Listed below are eight technical accounting terms introduced in this chapter.

$$\begin{array}{lll}\text { Retail method } & \text { FIFO method } & \text { Lower-of-cost-or-market } \\ \text { Gross profit method } & \text { LIFO method } & \text { Specific identification } \\ \text { Flow assumption } & \text { Average-cost method } & \end{array}$$

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if the statement does not correctly describe any of the terms.
d. The most conservative of the flow assumptions during a period of sustained inflation.

Holcomb Company reported these income statement data for a 2-year period.

$$\begin{array}{lcc} &\underline{\textbf{2014}}&\underline{\textbf{2013}}\\[3pt] \text{Sales revenue}&\underline{\text{\$\hspace{1pt}250,000}}&\underline{\text{\$\hspace{1pt}210,000}}\\ \text{Beginning inventory}&\text{\hspace{10pt}40,000}&\text{\hspace{10pt}32,000}\\ \text{Cost of goods purchased}&\underline{\text{\hspace{5pt}202,000}}&\underline{\text{\hspace{5pt}173,000}}\\ \text{Cost of goods available for sale}&\text{\hspace{5pt}242,000}&\text{\hspace{5pt}205,000}\\ \text{Less: Ending inventory}&\underline{\text{\hspace{10pt}55,000}}&\underline{\text{\hspace{10pt}40,000}}\\ \text{Cost of goods sold}&\underline{\text{\hspace{5pt}187,000}}&\underline{\text{\hspace{5pt}165,000}}\\ \text{Gross profit}&\underline{\underline{\text{\$\hspace{5pt}63,000}}}&\underline{\underline{\text{\$\hspace{5pt}45,000}}}\\ \end{array}$$

Holcomb Company uses a periodic inventory system. The inventories at January 1, 2013, and December 31, 2014, are correct. However, the ending inventory at December 31, 2013, is overstated by $8,000.

Instructions

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Following is an excerpt from a city’s General Fund statement of revenues, expenditures, and changes in fund balance. Calculate the numerator of the city’s operating margin. State the factors you considered in making your calculation.

$$\begin{array}{lrr} \text{Revenues}&\text{\$\hspace{5pt}670,000}\\ \text{Expenditures}&\underline{\text{\hspace{10pt}640,000}}\\ \text{Excess of revenues over expenditures}&\text{\$\hspace{10pt}30,000}\\ \text{Other financing sources (uses):}\\ \hspace{10pt}\text{Transfer in from closed Special Revenue Fund}\hspace{10pt}&{\text{\hspace{15pt}50,000}}\\ \hspace{10pt}\text{Proceeds from sale of capital assets}&\underline{\text{\hspace{15pt}40,000}}\\ \text{Net change in fund balance}&\text{\underline{\underline{\$\hspace{5pt}120,000}}}\\ \end{array}$$

The income statement and additional data of One Stop, Inc., follow:

$$\begin{aligned} &\begin{array}{l|r|r|} \hline \text { Revenues: }\\ \hline \text { Sales revenue } & \$ 265,000 & \\ \hline \text { Dividend revenue } & 11,000 & \$ 276,000 \\ \hline \text { Expenses: } & & \\ \hline \text { Cost of goods sold } & 109,000 & \\ \hline \text { Salary expense } & 52,000 & \\ \hline \text { Depreciation expense } & 32,000 & \\ \hline \text { Advertising expense } & 7,000 & \\ \hline \text { Interest expense } & 2,500 & \\ \hline \text { Income tax expense } & 11,500 & 214,000 \\ \hline \text { Net income } & & \$ 62,000 \\ \hline \end{array} \end{aligned}$$

Additional data: a. Collections from customers are $15,000 more than sales.
b. Payments to suppliers are$2,300 more than the sum of cost of goods sold plus advertising expense.
c. Payments to employees are $2,300 less than salary expense.
d. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
e. Acquisition of plant assets is$161,000. Of this amount, $133,000 is paid in cash and$28,000 by signing a long-term note payable.
f. Proceeds from sale of land total $25,000.
g. Proceeds from issuance of common stock total$93,000.
h. Payment of a long-term note payable is $29,000.
i. Payment of dividends is$10,000.
j. Cash balance, June 30, 2015, was $42,000.

1. Prepare One Stop, Inc.’s, statement of cash flows and accompanying schedule of noncash investing and financing activities. Report operating activities by the direct method.

2. Evaluate One Stop’s cash flows for the year. In your evaluation, mention all three categories of cash flows and give the reason for your evaluation.

Maria sees the growth of her business for the upcoming year as being tied to the gross domestic product (GDP). She believes that her business will grow (or contract) at the rate of $5 \%, 4.5 \%, 3 \%$, $0 \%$, or $-0.5 \%$ per year if the GDP grows (or contracts) at the rate of between $2 \%$ and $2.5 \%$, between $1.5 \%$ and $2 \%$, between $1 \%$ and $1.5 \%$, between $0 \%$ and $1 \%$, and between $-1 \%$ and $0 \%$, respectively. Maria has decided to assign probabilities of $.12, .24, .40, .20$, and $.04$, respectively, to these outcomes. At what rate does Maria expect her business to grow next year?

How many weeks can a movie run and still make a reasonable profit? The data that follow show the number of weeks in release (x) and the gross to date (y) for the top 12 movies during a recent week.

