What Is Meant By A Classified Balance Sheet

What Is Meant By A Classified Balance Sheet

1. What is meant by a classified balance sheet? 2. Why do we record accounts receivable on the balance sheet at net realizable value? 3. Which is required by GAAP, the direct write-off method or the allowance method for accounting for receivables? 4. Why is it important for the company to focus on improving the accounts receivable turnover ratio (why do they want to collect receivables as quickly as possible)? 5. There are two methods for calculating the allowance account, percent of sales and aging of accounts receivable. Briefly describe the difference between these two methods. Nassau Auto Parts sells new and used auto parts. Although a majority of its sales are cash sales, it makes a significant amount of credit sales. During 2013, its first year of operations, Dixie Auto Parts experienced the following: Sales on account $ 275,000 Beginning accounts receivable balance 550,000 Collections of accounts receivable 368,000 Uncollectible accounts charged off during the year 1,200 Beginning allowance for uncollectible accounts balance 14,500 Assume that Dixie Auto Parts uses the allowance method of accounting for bad debts and estimates that 1% of its sales on account will not be collected a. What is the Accounts Receivable balance at December 31, 2013? b. What is the ending balance of Allowance for Uncollectible Accounts (Allowance for Doubtful Accounts) at December 31, 2013, after all entries and adjusting entries are posted (the adjustment for bad debt expense for 2013)? c. What is the amount of bad debts expense recorded for 2013? d. What is the net realizable value of accounts receivable at December 31, 2013? 6. Asset purchase price less salvage value = the ____________ base of the asset. 7. What is the difference between a tangible and intangible asset? 9. True or False – It is legal for companies to use one depreciation method for their financial statements and a different form of depreciation for tax purposes. 10. Why do companies depreciate assets (why is the asset not all expensed immediately)? 11. Name the 3 methods companies can use to depreciate assets. 12. Do companies depreciate the following (yes or no)? Land Autos Building Goodwill Patent 13. Which of the following items should be classified as long-term operational assets? a. Accounts Receivable b. Building c. Office equipment d. Cash e. Supplies f. g. Delivery van h. Computer i. Inventory j. Patent 14. Identify each of the following long-term operational assets as either tangible (T) or intangible (I). a. Pizza oven b. Land c. Goodwill d. Filing cabinet e. f. Silver mine g. Office building h. Drill press i. Patent j. Desk 15. Pine Logging Co. purchased an electronic saw to cut various types and sizes of logs. The saw had a list price of $160,000. The seller agreed to allow a 5 percent discount because Pine paid cash. Delivery terms were FOB shipping point. Freight cost amounted to $4,200. Pine had to hire an individual to operate the saw. Pine had to build a special platform to mount the saw. The cost of the platform was $2,500. The saw operator was paid an annual salary of $65,000. Additionally, the cost of the company's theft insurance policy increased by $2,000 per year as a result of the acquisition of the saw. The saw had a four-year useful life and an expected salvage value of $10,000. Determine the amount to be capitalized in an asset account for the purchase of the saw (what amount should be reported in the saw asset account?). 16. Keenum Company purchased a restaurant building, land, and equipment for $900,000. Keenum paid cash for the purchase. The appraised value of the assets was as follows: Land $ 240,000 Building 600,000 Equipment 360,000 Total $ 1,200,000. Compute the amount to be recorded on the books for each of the assets. 17. What is the difference between capitalization of an asset cost and an ordinary operating and maintenance expense? 18. Southwest Sand and Gravel paid $850,000 to acquire 1,500,000 cubic yards of sand reserves. The following statements model reflects Southwest's financial condition just prior to purchasing the sand reserves. The company extracted 540,000 cubic yards of sand in year 1 and 480,000 cubic yards in year 2. a. Compute the depletion charge per unit. b. Record the acquisition of the sand reserves and the depletion entry for year 1 in journal entry form. 19. The following normal balances appear on the adjusted trial balance Equipment $75,000 Accumulated depreciation $15,000 Depreciation expense $5,000. The amount recorded on the balance sheet as original asset cost is a. $75,000 b. $70,000 c. $5,000 d. $60,. Refer to the data in 19. The amount that would be the Net Book Value of the asset is e. $75,000 f. $70,000 g. $5,000 h. $60,. Refer to the data in 19. The amount that would be expensed on the income statement for the current year is: i. $75,000 j. $70,000 k. $5,000 l. $60,. Chase Corporation borrowed $90,000 from the bank on November 1, 2012. The note had a 7% annual rate of interest and matured on April 30, 2013. Interest and principal were paid in cash on the maturity date. a. What amount of interest expense was paid in cash in 2012? b. What amount of interest expense was reported in the 2012 income statement? c. What total amount of cash was paid to the bank on April 30, 2013 for principal and interest? 23. What is treasury stock? Why would a company purchase treasury stock? 24. Fowler Corp. has the following stock outstanding: - Preferred stock , cumulative, 5%, $10 par, 10,000 shares - Common stock, $10 par, 20,000 shares Dividends have not been paid in 2 years. In the current year, the board of directors declared dividends of $25,000. How much money in dividends will each class of stock receive? 25. Assume that JB Inc. issues 100 shares of common stock with a par value of $10 per share at a price of $22 per share. Record the transaction in journal entry format. 26. What are the 3 main dates associated with issuing dividends? What are they and which dates require journal entries? 27. What happens to the number of shares in a 2 for 1 stock split? What happens to the market price? Assume there were 20,000 shares of $100 par value common stock selling for $400 each. 28. Why would a company issue a stock dividend vs. paying a cash dividend? 29. Why are dividends not considered expenses? 30. What is the difference between operating, investing and financing activities of a business? Provide an example for each area. 31. What are the 2 acceptable formats for preparing the statement of cash flows? How do they differ? 32. Tony B’s Pizza purchased a delivery van for $25,000. The useful life is estimated to be 5 years or 100,000 miles. The salvage value is estimated to be $5,000. a. Compute the annual depreciation amount for the first year using straight line depreciation. b. Compute the annual depreciation amount for the first year using units of production (assuming the actual miles for year 1 were 17,000). c. Compute the annual depreciation amount for the first year using double declining balance. 33. If the stated rate of a bond is issued above market rate it is issued at a ______________. 34. If the stated rate of a bond is issued below market rate it is issued at a ______________. 35. Current assets of Next Clothing are $250,000 and current liabilities are $150,000. Compute the current ratio. What does this ratio tell us?

