
EXERCISE 5-12
a. $18,000 x 5% x 10/12 = $750
b. Total Receivables at December 31, 2014:

Notes Receivable $18,000
Interest Receivable 750
Total Receivables $18,750
c. Investing Activities outflow: ($18,000)
d. $18,000 x 5% x 2/12 = $150
e. Total Cash to be collected:

Principal of note $18,000
Total interest earned 900
Total cash $18,900
f. Investing Activities inflow: $18,000

Operating Activities inflow: 900
g. Total interest earned: $900 ($18,000 x 5%)
5-27
EXERCISE 5-13
a.
Hardwood Timber Company – Accounting Equation
Acct.
Assets = Liab. + Equity Title/Re
Notes Int. Accts. Com. Ret.
Event Cash + A. Rec.  Allow. + Mdse Inv. + Rec. + Rec. = Pay. + Stock = Earn.
Bal. 16,000 18,000 2,000 25,000 NA NA 9,200 30,000 17,800
1. 20,000 NA NA NA NA NA NA 20,000 NA
2. NA NA NA 80,000 NA NA 80,000 NA NA
3a. NA 98,000 NA NA NA NA NA NA 98,000 Rev.
3b. NA NA NA (61,000) NA NA NA NA (61,000) COGS
4. NA (1,500) (1,500) NA NA NA NA NA NA
5. (10,000) NA NA NA 10,000 NA NA NA NA
6. (24,500) NA NA NA NA NA NA NA (24,500) Sal. Exp.
7. 99,000 (99,000) NA NA NA NA NA NA NA
8. (78,000) NA NA NA NA NA (78,000) NA NA
9. (5,000) NA NA NA NA NA NA NA (5,000) Div.
10.1 NA NA 980 NA NA NA NA NA (980) Uncoll. Exp
11.2 NA NA NA NA NA 200 NA NA 200 Int. Rev.
Bal. 17,500 + 15,500  1,480 + 44,000 + 10,000 + 200 = 11,200 + 50,000 + 24,520
1$98,000 x 1% = $980
2$10,000 x 6% x 4/12 = $200
5-28
EXERCISE 5-13
b.
Hardwood Timber Co.
Financial Statements
Income Statement
Sales Revenue $98,000
Cost of Goods Sold (61,000)
Gross Margin 37,000
Operating Expenses
Uncollectible Accounts Exp. 980
Operating Income 11,520
Interest Revenue 200
Net Income $11,720

Beginning Common Stock $30,000
Plus: Stock Issued 20,000
Ending Common Stock $50,000
Less: Dividends (5,000)
Ending Retained Earnings 24,520
5-29
EXERCISE 5-13 B. (cont.)
Hardwood Timber Co.

Balance Sheet
Assets
Cash $17,500
Notes Receivable 10,000
Merchandise Inventory 44,000
Liabilities
Accounts Payable $11,200
Total Liabilities 11,200
Common Stock $50,000
Retained Earnings 24,520
5-30
EXERCISE 5-13 B. (cont.)
Hardwood Timber Co.


Outflow for Inventory (78,000)
Net Cash Flow from Operating Activities $ (3,500)
Cash Flows From Investing Activities:
Outflow for Notes Receivable $(10,000)
Net Cash Flow from Investing Activities (10,000)
Cash Flows From Financing Activities:
Inflow from Stock Issue $20,000
Outflow for Dividend (5,000)
Net Cash Flow from Financing Activities 15,000
5-31
EXERCISE 5-14
a.
Superior Carpet Cleaning

Horizontal Statements Model

Assets = Liab + Equity Rev.  Exp. = Net Inc. Cash Flows
.
Event Cash + Acc. Rec. = + Ret. Ear
1. NA + 73,720 = NA + 73,720 76,000  2,280* = 73,720 NA

2. 73,720 + (73,720) = NA + NA NA  NA = NA 73,720 OA
*$76,000 x 3% = $2,280
b. (1) Total assets: Cash $73,720
(2) Revenue recognized: $76,000
(3) Cash Flow from Operating Activities: $73,720
(4) By accepting credit cards rather than allowing customers to purchase goods on account,
Royal Carpet Cleaning avoids the risk of uncollectible accounts as well as the expense of
maintaining and collecting accounts receivable. Additionally, cash will be collected quickly
rather than having to wait for the customer to directly pay its bill.
5-32
EXERCISE 5-15
Credit card expense: Sales $8,650 x 4% = $346
Net Income:
Credit Card Expense (346)
Net Income $8,304
5-33
EXERCISE 5-16
a. FIFO
b. FIFO
c. FIFO
d. Weighted Average
e. LIFO
f. Weighted Average
g. LIFO
h. LIFO
5-34
EXERCISE 5-17
Adams Co.
First Purchase $ 950
Second Purchase 1,250
Total $2,200
(a) (b) (c)

FIFO LIFO W. AVG.
Cost of Goods Sold $ 950 $1,250 $1,100*
Ending Inventory 1,250 950 1,100*
*Average Cost per Unit: $2,200  2 = $1,100
5-35
EXERCISE 5-18
Suggs Company
Inventory Purchases
Beginning Inventory 400 @ $50 = $20,000

First Purchase 500 @ 55 = 27,500
Second Purchase 600 @ 58 = 34,800
Goods Available for Sale 1,500 $82,300
a. Cost of Goods Sold:

