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    Use of accounting equation, Gomez increase or decrease, LIFO

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    1. Use the following information to calculate for the year ended December 31.

    Supplies $1,000
    Operating expenses $12,000
    Accounts payable $9,000
    Accounts receivable $3,000
    Beginning Stockholders' $5,000

    Revenues $23,000
    Cash $15,000
    Dividends $1,000
    Notes payable $1,000
    Equipment $6,000

    a. net income (net loss) ___________
    b. ending stockholders' equity ___________
    c. total assets ___________

    2. For each of the following accounts indicate the effect of a debit or a credit on the account and the normal balance (debit or credit). Increase (+), Decrease (-).

    Debit Credit Normal Balance
    a. Salary expense _________ ____________ _______________

    b. Accounts receivable __________ ____________ _______________

    c. Service revenue __________ ____________ _______________

    d. Retained Earnings __________ ____________ _______________

    3. On December 31, Gomez Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $120,000; total liabilities, $45,000; and stockholders' equity, $75,000.

    The data for the three adjusting entries were:
    (1) Depreciation of $9,000 was not recorded on equipment
    (2) Wages amounting to $8,000 for the last two days in December were not paid and not recorded. The next payroll will be in January next year.
    (3) Rent of $14,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid.

    Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parenthesis):

    Net Income Total Assets Total Liabilities Stockholders' Equity
    Incorrect balances $40,000 $120,000 $45,000 $75,000

    Effects of:
    Depreciation ___________ ____________ _________________ _______________

    Wages ___________ ____________ _________________ _______________

    Rent ___________ ____________ _________________ _______________

    4. Indicate the effect of inventory method (LIFO or FIFO) in the period of inflation.

    a. ________________ provides the highest ending inventory
    b. ________________ provides the highest cost of goods sold
    c. ________________ results in the highest net income
    d. ________________ results in the lowest income tax expense

    5. Use the following information to calculate three profitability ratios for CMP Inc. for the year:

    Net income $12,000
    Sales $88,000
    Total assets $140,000
    Total common stockholders' equity $96,000

    a. Profit margin percentage ________________
    b. Return on assets _______________
    c. Return on stockholders' equity _____________________

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    Solution Summary

    The expert examines the use of accounting equations, Gomez increase or decrease and LIFO and FIFO. The profit margin percentages are determined.