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The classified balance sheet is a financial statement that organizes a company's assets, liabilities, and equity into specific categories to provide clearer insight into its financial position. Assets and liabilities are divided into current and non-current (or long-term) categories, which enhances the understanding of liquidity and financial flexibility. Current assets are items like cash, accounts receivable, inventory, and prepaid expenses that are expected to be converted into cash or used within one year, while non-current assets include property, plant, equipment, intangible assets, and long-term investments. This classification facilitates better analysis by investors, creditors, and management, allowing more effective assessment of a company's short-term liquidity and long-term solvency (Kieso, Weygandt, & Warfield, 2019).

Account receivable is recorded on the balance sheet at net realizable value because this amount reflects the expected cash inflow from collections, considering potential uncollectible accounts. It aligns with the conservative accounting principle, ensuring assets are not overstated, which would mislead users. The net realizable value is the gross accounts receivable minus an allowance for doubtful accounts, which estimates the amount unlikely to be collected (Gibson, 2017).

Generally Accepted Accounting Principles (GAAP) require the allowance method for accounting for receivables, as it provides a more accurate and matching recognition of bad debts. The direct write-off method is rarely accepted because it does not estimate bad debts in the same period as revenue recognition and may significantly distort receivables and net income.

Improving the accounts receivable turnover ratio is crucial for companies because it indicates how efficiently receivables are collected. A higher ratio means quicker collection, which improves cash flow, reduces the risk of bad debts, and minimizes the amount of capital tied up in receivables. Effective management of receivables ensures sufficient liquidity to meet operational needs and investment opportunities (Brigham & Ehrhardt, 2017).

The allowance for uncollectible accounts can be estimated using the percent of sales method or the aging method. The percent of sales method applies a fixed percentage to sales to estimate bad debts, focusing on income statement impacts. Conversely, the aging method involves analyzing the receivables based on how long they have been outstanding, allowing a more precise estimate of uncollectible amounts by categorizing receivables into different aging periods. The aging method is typically considered more accurate because it reflects the actual condition of receivables (Hansen & Mowen, 2020).

In 2013, Dixie Auto Parts's accounts receivable balance at year-end can be calculated by adding sales on account to the beginning receivables, then subtracting collections and charge-offs. For the year, the calculation would be:

Accounts Receivable = Beginning Accounts Receivable + Sales on Account - Collections - Charge-offs

= $550,000 + $275,000 - $368,000 - $1,200

= $455,800

The ending balance of the allowance account is based on estimated uncollectible receivables, which is 1% of sales:

Bad Debt Expense = 1% of $275,000 = $2,750

Considering the beginning allowance of $14,500, charge-offs of $1,200, and the bad debt expense:

Allowance for Uncollectible Accounts (end) = Beginning Allowance + Bad Debt Expense - Charge-offs

= $14,500 + $2,750 - $1,200

= $16,050

The net realizable value of accounts receivable is:

Net Accounts Receivable = Accounts Receivable - Allowance for Doubtful Accounts

= $455,800 - $16,050

= $439,750

The asset base of an asset, often referred to as the capitalized cost, is calculated as the purchase price minus salvage value; this reflects the depreciable amount of the asset (Khan & Jain, 2016).

A tangible asset is a physical asset such as machinery, land, or equipment, while intangible assets lack physical substance and include goodwill, patents, trademarks, and copyrights. The crucial distinction lies in physical presence—tangible assets are physical, whereas intangible assets are legal or intellectual rights (Arnold, 2019).

GAAP allows companies to use different depreciation methods for financial reporting and tax purposes, such as straight-line versus accelerated methods, provided disclosure is adequate and the methods are consistent within each framework. This flexibility helps optimize tax benefits and accurately reflect asset usage (FASB, 2020).