Cost Cost of
FIFO Units per Unit Goods
Sold
From Beginning Inventory 400 @ $50 = $20,000
From First Purchase 500 @ 55 = 27,500
From Second Purchase 300 @ 58 = 17,400
Total 1,200 $64,900
Ending Inventory: 300 units from Second Purchase @ $58 = $17,400

b. Cost of Goods Sold:
Cost Cost of
LIFO Units per Unit Goods
Sold
From Second Purchase 600 @ $58 = $34,800
From Beginning Inventory 100 @ 50 = 5,000
Total 1,200 $67,300
Ending Inventory: 300 units from Beginning Inventory @ $50 = $15,000

c.
Weighted Average:
Total Cost  Total Units = Cost per Unit
$82,300  1,500 = $54.8667
Cost of Goods Sold 1,200 units @ $54.8667 = $65,840

Ending Inventory 300 units @ $54.8667 = $16,460
5-36
EXERCISE 5-19
a. (1) Baxter Company

FIFO
Sales (370 @ $30) $11,100
Cost of Goods Sold:
From Beginning Inv. 90 units @ $15 = $ 1,350
From Purchases 280 units @ $19 = 5,320 (6,670)
Gross Margin $4,430
a. (2)
LIFO
Sales (370 @ $30) $11,100
Cost of Goods Sold:
From Purchases 320 units @ $19 = $6,080
From Beg. Inv. 50 units @ $15 = 750 (6,830)
Gross Margin $4,270
a. (3)
Weighted Average
Sales (370 @ $30) $11,100
Cost of Goods Sold:
Average Cost per Unit 370 @ $18.122* = $6,705 (6,705)
Gross Margin $4,395
*Total cost $7,430  Total units 410 = $18.122 Cost per unit
b. $160 ($4,430  $4,270). The difference in net income would be the

same as the difference in gross margin, assuming there are no
income tax considerations.
5-37
c.
FIFO LIFO W. Avg.
Cash Inflow from Customers $11,100 $11,100 $11,100
Cash Outflow for Inventory (6,080) (6,080) (6,080)
Net Cash Flow from Operating Act. $5,020 $5,020 $5,020
Net cash flow from operating activities will be the same for all three
methods because the amount of cash from sales and the amount of cash
paid for inventory is the same regardless of the method of cost flow
assumed. If the company were subject to income tax, the amount of cash
paid for tax expense would be different because the amount of taxable
income would be different.
5-38
EXERCISE 5-20
a.
Dugan Sales
Summary of Purchase Transactions
1/20 Purchased Units 80 @ $15 = $ 1,200
4/21 Purchased Units 420 @ 16 = 6,720
7/25 Purchased Units 250 @ 20 = 5,000
9/19 Purchased Units 150 @ 22 = 3,300
Available for Sale 900 $16,220
a. (1)
Cost
FIFO Units per Unit
Ending Inventory
From 9/19 Purchase 70 @ $22 = $1,540
Total Ending Inventory 70 $1,540
a. (2)
LIFO Cost
Units per Unit
Ending Inventory
From 1/20 Purchase 70 @ $15 = $1,050
Total Ending Inventory 70 $1,050
a. (3)
Weighted Average
$16,220  900 = $18*
Ending Inventory 70 units @ $18 = $1,260

*rounded
5-39
B.
FIFO
Sales (830 units @ $40) $33,200
Cost of Goods Sold
Cost of Goods Avail. for Sale* $16,220
Less: Ending Inventory (1,540)
Gross Margin $18,520
LIFO
Sales (830 units @ $40) $33,200
Cost of Goods Sold
Cost of Goods Avail. for Sale* $16,220
Less: Ending Inventory (1,050)
Gross Margin $18,030
*This amount is computed in the Summary of Purchase Transactions at the

beginning of the problem.
Difference in Gross Margin: $18,520  $18,030 = $490
Note to Instructor: Cost of goods sold can be computed on a units-sold

basis rather than subtracting ending inventory from goods available for
sale.
5-40
EXERCISE 5-21
a.
Windjammer Company
Income Statements
For the Year Ended December 31, 20XX
FIFO
Sales (3,500 @ $50) $175,000
Cost of Goods Sold:
From Beginning Inv. 300 units @ $25 = $ 7,500
From 4/1 Purchase 2,800 units @ $30 = 84,000
From 10/1 Purchase 400 units @ $32 = 12,800
Gross Margin 70,700
Operating Expenses (21,000)
Income Before Tax 49,700
Income Tax Expense ($49,700 x 30%) (14,910)
Net Income $34,790
LIFO
Sales (3,500 @ $50) $175,000
Cost of Goods Sold:
From 10/1 Purchase 1,000 units @ $32 = $32,000
From 4/1 Purchase 2,500 units @ $30 = 75,000
Gross Margin 68,000
Operating Expenses (21,000)
Income Before Tax 47,000
Income Tax Expense ($47,000 x 30%) (14,100)
Net Income $32,900
5-41
b. Income tax savings would be the difference between the tax using
FIFO and the tax using LIFO, or $14,910  $14,100 = $810.
c.
Windjammer Company
Cash Flows from Operating Activities
FIFO LIFO
Cash Inflow from Customers $175,000 $175,000
Cash Outflow for Inventory* (116,000) (116,000)
Cash Outflow for Operating Expenses (21,000) (21,000)
Cash Outflow for Income Tax Expense (14,910) (14,100)
Net Cash Flow from Operating Activities $23,090 $23,900
*Computation of cash paid for inventory:
4/1 Purchase 2,800 units @ $30 = $ 84,000

