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Temporary accounts, financial leverage, perpetual inventory

3.
Describe the difference between temporary and permanent accounts, and state which ones are closed. Describe the purpose of the closing process.

5.
Explain the significance of the return on equity ratio. Who (what category or type of financial statement users) would normally be most interested in this ratio?

6.
What is financial leverage? What financial ratio can be increased by using financial leverage?

7.
Discuss the major differences between a perpetual inventory system and a periodic inventory system.

8.
Why are cash discounts given, and who benefits by these discounts?

10.
List the specific steps used in computing the estimated inventory balance using the gross margin method.

11.
List the measures that a business can use to achieve strong internal controls.

12.
Petty cash funds are maintained on an imprest basis. Explain the advantage of using the imprest basis in accounting for petty cash.

13.
Rolla Company was founded in 2010. It acquired $30,000 cash by issuing stock to investors and an additional $20,000 cash by borrowing from creditors. During 2010 it received $15,000 cash revenues and paid $22,000 in cash expenses. The company then went out of business.What amount of cash should Rolla Company have had on hand immediately before going out of business?

14.
Why would a merchandising company need good internal controls related to its inventory?

16.
Rolla Company was founded in 2010. It acquired $30,000 cash by issuing stock to investors and an additional $20,000 cash by borrowing from creditors. During 2010 it received $15,000 cash revenues and paid $22,000 in cash expenses. The company then went out of business.What amount of cash will Rolla's creditors receive?

17.
Rolla Company was founded in 2010. It acquired $30,000 cash by issuing stock to investors and an additional $20,000 cash by borrowing from creditors. During 2010 it received $15,000 cash revenues and paid $22,000 in cash expenses. The company then went out of business.What amount of cash will Rolla's stockholders receive?

18.
List the key elements of an internal control system that would apply to inventory, and explain how each of them does relate to inventory.

19.
What is the purpose of closing entries?

20.
What is the purpose of a journal in accounting?

Solution Preview

3. Describe the difference between temporary and permanent accounts, and state which ones are closed. Describe the purpose of the closing process.

Temporary accounts measure only activity within one period of time and are emptied to income summary or retained earnings to permit the measuring of activity in the next period. For instance, revenue for July must be emptied to income summary (or retained earnings) to permit measuring of revenue for August. If you left July's revenue in the revenue account, your measure of August revenue would be corrupt. Permanent accounts have running totals each period and do not have their balances emptied into another account to permit "starting over".? For instance, cash is not emptied into something else so that cash is always zero at the start of a period. The ending cash for July is the beginning cash for August without any disruption or need to change the amount.

5. Explain the significance of the return on equity ratio. Who (what category or type of financial statement users) would normally be most interested in this ratio?

Return on equity is a ratio most interesting to owners since it measures the amount of profit returned to them. Typically since preferred shareholders, if any, have a maximum return, the return on equity is most interesting to common shareholders who can enjoy the entire earnings accruing to them after satisfying creditors. Return on equity is a measure of the investment return for owners and therefore helps them decide if the ownership decision should be continued (beats other options) or stopped (sell off).

6. What is financial leverage? What financial ratio can be increased by using financial leverage?
Positive financial leverage is when you borrow and can earn more than the cost of borrowing with the proceeds. If you borrow $100,000 at 5% and can earn 12% on the project you borrowed to fund, the owners get to keep the difference (12% - 5% to bank = leased 7% for owners to keep). You can have negative financial leverage (an unfortunate mistake but possible) where you borrow at 8% but only earn 2% and so the owners must earnings from another project to pay for the project that didn't fund itself with the project profits (shortfall of 8% - 2% = 6%). Return on equity is magnified by positive financial leverage because the profits are increase (excess over cost of capital) without using owner's fund).

7. Discuss the major differences between a perpetual inventory system and a periodic inventory system.

Perpetual inventory system updates the records of unit cost after ...

Solution Summary

Your tutorial is 1,184 words plus four references. It gives 11 potential controls for inventory, five classic ways to better controls for all businesses, reasons for temporary accounting, cash discounts, imprest petty cash and more. Computations for cash activity are shown for you as well as an example of the gross profit method with amounts.

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