Error Correction – The bookkeeper of the Cask Company, who has maintained its accounting records since the company’s formation in January 2005, has prepared the unaudited financial statements. In your examination of these statements at the end of 2007, you discover the following items: 1. Sales taxes collected from customers have been included in the sales account. The Sales Tax Expense account is debited when […]

Comprehensive – The financial statements of the Gray Company showed income before income taxes of $4,030,000 for the year ended December 31, 2008, and $3,330,000 for the year ended December 31, 2007. Additional information is as follows: 1. Capital expenditures were $2,800,000 in 2008 and $4,000,000 in 2007. Included in the 2008 capital expenditures is equipment purchased for $1,000,000 on January 1, 2008, with no […]

Comprehensive – The Ingalls Corporation is in the process of negotiating a loan for expansion purposes. The books and records have never been audited, and the bank has requested that an audit be performed. Ingalls has prepared the following comparative financial statements for the years ended December 31, 2008 and 2007: Balance Sheet As of December 31, 2008 2007 Assets Current assets Cash $163,000 $82,000 […]

Identification and Accounting for Changes and Errors – The following are several independent events: 1. A partnership is preparing to become a corporation and sell stock to the public. At this time, it is decided to switch from accelerated to straight-line depreciation. 2. A company has been debiting half its advertising costs to an intangible asset account and amortizing these costs over three years. 3. […]

Accounting Changes – The various types of accounting changes may significantly affect the presentation of a company’s financial statements, and also affect the trends shown in its comparative financial statements and historical summaries. Required 1. Explain a change in accounting principle and how a company reports it in the period of the change. 2. Explain a change in accounting estimate and how a company reports […]

Change in Inventory Cost Flow Assumption – At the beginning of 2008 the Brett Company decided to change from the FIFO to the average cost inventory cost flow assumption for financial reporting purposes. The following data are available in regard to its pretax operating income and cost of goods sold: Year Reported IncomeBefore Income Taxes Excess of Average Cost of Goods Sold Over FIFO Cost […]

Accounting Changes – Berkeley Company, a manufacturer of many different products, changed its inventory method from FIFO to LIFO. The LIFO method was determined to be preferable. In addition, Berkeley changed the residual values used in computing depreciation for its office equipment. It made this change on January 1, 2007 because it obtained additional information. On December 31, 2007, Berkeley changed the specific subsidiaries comprising […]

Change in Inventory Cost Flow Assumption – The Berg Company began operations on January 1, 2007 and uses the FIFO method in costing its raw material inventory. During 2008 management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed: 2007 2008 FIFO—Ending inventory $240,000 […]

Accounting Changes – Sometimes a business entity may change its method of accounting for certain items. It may classify the change as a change in accounting principle, a change in accounting estimate, or a change in reporting entity. The following are three independent, unrelated sets of facts relating to accounting changes. Situation I A company determined that the depreciable lives of its fixed assets are […]

Comprehensive – Angel Company has prepared its financial statements for the year ended December 31, 2007 and for the three months ended March 31, 2008. You have been asked to prepare a statement of cash flows for the three months ended March 31, 2008. The company’s balance sheet data at December 31, 2007 and March 31, 2008, and its income statement data for the three […]