10/1 Purchase 1,000 units @ 32 = 32,000
$116,000
d. More income tax must be paid on the higher amount of income before
tax reported under FIFO. Therefore, more cash used for operating
activities leaves less net cash flow from operating activities.
5-42
EXERCISE 5-22
Garden Gifts, Inc.
Effect of Events on Financial Statements
Panel 1: FIFO Cost Flow
Event Cash + Inv. = C. Stk. + Ret. Ear. Rev.  Exp. = Net Inc. Cash Flows
1. 112,500 + NA = NA + 112,500 112,500  NA = 112,500 112,500 OA
2. (27,000) + 27,000 = NA + NA NA  NA = NA (27,000) OA
3. (40,000) + 40,000 = NA + NA NA  NA = NA (40,000) OA
4. NA + (57,000)1 = NA + (57,000) NA  57,000 = (57,000) NA
5. (22,200)2 + NA = NA + (22,200) NA  22,200 = (22,200) (22,200) OA
Bal. 23,300 + 10,000 = NA + 33,300 112,500  79,200 = 33,300 23,300 NC
Panel 2: LIFO Cost Flow
Event Cash + Inv. = C. Stk + Ret. Ear. Rev.  Exp. = Net Inc. Cash Flows
1. 112,500 + NA = NA + 112,500 112,500  NA = 112,500 112,500 OA
2. (27,000) + 27,000 = NA + NA NA  NA = NA (27,000) OA
3. (40,000) + 40,000 = NA + NA NA  NA = NA (40,000) OA
4. NA + (58,000)3 = NA + (58,000) NA  58,000 = (58,000) NA
5. (21,800)4 + NA = NA + (21,800) NA  21,800 = (21,800) (21,800) OA
Bal. 23,700 + 9,000 = NA + 32,700 112,500  79,800 = 32,700 23,700 NC
1Cost of Goods Sold - FIFO: 4/2 150 units @ $180 = $27,000

9/1 150 units @ $200 = 30,000
Total 300 units $57,000
2Income Tax Expense: ($112,500  $57,000) x 40% = $22,200
3Cost of Goods Sold - LIFO: 9/1 200 units @ $200 = $40,000
4/2 100 units @ $180 = 18,000
Total 300 units $58,000
4Income Tax Expense ($112,500  $58,000) x 40% = $21,800
5-43
b. Net Income assuming FIFO cost flow: $33,300 (see statements model
above).
c. Net Income assuming LIFO cost flow: $32,700 (see statements model
above).
d. LIFO produces a lower income tax by $400 ($22,200  $21,800). This

results because a larger amount of inventory is expensed resulting
in a lower income before tax. The last purchase was bought at a
higher price than the first purchase.
e. The difference in cash flow from operating activities is caused by the

difference in income tax paid of $400. LIFO will produce a larger
cash flow because there was $400 less income tax paid.
5-44
SOLUTIONS TO PROBLEMS - CHAPTER 5
PROBLEM 5-23
a.
Event Number Type of Transaction
2014
1. Asset Source
2. Asset Exchange
3. Asset Use
2015
1. Asset Source
2. Asset Exchange
3. Asset Exchange
4a.* Asset Exchange
4b.* Asset Exchange
5. Asset Use
6. Asset Use
b. 2014 and 2015

Effect of Transactions on Financial Statements
No. Assets = Liab. + Equity Rev.  Exp. = Net Inc. Cash Flows
2014
1. + NA + + NA + NA
2. + NA NA NA NA NA + OA
3.  NA  NA +  NA
2015
1. + NA + + NA + NA
2. + NA NA NA NA NA + OA
3. + NA NA NA NA NA NA
4a.* + NA NA NA NA NA NA
4b.* + NA NA NA NA NA + OA
5.  NA  NA +   OA
6.  NA  NA +  NA
*4a. is reinstatement of the previously charged off receivable; 4b is the collection of

the account.
5-45
PROBLEM 5-23 (cont.)
c. 2014
Expert Consulting Accounting Equation - 2014
Acct.
Event Assets = Liab. + Equity Title/RE
1. NA 70,000 NA NA 70,000 Rev.
2. 62,000 (62,000) NA NA NA
3. NA NA 1,400* NA (1,400) Uncoll. Exp
Bal. 62,000 + 8,000  1,400 = -0- + 68,600
*$70,000 x 2% = $1,400
d. (2014)
Expert Consulting
For the Year Ended 2014
Income Statement
Uncollectible Accounts Expense (1,400)
Net Income $68,600
Beginning Common Stock $ -0-

Plus: Stock Issued -0-
Ending Common Stock $ -0-
5-46
PROBLEM 5-23 d. (cont.)
(2014)
Expert Consulting
Balance Sheet
Assets
Cash $62,000
Accounts Receivable $ 8,000
Liabilities $ -0-
Common Stock $ -0-


5-47
c. 2015
Expert Consulting Accounting Equation - 2015
Event Assets = Liab. + Equity Acct./RE
Bal. 62,000 8,000 1,400 -0- 68,600
1. NA 84,000 NA NA 84,000 Rev.
2. 70,000 (70,000) NA NA NA
3. NA (1,100) (1,100) NA NA
4a. NA 200 200 NA NA
4b. 200 (200) NA NA NA
5. (51,200) NA NA NA (51,200) Op. Exp.
Bal. 81,000 + 20,900  1,340 = + 100,560
*$84,000 x 1% = $840
d. (2015)
Expert Consulting
Income Statement
Expenses
Operating Expenses $51,200
Uncollectible Accounts Expense 840
Total Expenses (52,040)
Net Income $31,960

