Financial Accounting problems and Solutions

March 30, 2017
Financial Accounting

These sample problems are intended as a supplement to my book Accounting Made Simple: Accounting Explained in 100 Pages or Less.

Chapter 1: The Accounting Equation

Question 1: Define the three components of the Accounting Equation.

Question 2: If a business owns a piece of real estate worth $250, 000, and they owe $180, 000 on a loan for that real estate, what is owners’ equity in the property?

Answer to Question 1:

Assets: All the property owned by a business.
Liabilities: A company’s outstanding debts.
Owners’ Equity: The company’s ownership interests in its property after all debts have been repaid.

Answer to Question 2: $70, 000

Chapter 2: The Balance Sheet

Question 1: Categorize the following accounts as to whether they’re Asset, Liability, of Owners’ Equity accounts.

Common Stock
Accounts Receivable
Retained Earnings
Cash
Notes Payable

Question 2: For each of the following assets or liabilities, state whether it is current or non-current:

Accounts Payable
Property, Plant, and Equipment
Note Payable
Inventory

Common Stock: Owners’ Equity
Accounts Receivable: Asset
Retained Earnings: Owners’ Equity
Cash: Asset
Notes Payable: Liability

Answer to Question 2:

Accounts Payable: current liability
Cash: current asset
Property, Plant, and Equipment: non-current asset
Note Payable: non-current liability (Though if a portion of the note is due within the next twelve months, that portion should be shown as a current liability.)
Inventory: current asset

Chapter 3: The Income Statement

Question 1: Given the following information, calculate ABC Corp’s Net Income:

Sales: $260, 000
Cost of Goods Sold: $100, 000
Salaries and Wages: $20, 000
Rent Expense: $15, 000
Advertising Expense: $35, 000
Cost of repairs resulting from fire: $50, 000

Question 2: Using the above information, calculate ABC Corp’s Operating Income.

Question 3:Using the above information, calculate ABC Corp’s Gross Profit.

Answer to Question 1: $40, 000 (Sales of $260, 000 minus $220, 000 of total expenses.)

Answer to Question 2: $90, 000 (Operating Income is intended to represent income from typical business operations. As a result, expenses resulting from a fire would certainly not be included when calculating Operating Income.)

Answer to Question 3: $160, 000 (Sales minus Cost of Goods Sold)

Chapter 4: The Statement of Retained Earnings

Question 1: Using the following information, calculate the ending balance in Retained Earnings:

Beginning Retained Earnings: $10, 000
Net Income: $5, 000
Dividends Paid: $4, 000

Question 2: Calculate Net Income given the following information:

Consulting Revenue: $50, 000
Rent Expense: $5, 000
Software Licensing Fees: $3, 000
Dividends Paid: $6, 000
Advertising Expense:$20, 000

Question 3: Using the following information, calculate how much was paid out in dividends during the year:

Beginning Retained Earnings: $40, 000
Net Income: $15, 000
Ending Retained Earnings: $30, 000

Answer to Question 1: $11, 000

Answer to Question 2: $22, 000 (Remember, dividends are not an expense! They are a distribution of net income rather than a reduction of net income.)

Answer to Question 3: $25, 000

Chapter 5: The Cash Flow Statement

Question 1: Calculate cash flow from operating activities using the following information:

Cash sales: $10, 000
Credit sales: $15, 000
Cash received from prior credit sales: $8, 000
Rent paid: $3, 000
Inventory purchased: $6, 000
Wages paid:$5, 000

Question 2: Categorize the following cash flows as to whether they are operating, investing, or financing activities:

Taxes paid
Dividends paid to shareholders
Interest paid on loans
Dividends received on investments
Cash sales
Purchase of new office furniture

Answer to Question 1: Net cash inflow of $4, 000. (Remember not to include the $15, 000 of credit sales when calculating cash flow.)

Taxes paid: Operating Activities
Dividends paid to shareholders: Financing Activities
Interest paid on loans: Operating Activities (Note: Principal paid on loans is a financing activity.)
Dividends received on investments: Operating Activities
Cash sales: Operating Activities
Purchase of new office furniture: Investing Activities

Chapter 6: Financial Ratios

Questions 1-3: Use the following income statement and balance sheet to answer the following questions.

Income Statement
Sales		130, 000
Cost of Goods Sold		26, 000
Profit Margin		104, 000

Salaries and Wages		15, 000
Rent Expense		5, 000
Licensing Expenses		20, 000
Advertising Expense		4, 000
Total Expenses		44, 000

Net Income		60, 000


Balance Sheet
Assets
Cash	10, 000
Inventory	15, 000
Property, Plant, and Equipment	250, 000
Accounts Receivable	5, 000
Total Assets	280, 000
Liabilities
Accounts Payable	20, 000
Notes Payable	40, 000
Total Liabilities	60, 000
Owners’ Equity
Common Stock	120, 000
Retained Earnings	100, 000
Total Owners’ Equity	220, 000