Depreciation spreads the cost of an asset over its useful life because assets provide benefits over multiple periods, and immediate expensing would distort income. Depreciating assets ensures matching costs with revenues, providing a more accurate picture of profitability (Ross, Westerfield, & Jaffe, 2020).

The three main methods for depreciating assets are straight-line, units of production, and declining balance (which includes double declining balance). The straight-line method allocates equal expense each period; units of production bases depreciation on usage; declining balance accelerates depreciation in the earlier years (Warren, Reeve, & Duchac, 2019).

Land is not depreciated because it has an indefinite useful life, whereas autos, buildings, goodwill, and patents are depreciated or amortized due to wear, obsolescence, or legal life limits (Kieso et al., 2019).

Classifying assets involves understanding their nature. Long-term operational assets generally include buildings, land, delivery vans, and office equipment, as they are used in operations over several years, whereas accounts receivable, cash, and supplies are not considered long-term operational assets (Gibson, 2017).

Tangible long-term operational assets are physical assets like pizza ovens, land, and drill presses, whereas intangible assets include goodwill and patents, which are non-physical rights or incorporations of ideas. For example, a pizza oven is tangible, while goodwill is intangible (Arnold, 2019).

In the example of Pine Logging, the cost to capitalize includes the purchase price minus the discount, freight costs, and expenses directly attributable to preparing the asset for use, such as building a platform, while salaries or insurance costs unrelated to acquisition are usually expensed (Khan & Jain, 2016). The calculated amount to record as the asset would include the price less discount plus delivery and platform costs.

Keenum Company's purchase price allocation based on appraised values involves allocating the total purchase price proportionally to each asset's fair value. For example, Land’s fair value is $240,000 out of $1,200,000 total, so book value = ($240,000/$1,200,000) * $900,000 = $180,000. Similar calculations are made for building and equipment (Brigham & Ehrhardt, 2017).

Capitalization involves recording the cost of acquiring an asset to balance sheet accounts, while operating and maintenance expenses are recognized immediately on the income statement, as these do not extend the asset's useful life or improve it significantly.

Depletion is similar to depreciation but applies to natural resources like reserves of sand. The depletion charge per unit equals the cost divided by total units. Recording involves debiting depletion expense and crediting accumulated depletion for the extracted units.

The book value of equipment is calculated by subtracting accumulated depreciation from the original cost. Here, it’s $75,000 - $15,000 = $60,000, which is the net book value and the amount on the balance sheet. The depreciation expense for the year is $5,000, reflecting the period’s expense (Kieso et al., 2019).

Regarding Chase Corporation's interest, the interest paid in 2012 is based on the duration from November 1 to December 31, which is two months. The annual interest is 7% of $90,000, so:

Interest = $90,000 7% (2/12) = $1,050.

The total interest expense for 2012 considers the accrued interest over the period, while the cash paid at maturity includes interest for the entire period up to April 30, 2013.

Treasury stock refers to shares that a corporation repurchases from the marketplace. Companies buy treasury stock to reduce the number of outstanding shares, increase earnings per share, or have shares available for employee compensation plans (FASB, 2020).

Fowler Corp.’s dividends are allocated proportionally based on cumulative preferred and common stock. The preferred stock receives dividends first at 5% of $10 par, accumulated for two years, totaling $1 per share per year. Since dividends are $25,000, preferred stock would receive:

Preferred dividend = 10,000 $1 2 = $20,000,

Remaining dividend for common stock = $5,000.

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The classified balance sheet is an essential financial statement that categorizes a company's assets, liabilities, and equity into manageable and meaningful sections to facilitate better analysis. By dividing assets and liabilities into current and long-term categories, stakeholders gain clearer insights about a company's liquidity and solvency capabilities. Current assets include items like cash, accounts receivable, inventory, and prepaid expenses, which are expected to be converted to cash or utilized within one year. Long-term assets, on the other hand, encompass property, plant, equipment, intangible assets, and other investments that have useful lives extending beyond a year. This classification helps in assessing a company's ability to meet short-term obligations and plan for long-term growth (Kieso, Weygandt, & Warfield, 2019).

Accounts receivable is recorded at net realizable value because it represents an estimate of the cash inflow that a company expects to collect from its customers. The rationale for this approach stems from conservative accounting principles, which aim to avoid overstating assets and income. This involves deducting an allowance for doubtful accounts from the gross receivables to arrive at net realizable value, reflecting a more realistic picture of expected cash collections (Gibson, 2017). The allowance for doubtful accounts is estimated using methods such as percentage of sales or aging of receivables, with the latter often providing a more precise estimate based on the receivables' aging categories.

GAAP mandates the use of the allowance method for accounting for uncollectible accounts because it aligns expenses with the revenue generated in the same period. This method estimates bad debts expense at the end of each period by analyzing receivables, thereby matching costs and revenues more accurately. The direct write-off method, which recognizes bad debts only when specific accounts are deemed uncollectible, is generally not accepted for financial reporting because it can distort financial statements and violate the matching principle (Hansen & Mowen, 2020).

Improving the accounts receivable turnover ratio is vital as it directly impacts a company's liquidity position. A higher turnover ratio indicates efficient collection processes,