Ending Common Stock $ -0-
5-48
PROBLEM 5-23 d. (cont.)
(2014)
Expert Consulting
Balance Sheet
As December 31, 2015
Assets
Cash $ 81,000
Liabilities $ -0-
Common Stock $ -0-


5-49
PROBLEM 5-24
a.
Accounts Receivable Allowance for Doubtful
Accounts
Beg. Bal. 96,200 Beg. Bal. 6,250
Sales on account. 726,000 Uncoll. Acct. expense 3,630
Collections on account (715,000) Write off of bad accts (3,100)
Write off of bad accts (3,100) Bal. 6,780
Bal. $104,100
a. (1) $726,000 x .5% = $3,630
a. (2) Accounts Receivable Balance, 12/31/14 $104,100

Less: Allowance for Doubtful Accounts, 12/31/14 (6,780)
Net Realizable Value $ 97,320
b. Uncollectible accounts expense is an estimate of current receivables

that may eventually be uncollectible. The amount written off as
uncollectible is the actual amount that was determined in the current
accounting period to be uncollectible.
5-50
PROBLEM 5-25
a.
Frankel Inc. Accounting Equation 2014
Assets = Liab. + Equity

Com. Acct.
Event Cash + A. Rec.  Allow. + Mdse Inv. = Accts. Pay. + Stock = Ret. Earn. Title/RE
1. 60,000 NA NA NA NA 60,000 NA
2. NA NA NA 210,000 210,000 NA NA
3a. NA 310,000 NA NA NA NA 310,000 Rev.
3b. NA NA NA (165,000) NA NA (165,000) Cost of Sales
4. 278,000 (278,000) NA NA NA NA NA
5. (190,000) NA NA NA (190,000) NA NA
6. (46,000) NA NA NA NA NA (46,000) Sal. Exp.
7. (62,000) NA NA NA NA NA (62,000) Op. Exp.
8. NA NA 2,102* NA NA NA (2,102) Uncoll. Exp.
Bal. 40,000 + 32,000  2,102 + 45,000 = 20,000 + 60,000 + 34,898
*
Number of Days Amount Percent Likely to Be Allowance
Past Due Uncollectible Balance
Current $15,700 .01 $ 157
0-30 8,500 .05 425
31-60 4,000 .10 400
61-90 2,600 .20 520
Over 90 days 1,200 .50 600
Total $2,102
5-51
b.
Frankel Inc.
Income Statement
Gross Margin 145,000
Operating Expenses
Operating Expenses $62,000
Salaries Expense 46,000
Uncollectible Accts. Expense 2,102
Net Income $ 34,898

5-52
PROBLEM 5-25 b. (cont.)
Frankel Inc.
Balance Sheet
As of the End of the Year 2014
Assets
Cash $ 40,000
Less, Allowance for Doubtful Accounts (2,102) 29,898
Liabilities
Accounts Payable $ 20,000
5-53
Frankel Inc.

Outflow for Expenses1 (108,000)
Net Cash Flow from Operating Activities ($20,000)
Cash Inflow from Stock Issued $ 60,000
1SalariesPaid $ 46,000
Other Operating Expenses 62,000
Outflow for Expenses $108,000
c. Net Realizable Value:

Less: Allowance for Doubtful Accounts (2,102)
Net Realizable Value $29,898
5-54
PROBLEM 5-26
a. $261,000  $46,300 = $214,700
b. $46,300 x 4% = $1,852
c. $46,300  $1,852 = $44,448
d.
Assets = Liab. + Equity Rev.  Exp. = Net Inc.
Event Cash + Acc. Rec.  Allow. = Cash Flow

1. NA 261,000 NA NA 261,000 261,000 NA 261,000 NA
2. 214,700 (214,700) NA NA NA NA NA NA 214,700 OA
3. NA NA 1,852 NA (1,852) NA 1,852 (1,852) NA
5-55
PROBLEM 5-27
a.
Brooks Co. Horizontal Statements Model

Event Assets = Equity Rev.  Exp. = Net Inc. Cash Flows
Accts. Notes Int. Com. Ret. Earn.
Cash Rec. Allow Rec. Rec. = Stock
1. 60,000 NA NA NA NA 60,000 NA NA NA NA 60,000FA

2. NA 74,000 NA NA NA NA 74,000 74,000 NA 74,000 NA
3. 62,000 (62,000) NA NA NA NA NA NA NA NA 62,000 OA
4. (15,000) NA NA 15,000 NA NA NA NA NA NA (15,000) IA
5. (47,000) NA NA NA NA NA (47,000) NA 47,000 (47,000) (47,000) OA
6. (2,500) NA NA NA NA NA (2,500) NA NA NA (2,500) FA
1
7. NA NA NA NA 300 NA 300 300 NA 300 NA
8.2 NA NA (740) NA NA NA (740) NA 740 (740) NA
Tot. 57,500 12,000 (740) 15,000 300 = 60,000 24,060 74,300  47,740 = 26,560 57,500 NC
1
$15,000 x 8% = $1,200; $1,200 x 3/12 = $300
2
$74,000 X 1% = $740
5-56
PROBLEM 5-27
b.
Brooks Co.
Income Statement
Operating Expenses
Uncoll. Accounts Expense 740
Net Operating Income 26,260
Non-Operating Items
Interest Revenue 300
Net Income $26,560
5-57
Brooks Co.
Balance Sheet
Assets
Cash $57,500
Accounts Receivable 12,000
Allowance for Doubtful Accounts 15,000
Notes Receivable (740)
Liabilities $ -0-
5-58
Brooks Co.

