Use the following information for questions 1 and 2.
Ventura Corporation purchased machinery on January 1, 2012 for $840,000. The company used the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2013, Ventura changed to the straight-line depreciation method for this asset. The following facts pertain:
Straight-line $140,000 $140,000
Sum-of-the-years’-digits 240,000 200,000
1. Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
2. The amount that Ventura should report for depreciation expense on its 2014 income statement is
d. none of the above.
3. During 2013, a construction company changed from the completed-contract method to the
percentage-of-completion method for accounting purposes but not for tax purposes. Gross
profit figures under both methods for the past three years appear below:
2011 $ 475,000 $ 700,000
2012 625,000 950,000
2013 700,000 1,050,000
Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
a. $540,000 on the 2013 income statement.
b. $330,000 on the 2013 income statement.
c. $540,000 on the 2013 retained earnings statement.
d. $330,000 on the 2013 retained earnings statement.
Use the following information for questions 4 through 8.
Harlan Mining Co. has recently decided to go public and has hired you as an independent CPA. One statement that the enterprise is anxious to have prepared is a statement of cash flows. Financial statements of Harlan Mining Co. for 2013 and 2012 are provided below.
Cash $306,000 $ 144,000
Accounts receivable 270,000 162,000
Merchandise inventory 288,000 360,000
Property, plant and equipment $456,000 $720,000
Less accumulated depreciation (240,000) 216,000 (228,000) 492,000
Accounts payable $ 132,000 $ 72,000
Income taxes payable 264,000 294,000
Bonds payable 270,000 450,000
Common stock 162,000 162,000
Retained earnings 252,000 180,000
For the Year Ended December 31, 2013
Cost of sales 5,364,000
Gross profit 936,000
Selling expenses $450,000
Administrative expenses 144,000 594,000
Income from operations 342,000
Interest expense 54,000
Income before taxes 192,000
Income taxes 72,000
Net income $ 216,000
The following additional data were provided:
1. Dividends for the year 2013 were $144,000.
2. During the year, equipment was sold for $180,000. This equipment cost $264,000 originally and had a book value of $216,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales.
3. All depreciation expense is in the selling expense category.
Questions 4 through 8 relate to a statement of cash flows (direct method) for the year ended December 31, 2013, for Harlan Mining Company.
4. The net cash provided by operating activities is
5. The net cash provided (used) by investing activities is
6. Under the direct method, the cash received from customers is
7. Under the direct method, the total taxes paid is
8. The net cash provided (used) by financing activities is
9. The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
a. All information related to an entity's business and operating objectives is required to be disclosed in the financial statements.
b. Information about each account balance appearing in the financial statements is to be included in the notes to the financial statements.
c. Enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
10. The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This information is important to financial statement readers in determining
a. net income for the year.
b. whether accounting policies are consistently applied from year to year.
c. the value of obsolete items included in ending inventory.
d. whether the working capital position is adequate for future operations.
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