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# Ch03 - Chapter 3 EXERCISES E3-1 Sales revenue Cost of goods...

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Chapter 3 Operating Decisions and the Income Statement EXERCISES E3-1 Case A Case B Case C Case D Case E Sales revenue \$900 \$700 \$410 \$1,190* \$750* Cost of goods sold 500 * 380 200 * 500 310 Gross margin 400 320 * 210 * 690 * 440 Other operating expenses: Selling expense 50* 150 80 400 250 Administrative expense 150 80 * 60 100 80 200 * 230 * 140 * 500 * 330 * Income before income tax 200 90 70* 190 110* Income tax expense 30 * 30 20 40 30 Net income \$170 \$60 * \$50 \$150 * \$80 *Amounts not given in the exercise. E3-2 VILLAGE CORPORATION Income Statement For the Year Ended, December 31, 2008 Computations in Order Sales revenue ................................. Given \$70,000 Cost of goods sold ........................... (a) \$70,000 – \$24,500 45,500 Gross profit ...................................... Given 24,500 Other operating expenses: Selling expense ............................. Given \$ 8,000 Administrative expense ................. (c) \$14,500 – \$8,000 6,500 Total other operating expenses ...... (b) \$24,500 – \$10,000 14,500 Income before income tax ....................................... Given 10,000 Income tax expense .................... (d) \$10,000 x 30%* 3,000 Net income ...................................... (e) \$10,000 – \$3,000 \$ 7,000 Earnings per share (\$7,000 ÷ 4,000 shares*) \$1.75 *Given Note that in this exercise Income before income tax (\$10,000) is the same as Income from operations.

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E3–7 Req. 1 and 2 Accounts Affected and Type of Account Cash Received (Paid) in July Amount of Revenue Earned or Expense Incurred in July OR Why a Revenue or an Expense Is Not Recognized (a) Cash (+A) Game fees revenue (+R) \$10,000 \$10,000 (b) Cash (+A) Accounts receivable (+A) Equipment sales revenue (+R) Cost of goods sold (+E) Inventory (-A) \$3,000 \$ 5,000 \$(2,800) (c) Cash (+A) Accounts receivable ( - A) \$1,000 No revenue earned in July; collections in July related to earnings in June. (d) Cash (+A) Unearned revenue (+L) \$1,500 No revenue earned in July; earnings process is not yet complete. (e) Accounts payable (+L) Cash ( - A) Utilities expense (+E - SE) \$(2,000) \$(2,200) incurred in July; (f) Cash ( - A) Wages expense (+E - SE) \$(4,000) \$(4,000) (g) Cash ( - A) Prepaid expense (+A) Insurance expense (+E - SE) \$(1,200) \$(400) incurred in July; (h) Cash ( - A) Repairs and maintenance expense (+E - SE) \$(1,000) \$(1,000) Totals \$7,300 \$4,600 Req. 3 The net cash flow from these transactions is \$7,300, but the difference between revenues and expenses is \$4,600. The reason for the difference of \$2,700 is that some cash receipts in July relate to sales made in June, and other cash receipts in July relate to revenue to be earned in the future. At the same time, collection of some revenue earned in July will be made in future months. Furthermore, some of the cash paid in July relates to expenses incurred in July or in prior periods (e.g. utility bill). Finally some of the cash paid in July relates to expenses that will be recognized in future periods (e.g. insurance).
E3–11 Balance Sheet Income Statement Assets Liabilities Shareholders’ Equity Revenues Expenses Net Income a. +1,124 NE +1,124 NE NE NE b. +677,347 +677,347 NE NE NE NE c. –10,730 –10,730 NE NE NE NE d. +1,060,999 –655,800 NE +405,199 +1,060,999 +655,800 +405,199 e. –14,814 NE –14,814 NE NE NE f. +19,160 –19,160 NE NE NE NE NE g. –67,927 +33,964 –101,891 NE +101,891 –101,891 h. +1,736 NE +1,736 +1,736 NE +1,736 i. NE +3,647 –3,647 NE +3,647 –3,647 Transaction (d) results in an increase in an asset (accounts receivable) and a decrease in an asset (inventory). Transaction (f) results in an increase in an asset (capital assets) and a decrease in an asset (cash). Therefore, there is no net effect on assets.

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