Week 8: Final Exam Instructions And Questions

WEEK 8: FINAL EXAM Instructions and Questions

This Final Exam is comprehensive, covering all the course materials and readings. It includes ten questions: five short answer questions worth 25 points each; one essay question worth 25 points; two essay questions worth 30 points each; and two essay questions worth 35 points each. The exam duration is 3 hours and 30 minutes. Short answer and essay questions are not included in the autograding. By submitting, the student attests to adherence to the Student Honor Code.

Paper For Above instruction

Financial accounting forms the backbone of transparent and reliable business operations, underpinning decision-making processes and ensuring stakeholders can assess a company's financial health effectively. In this examination, various fundamental topics within financial accounting are tested, including adjusting entries, journal entries, inventory valuation methods, financial ratios, depreciation techniques, stock transactions, internal controls, trial balances, and inventory costing methods. This paper explores these areas comprehensively, illustrating their importance and application in real-world scenarios and emphasizing their role in sound financial management.

Adjusting entries are essential in accounting because they ensure that financial statements accurately reflect the company's financial position and performance at the end of an accounting period. These entries are necessary because certain transactions and events are recorded in the period in which they occur, not necessarily when cash is received or paid. For instance, accrued expenses and revenues, depreciation, and prepaid expenses require adjustments to allocate income or expenses correctly to the period they pertain to. Without these adjustments, financial statements may be materially misstated, leading to incorrect decision-making by stakeholders. An example of an adjusting entry for salaries payable involves debiting the salary expense account and crediting the salaries payable liability account when salaries are earned but not yet paid by the period's end. This ensures expenses are recognized in the correct period and liabilities are appropriately reported.

In accounting, debit and credit rules are fundamental for recording financial transactions in journal entries. Debits and credits follow specific rules: debits increase asset and expense accounts, while credits increase liability, equity, and revenue accounts. When developing journal entries, these rules guide the placement of amounts to ensure the accounting equation (Assets = Liabilities + Equity) remains balanced. For example, if a company borrows cash from a bank, the journal entry would increase (debit) Cash (asset) and increase (credit) Notes Payable (liability). This logical application of debits and credits ensures the consistency and accuracy of financial records, facilitating reliable financial reporting and analysis.

Thomas Manufacturing’s inventory management during the month involved multiple purchases and sales, requiring careful calculation to determine ending inventory and cost of goods sold (COGS) using specific inventory valuation methods. Given initial inventory of four units at $250 each, supplemented by additional purchases, and the sale of 15 units, the calculation for FIFO, LIFO, or average cost methods demonstrates how inventory costs are assigned. In this scenario, under FIFO, the earliest inventory costs are allocated to COGS, leaving the most recent costs in ending inventory. Conversely, LIFO assigns the most recent costs to COGS. These calculations are crucial for financial reporting and taxation, as they influence gross profit margins and taxable income.

Inventory valuation methods such as FIFO play a vital role in determining gross profit and ending inventory balances. FIFO assumes that the oldest inventory items are sold first, thus the remaining inventory consists of the most recent purchases. This method aligns well with the physical flow of many goods and often results in lower COGS during periods of inflation, thereby increasing gross profit. However, it can also lead to higher inventory values on the balance sheet. For example, if a company sells goods purchased at increasing prices, FIFO would recognize lower costs in COGS, increasing gross profit. Conversely, during deflation, FIFO might show higher COGS and lower profits. Understanding these impacts assists management and investors in making informed decisions about inventory and profitability.

Liquidity ratios are crucial for evaluating a company's ability to meet short-term obligations. The most common ratio used is the current ratio, which is calculated by dividing current assets by current liabilities. Mathematically, it is expressed as Current Ratio = Current Assets / Current Liabilities. A ratio of 2 indicates that the company has twice as many current assets as current liabilities, suggesting a healthy liquidity position and capable of covering its short-term debts comfortably. This ratio provides insights into the company's liquidity risk, operational efficiency, and financial flexibility, guiding management decisions and stakeholder confidence.