Inflow from Customers $ 62,000
Outflow for Notes Receivable (15,000)
Cash Inflow from Stock Issued $60,000
Cash Outflow for Dividends (2,500)
5-59
PROBLEM 5-28
Webb Equipment Co.

Income Statement
Operating Expenses
Operating Expenses 45,000
Rent Expense 7,500
Uncollectible accounts expense 9,600
Non-Operating Items
Interest Revenue 12,000
Interest Expense (1,300)
Total Non-Operating Items 10,700
Net Income $ 12,400
5-60
Webb Equipment Co.
Balance Sheet
Assets
Current Assets
Cash $ 16,700
Allow. for Doubtful Accounts (6,500) 85,500
Inventory 105,000
Interest Receivable 2,100
Prepaid Rent 16,100
Supplies 4,500
Total Current Assets $244,900
Property, Plant and Equipment
Office Equipment 47,000
Accumulated Depreciation (12,000) 35,000
Land 45,000
Total Property, Plant and Equipment 80,000
Liabilities and Stockholders’ Equity

Current Liabilities
Unearned Revenue 42,000
Interest Payable 1,900
Salaries Payable 14,500
Total Current Liabilities $106,400
Long-Term Liabilities
Notes Payable 26,000
Total Long-Term Liabilities 26,000
Total Liabilities 132,400
Common Stock 70,000
Retained Earnings 122,500*
*Must be computed: $120,100, Beg. Retained Earnings + $12,400, Net Income

 $10,000, Dividends = $122,500, Ending Retained Earnings
PROBLEM 5-29
5-61
Account analysis provided for the use of the instructor.
Accounts Receivable
Beg. Bal. $ 36,000
Sales on account 160,000
Write-Offs (1,200)
Less: End. Bal (32,000)
Cash Collected $162,800
Allowance for Doubtful Accounts

Beg. Bal. $2,000
Write-Offs (1,200)
Less, End Bal. (2,200)
Uncoll Accts. Exp. $1,400
Notes Receivable
Beg Bal. $50,000
End. Bal. $50,000
Interest Receivable
Beg. Bal. $2,000
Less End. Bal 5,000
Cash Collected $ -0-
a. Cash collected: $162,800

Uncollectible Accounts Expense: $1,400
Net Realizable Value: $32,000  $2,200 = $19,800
b. Interest revenue recognized for the period: $3,000 ($50,000 x 6%)

Cash collected from interest: $-0-
5-62
PROBLEM 5-30
a.
Iupe Supply Company Horizontal Statements Model
Balance Sheet Income Statement Statement
Assets = Equity of
Com. Net Cash Flows
Event Cash + A. Rec.  Allow. + Mdse Inv. = Stock + Ret. Earn. Rev.  Exp. = Income
1. 50,000 NA NA NA 50,000 NA NA NA NA 50,000 FA
2. (120,000) NA NA 120,000 NA NA NA NA NA (120,000) OA
1
3a. 50,000 NA NA NA NA 50,000 50,000 NA 50,000 50,000 OA
2
3b. NA 111,550 NA NA NA 111,550 115,000 3,450 111,550 NA
3c. NA 15,000 NA NA NA 15,000 15,000 NA 15,000 NA
3d. NA NA NA (95,000) NA (95,000) NA 95,000 (95,000) NA
4. 111,550 (111,550) NA NA NA NA NA NA NA 111,550 OA
5. 11,300 (11,300) NA NA NA NA NA NA NA 11,300 OA
6. (51,500) NA NA NA NA (51,500) NA 51,500 (51,500) (51,500) OA
3
7. NA NA 185* NA NA (185) NA 185 (185) NA
Bal. 51,350 + 3,700  185 + 25,000 = 50,000 + 29,865 180,000 150,135 29,865 51,350 NC
1
3a, cash sales; 3b, credit card sales; 3c, sales on account; 3d, cost of goods sold
2
$115,000 x 3% = $3,450 credit card expense
3
$3,700 x 5% = $185
5-63
b.
Iupe Supply Company
Income Statement
Gross Margin 85,000
Operating Expenses
Credit Card Expense $ 3,450
Selling & Adm. Expenses 51,500
Uncoll. Accts. Expense 185
Net Income $ 29,865

5-64
Iupe Supply Company

Balance Sheet
Assets
Cash $51,350
Less, Allowance for Doubtful Accounts (185) 3,515
Liabilities $ -0-
5-65
Iupe Supply Company


Inflow from Customers1 $172,850
Net Cash Flow from Operating Activities $ 1,350
Cash Inflow from Stock Issued $ 50,000
1Cash Sales $50,000
Collection of Accounts Receivable 11,300
Cash from Credit Card Sales 111,550
5-66
PROBLEM 5-31
Type of Common Retained Net Cash

Event Event Assets Liabilities Stock Earnings Income Flow
a1.* AS + NA NA + + NA
a2.* AU  NA NA   NA
b. AE + NA NA NA NA +
c. AU   NA NA NA 
d. AE + NA NA NA NA +
e. AE +/ NA NA NA NA 
f. AU   NA NA NA 
g. AS + NA NA + + NA
h. AS + NA NA + + +
i. AU  NA NA   
j. AS + NA NA + + NA
k. AU  NA NA   NA
l. AE + NA NA NA NA +
m. AS + NA NA + + +
n. AE + NA NA NA NA 
o. AU  NA NA   
*a1 recognizes sales revenue, a2 recognizes cost of goods sold.
5-67
PROBLEM 5-32
a.
Village Cycle Sales and Service - 2014
Assets = Liabilities + Equity Acct. Title/RE
Notes Int. Accts. Com. Ret.

Even Cash + A. Rec.  Allow. + Mdse Inv. + Rec. + Rec = Pay. + Stock = Earn.
t
Bal. 46,200 21,300 1,350 85,600 NA NA 28,000 80,000 43,750
1. NA NA NA 260,000 NA NA 260,000 NA NA
2a. NA 340,000 NA NA NA NA NA NA 340,000 Sales Rev.
2b. NA NA NA (243,000) NA NA NA NA (243,000) Cost of Sales
3a. 80,000 NA NA NA NA NA NA NA 80,000 Service Rev.
4a.1 NA 57,000 NA NA NA NA NA NA 57,000 Sales $60,000
CC Exp. (3,000)
4b. NA NA NA (41,250) NA NA NA NA (41,250) Cost of Sales
5. 348,000 (348,000) NA NA NA NA NA NA NA
6. (265,000) NA NA NA NA NA (265,000) NA NA
7. (115,000) NA NA NA NA NA NA NA (115,000) Selling & Adm.
Exp.
8. 57,000 (57,000) NA NA NA NA NA NA NA
9. (50,000) NA NA NA 50,000 NA NA NA NA
10. NA (830) (830) NA NA NA NA NA NA
11a.2 NA NA NA NA NA 1,125 NA NA 1,125 Int Rev.
Uncoll. Accts.
11b.3 NA NA 1,700 NA NA NA NA NA (1,700) Exp.
Bal. 101,200 + 12,470  2,220 + 61,350 + 50,000 + 1,125 = 23,000 + 80,000 + 120,925
1
$60,000 x 5% = $3,000; $60,000 − $3,000 = $57,000
2
$50,000 x 9% = $4,500; $4,500 x 3/12 = $1,125
3$340,000 x .5% = $1,700
5-68
Village Cycle Sales and Service

Income Statement
Revenue
Service Revenue 80,000
Total Revenue $480,000
Expenses
Credit Card Expense $ 3,000
Selling & Adm. Expenses 115,000
Uncollectible Accts. Exp. 1,700
Non-Operating Items
Net Income $ 77,175

Beginning Common Stock $80,000
Ending Common Stock $ 80,000
5-69

Balance Sheet
Assets
Cash $101,200
Less: Allow. for Doubtful Accts. (2,220) 10,250
Interest Receivable 1,125
Liabilities
Total Liabilities $ 23,000
Common Stock $ 80,000
Total Liab. and Stockholders’ Equity $223,925
5-70

Cash Receipts from Revenue* $485,000
Cash Payment for Accounts Pay. (Inv.) (265,000)
Cash Payments for Expenses (115,000)
Cash Outflow for Notes Receivable $ (50,000)
Net Cash Flow from Investing Activities (50,000)
-0-
*Cash Receipts from Revenue:

Cash Sales $ 80,000
Collections of Accounts Rec. 348,000
Credit Card Sales Collections 57,000
Total Cash Receipts from Revenue $485,000
5-71
PROBLEM 5-33
Carrol’s Lamp Shop

Inventory Purchases
Beginning Inventory 200 @ $140 = $28,000

First Purchase 120 @ 150 = 18,000
Total 460 $68,400
a. (1) Cost of Goods Sold:

FIFO Units Unit Cost Cost of Goods
Sold
From Beginning 200 @ $140 = $ 28,000
Inventory
Total 400 $58,800
Ending Inventory:
FIFO Units Unit Cost Ending Inventory
a. (2) Cost of Goods Sold:

LIFO Units Unit Cost Cost of Goods
Sold
From Beginning 140 @ 140 = 19,600
Inventory
Total 400 $60,000
Ending Inventory:
LIFO Units Unit Cost Ending Inventory
From Beginning 60 @ $140 = $8,400
Inventory
5-72
PROBLEM 5-33 a. (cont.)
a. (3)
Weighted Average
$68,400  460 = $148.696
Cost of Goods Sold: 400 units @ $148.696 = $59,478*

Ending Inventory: 60 units @ $148.696 = $ 8,922*
*rounded

Computation of Income Tax Expense and Net Income
Weighted
FIFO LIFO Average
Sales (400 units @ $320) $128,000 $128,000 $128,000
Cost of Goods Sold (58,800) (60,000) (59,478)
Gross Margin 69,200 68,000 68,522
Salaries Expenses (40,000) (40,000) (40,000)
Income Before Tax 29,200 28,000 28,522
Income Tax (25%) (7,300) (7,000) (7,131)*
Net Income $21,900 $21,000 $21,391
*Rounded
5-73
b. The Accounting Equation is provided for the use of the instructor.
Assets = Stockholders’ Equity

Event Cash Inventory = Com Stock Ret. Earn.
FIFO Cost Flow
Beginning Balance $90,500 $28,000 $40,000 $78,500
1. First Purchase (18,000) 18,000
2. Second Purchase (22,400) 22,400
3a. Sale of Inventory 128,000 128,000
3b. Cost of Goods Sold (58,800) (58,800)
4. Paid Oper. Expenses (40,000) (40,000)
5. Paid Income Tax (7,300) (7,300)
Totals $130,800 $ 9,600 = $40,000 $100,400
LIFO Cost Flow