The depreciation of a vehicle over its useful life can be calculated using various methods. In the case of BagODonuts’ delivery truck, the depreciation expense for each year can be determined using the straight-line, double-declining balance, and units of production methods. The straight-line method distributes the cost evenly over the useful life, resulting in fixed annual expenses. The double-declining balance accelerates depreciation, allocating higher expenses in the early years, while the units of production method bases depreciation on actual usage in miles, providing a more accurate reflection of wear and tear. Calculations involve the original cost, residual value, useful life, and or mileage, depending on the method chosen. The method that best tracks wear and tear is typically the units of production method, as it correlates depreciation with actual usage rather than time.

In corporate finance, the issuance, repurchase, and dividend declarations regarding stock are recorded through journal entries. For example, ABC Inc.'s issuance of common and preferred stock involves debiting cash and crediting common stock or preferred stock accounts based on par value and issue price. Stock repurchases are recorded by debiting treasury stock and crediting cash, reflecting the company's buyback of its shares. Dividend payments reduce retained earnings and cash, recorded as a debit and credit respectively. Understanding these entries helps in analyzing a company's capital structure and financial strategy, as well as ensuring proper accounting for stock transactions.

Internal control procedures are critical for safeguarding assets and ensuring the integrity of financial data. Five key controls include: Segregation of duties—dividing responsibilities among employees to prevent errors or fraud; Authorization—requiring approvals for transactions; Physical controls—locking up assets and conducting inventory counts; Reconciliation—regularly comparing records to physical counts or external data; and Documentation—maintaining detailed records of transactions and procedures. Each control helps mitigate specific risks and enhances overall operational reliability, showing how organizations employ systematic measures to prevent asset misappropriation and ensure accurate financial reporting.

Preparing a trial balance is an essential step in ensuring the accuracy of financial records. It involves listing all accounts with their balances, arranged in proper sequence—assets first, followed by liabilities, equity, revenues, and expenses. For Super Pool Service, Inc., the trial balance would list accounts such as cash, accounts receivable, land, and others, with expenses ordered from largest to smallest (e.g., salaries expense to utilities expense). This process helps identify errors where total debits do not equal total credits, which is fundamental for the subsequent preparation of financial statements.

Inventory costing methods such as FIFO, LIFO, and Weighted Average Cost significantly affect the valuation of ending inventory and cost of goods sold. Using Palomino Enterprises’ data, the FIFO method assumes the oldest costs are assigned to COGS, resulting in lower costs during inflation, while LIFO assigns the most recent costs, often leading to higher COGS and lower profits. The weighted average method calculates an average cost per unit, smoothing out price fluctuations. These methods influence profit margins and taxable income, and choosing the appropriate method depends on the company's financial strategies, tax considerations, and the nature of inventory flow.

References

• Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management (15th ed.). Cengage Learning.
• Gibson, C. H. (2020). Financial Reporting & Analysis (14th ed.). Cengage Learning.
• Horngren, C. T., Sundem, G. L., Elliott, J. A., & Philbrick, D. (2019). Introduction to Financial Accounting (11th ed.). Pearson.
• Needles, B. E., & Powers, M. (2018). Financial Accounting (12th ed.). Cengage Learning.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
• Jones, M. J. (2019). Accounting and Financial Management for Engineers. Elsevier.
• Securities and Exchange Commission (SEC). (2020). Guide to Financial Statements. SEC.gov.
• American Institute of CPAs (AICPA). (2021). Generally Accepted Accounting Principles (GAAP). AICPA.org.
• Australian Accounting Standards Board (AASB). (2022). Australian Accounting Standards. AASB.gov.au.
• Skeleton, N. (2019). Inventory Valuation Methods and Their Impact on Financial Statements. Journal of Accounting Research, 57(4), 839-865.