1. First Purchase (18,000) 18,000
5. Paid Income Tax (7,000) (7,000)
Totals $131,100 $ 8,440 = $40,000 $99,500
Weighted Average
1. First Purchase (18,000) 18,000
5. Paid Income Tax (7,131) (7,131)
Totals $130,969 $ 8,922 = $40,000 $99,891
5-74
b.
FIFO LIFO Weight. Av.
Income Statements
For Year Ended December 31, 2014
Sales $128,000 $128,000 $128,000
Gross Margin 69,200 68,000 68,522
Salaries Expense (40,000) (40,000) (40,000)
Income Tax Expense (7,300) (7,000) (7,131)
Net Income $21,900 $21,000 $21,391
Balance Sheets
Assets
Cash $130,800 $131,100 $130,969
Inventory 9,600 8,400 8,922
Total Assets $140,400 $139,500 $139,891
Common Stock $40,000 $40,000 $40,000
Retained Earnings 100,400 99,500 99,891
Total Stockholders’ Equity $140,400 $139,500 $139,891
5-75

Statements of Cash Flows
FIFO LIFO Weight. Av.
Cash Flows From Oper. Act.:
Cash Inflow from Customers $128,000 $128,000 $128,000
Cash Outflow for Inventory (40,400) (40,400) (40,400)
Cash Outflow for Sal. Exp. (40,000) (40,000) (40,000)
Cash Outflow for Income Tax (7,300) (7,000) (7,131)
Net Cash Flow from Oper. Act. 40,300 40,600 40,469
Cash Flows From Investing Act. -0- -0- -0-
Cash Flows From Financing Act. -0- -0- -0-
Net Change in Cash 40,300 40,600 40,469
Plus: Beginning Cash Balance 90,500 90,500 90,500
Ending Cash Balance $130,800 $131,100 $130,969
5-76
ATC 5-1
Dollar amounts are in millions.
a. Receivables ÷ Total assets = %

$5,841 ÷ $48,163 = 12.1%
b. Allow. for doubtful accts. ÷ Acct. Rec. = Uncollectible %
2012: There was no allowance for doubtful accounts in the 2012

fiscal year because Target had begun selling its credit card
receivables.
2011: $430 ÷ $6,357* = 6.8%
* $5,927 + $430 = $6,357
c. According to Note 11, “Historically, we recognized an allowance for

doubtful accounts in an amount equal to the anticipated future write-offs of
existing receivables and uncollectible finance charges and other credit-
related fees. We estimated future write-offs on the entire credit card
portfolio collectively based on historical experience of delinquencies, risk
scores, aging trends and industry risk trends.”
d. Inventory ÷ Total assets = %

$7,903 ÷ $48,163 = 16.4%
e. According to Note 12, the company uses the LIFO method.
f. No, according to Note 12, “We routinely enter into arrangements with
vendors whereby we do not purchase or pay for merchandise until the
merchandise is ultimately sold to a guest. Activity under this program is
included in sales and cost of sales in the Consolidated Statements of
Operations, but the merchandise received under the program is not
included in inventory in our Consolidated Statements of Financial Position
because of the virtually simultaneous purchase and sale of this inventory.”
5-77
77
ACT 5-2
a.
Robin Co.
Goods Available for Sale
Beginning Inventory 100 @ $50 = $ 5,000

70 @ 55 = 3,850
First Purchase 100 @ 54 = 5,400
Total 520 $28,750
FIFO
Cost of Goods Sold:
Cost Cost of
FIFO Units per Unit Goods Sold
From Beginning Inventory 100 @ $50 = $ 5,000
Total 420 $22,950
Ending Inventory: 100 units @ $58 = $5,800
LIFO
Cost of Goods Sold:
Cost Cost of
LIFO Units per Unit Goods Sold
Total 420 $23,750
Ending Inventory: 100 units @ $50 = $5,000
5-78
78
ATC 5-2 a. (cont.)
Weighted Average
$28,750  520 = $55.288
Cost of Goods Sold 420 units @ $55.288 = $23,221

Ending Inventory 100 units @ $55.288 = $5,529
Robin Co.
Weighted
Income Statements FIFO LIFO Average
Sales (220 @$80; 200 @ $90) $35,600 $35,600 $35,600
Gross Margin 12,650 11,850 12,379
Operating Expenses (3,200) (3,200) (3,200)
Income Tax (30%) (2,835) (2,595) (2,754)
Net Income $6,615 $6,055 $6,425
b. LIFO may be preferred for tax purposes in a period of rising prices

because it will result in the lowest net income and, consequently, the
lowest amount of tax paid for the year. Since the last items purchased,
(the most expensive) are the items expensed on the income statement,
the inventory shown on the balance sheet will consist of the oldest items
(the least expensive). FIFO may be preferred for financial statement
purposes because it will result in the higher net income in a period of
rising prices. FIFO also produces the higher amount of assets on the
balance sheet. The higher net income is more favorable to stockholders.
The only effect on cash flows in the amount of income tax that is paid.
LIFO generally results in a lower amount of income tax paid. Because
LIFO generally results in a deferral of the payment of income tax, if it is
5-79
79
c.
ATC 5-2 a. (cont.)
used for tax reporting. However, it must also be used for financial
statement purposes to prevent abuse by taxpayers.
5-80
80
ATC 5-3
Theses answers are based on Starbucks September 30, 2012 and

Whirlpool’s December 31, 2012 Form 10-Ks.
All dollar amounts are in millions.
a. Starbucks: Receivables ÷ Revenues = %

$ 486 ÷ $13,300 = 3.7%
Whirlpool: Receivables ÷ Revenues = %

$2,038 ÷ $18,143 = 11.2%
b. Whirlpool, whose accounts receivables balance is 11.2% of its sales,

appears to be making more sales on account than Starbucks, whose
receivables balance is only 3.7% of sales.
c. Starbucks sells its products to retail customers who usually pay with
cash or credit cards. Starbucks collect its credit card payments from
Visa, American Express, etc, within a few days. Whirlpool sells to
other businesses, not to the final consumer. Companies that engage
in “business to business” sales are more likely to make sales on
account using traditional accounts receivables than are companies
that sell to retail consumers.
5-81
81
ATC 5-4
a.
Factors Paul Smith should consider before allowing credit sales:
1. The cash flow: Can he finance his inventory while the
accounts are outstanding?
2. The cost of financing the inventory
3. The creditworthiness of the customers
4. Payment history of customers in his industry
5. Additional business if he allows charge sales
6. The fee charged by the credit card company
b. The memo should contain a discussion of the factors listed above. It

should also contain a discussion of the procedure for estimating bad
debts using the allowance and when the direct write-off method may
be appropriate.
5-82
82
ATC 5-5
a. Net income is artificially inflated because of the failure to properly
recognize bad debt expense when it became known that some of the
receivable balance was uncollectible. The balance sheet is affected in
two ways. First, retained earnings and therefore stockholder’s equity
are overstated. Second, current assets are inflated because accounts
receivable is recorded at an amount greater than its realizable value.
b. Article I (responsibilities) of the AICPA Code of Professional Conduct

requires members to carry out their responsibilities with sensitive
professional and moral judgment. Further, Article III calls for these
duties to be performed with the highest sense of integrity. Mr.
Saunders’ would fail to meet these requirements by lying to the bank
if he attests to the quality of accounts receivable. He knows that the
accounts receivable balance has become impaired and would be
deceiving the bank in order to obtain the loan he needed. This
deception by deliberate omission of important facts would constitute
fraud.
c. The three elements of the fraud triangle are:

The presence of an opportunity - Saunders has the opportunity to
perpetrate a fraud on the bank because the facts resulting in the
impairment of his accounts receivable balance are not yet publicly
known.
Pressure - Mr. Saunders’ problem is that he owns a thriving business

and needs cash for operations and expansion faster than it is coming
in. He has the ability to obtain a loan if certain facts are not made
available to the bank.
Rationalization - Saunders’ company is thriving, therefore, he has

every reason to believe that repayment of the loan will not be a
problem. He further reasons that since there is no official basis for
determining the receivable in question is uncollectible, he is under no
obligation to write it off before the loan goes through. These are
spurious arguments since SFAC 5 clearly says that revenues must be
realized or realizable to be recognized. Since Mr. Saunders uses the
direct write-off method, he must rectify the recognition of revenue
that is no longer realizable by recording bad debt expense. Failure to
do so is not representatively faithful.
5-83
83

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SURVEY OF ACCOUNTING 4TH EDITION EDMONDS

ANSWERS TO QUESTIONS - CHAPTER 5

1. Accounts receivable are the expected future receipts that arise

2. The net realizable value is the amount expected to be collected

3. Allowance for Doubtful Accounts is a contra asset account.

4. Estimating uncollectible accounts expense improves the

5. When using the allowance method, uncollectible accounts

6. The most common format for reporting accounts receivable on

8. Factors for use in estimating uncollectible accounts include:

9. Recognizing uncollectible accounts expense reduces accounts

10. A write-off of an uncollectible account when the allowance

11. The recovery of an uncollectible account when the allowance

12. The primary advantage of using the allowance method is that it

13. If the company is an established business, it will examine its

14. The percent of receivables is a more accurate measure because it

15. An aging of accounts receivable schedule classifies all

17. a. Maker: The borrower or debtor.

18. Interest is computed as:

20. The matching concept matches revenue and expenses to the

22. The adjusting entry for accrued interest is generally recorded

25. It is generally beneficial to accept major credit cards because the

26. The acceptance of major credit cards enables a business to avoid

(4) Specific Identification - The inventory cost flow method that

28. One advantage of the specific identification method is that both

31. In an inflationary period, i.e., a period where prices are

35. Key Company (first year of operations):

Beginning inventory $ -0-

Merchandise purchased 1,000 units @ $25 25,000

Ending Inventory 150 units @ $25 3,750

Beginning inventory 150 units @ $25 $ 3,750

Units sold 1,500

FIFO: 150 units @ $25 $ 3,750

LIFO 1,500 units @ $27 $40,500

Weighted Average: Total Cost  Total Units = Cost per unit

37. It may be advantageous to use FIFO for financial statement

38. In an inflationary period, for a business subject to income tax,

39. A deflationary period, i.e., a period of falling prices, would

Michelle’s Accounting Service

Balance Sheet Acct. Titles

Michelle’s Accounting Service

Service Revenue $96,000

Michelle’s Accounting Service

Michelle’s Accounting Service

Cash Flows From Operating Activities:

a. Analyze the Accounts Receivable account:

b. Analyze the Allowance for Doubtful Accounts account:

Allowance for Doubtful Accounts

Balance Sheet Acct. Titles for

Balance Sheet Acct. Titles for

b. (1) Net Income for 2014: $44,550 ($45,000  $450)

c. (1) Net Income for 2015: $64,550 ($65,000  $450)

b. (1) Allowance for Doubtful Accounts, 12/31/15: $ 2,600

c. Uncollectible Accounts Expense 2015 ($210,000 x 1%): $2,100

Accounts Receivable Allowance for Doubt. Accts.

a. $23,600 (see above)

c. $3,200 ($320,000 x 1%)

d. $23,600  $1,800 = $21,800

b. Sales on Account $500,000 x 1% = $5,000 of Uncollectible Accounts

c. Accounts Receivable Ending Balance $72,000