Movie, Gross to Date ($millions), Weeks in Release

1. The Town, 33.1, 1
2. Easy A, 22.1, 1
3. Resident Evil: Afterlife 3D, 47.1, 2
4. Devom, 15.3, 1
5. Alpha and Omega 3D, 10.4, 1
6. The American, 33.7, 3
7. Takers, 53.3, 4
8. Eat Pray Love, 78.3, 6
9. Inception, 285.8, 10
10. Machete, 25.1, 3
11. The other Guys, 116.0, 7
12. Going the Distance, 17.3, 3

a. Plot the points in a scatterplot. Does it appear that the relationship between x and y is linear? How would you describe the direction and strength of the relationship? b. Calculate the value of$r^2$. What percentage of overall variation is explained by using the linear model rather than$$$\overline{y}$ to predict the response variable y. c. What is the regression equation? Do the data provide evidence to indicate that x and y are linearly related? Test using a 5% significance level. d. Given the results of parts b and c, is it appropriate to use the regression line for estimation and prediction? Explain your answer.

The following spreadsheet can be used to compute total weekly pay, given the hours, hourly rate, and overtime rate.

$$\begin{array}{|c|c|c|c|c|c|c|c|c|} \hline \text{ } & \text{A} & \text{B} & \text{C} & \text{D} & \text{E} & \text{F} & \text{G} & \text{H}\\ \hline \text{ } & \text{ } & \text{ } & \text{ } & \text{ } & \text{ } & \text{Time-and-a-} & \text{ } & \text{ }\\ \text{ } & \text{Hours} & \text{Regular} & \text{Hourly} & \text{Regular} & \text{Overtime} & \text{Half Overtime} & \text{Total Overtime} & \text{Total Gross}\\ \text{1} & \text{Worked} & \text{Hours} & \text{Rate} & \text{Gross Pay} & \text{Hours} & \text{Rate} & \text{Pay} & \text{Pay}\\ \hline \text{2} & \text{42} & \text{40} & \text{16.00} & \text{ } & \text{ } & \text{ } & \text{ } & \text{ }\\ \hline \text{3} & \text{44} & \text{40} & \text{19.00} & \text{ } & \text{ } & \text{ } & \text{ } & \text{ }\\ \hline \text{4} & \text{45} & \text{40} & \text{15.80} & \text{ } & \text{ } & \text{ } & \text{ } & \text{ }\\ \hline \end{array}$$

Write the formula to compute the time-and-a-half overtime hourly rate in cell F2.

Extend the income statement for Miss Muffins' Bakery to include a vertical analysis for $2012$ and for $2013$.

$$\begin{array}{} \text{Miss Muffins' Bakery}\\ \text{Vertical Analysis of Income Statement for the Months Ending}\\ \text{July 31, 2012 and July 31, 2013}\end{array}$$

$$\begin{array}{} &2013& \begin{array}{}\text{Percent of}\\\text{Net Sales}\end{array}& 2012& \begin{array}{}\text{Percent of}\\\text{Net Sales}\end{array}\end{array}$$

$$\begin{aligned} &\text{Gross sales} \\ &\text{Returns and allowances} \\ &\text{Net Sales} &\qquad \underline{\qquad\qquad} \qquad\qquad\quad \underline{\qquad\qquad} \\ &&\quad \underline{\qquad\qquad} \qquad\qquad\quad \underline{\qquad\qquad} \\ &\text{Cost of beginning inventory}\\ &\text{Cost of purchases}\\ &\text{Cost of ending inventory} &\underline{\qquad\qquad} \qquad\qquad\quad \underline{\qquad\qquad} \\ &\text{Cost of goods sold}&\underline{\qquad\qquad} \qquad\qquad\quad \underline{\qquad\qquad} \\ &\text{Gross Proft}\\ &\text{Total perating Expenses}&\quad \underline{\qquad\qquad} \qquad\qquad\quad \underline{\qquad\qquad} \\ &\text{Net income}&\quad \underline{\qquad\qquad} \qquad\qquad\quad \underline{\qquad\qquad} \\\\ \end{aligned}$$

On October 1, 2018, the Marshall Company sold a large piece of machinery to the Hammond Construction Company for $\$ 80,000$. The cost of the machine was $\$ 40,000$. Hammond made a down payment of $\$ 10,000$ and agreed to pay the remaining balance in seven equal monthly installments of $\$ 10,000$, plus interest at $12 \%$ on the unpaid balance, beginning November 1 .

Required:

1. Identify three alternative methods for recognizing revenue and costs for the situation described and compute the amount of gross profit that would be recognized in 2018 using each method.
2. Discuss the circumstances under which each of the three methods would be used.

Cast Iron Grills, Inc., manufactures premium gas barbecue grills. The company uses a periodic inventory system and the LIFO cost method for its grill inventory. Cast Iron’s December 31, 2016, fiscal year-end inventory consisted of the following (listed in chronological order of acquisition): Units 5,000 Unit Cost $700. Units 4,000 Unit Cost$800. Units 6,000 Unit Cost $900. The replacement cost of the grills throughout 2017 was$1,000. Cast Iron sold 27,000 grills during 2017. The company’s selling price is set at 200% of the current replacement cost. Required: 1. Compute the gross profit (sales minus cost of goods sold) and the gross profit ratio for 2017 assuming that Cast Iron purchased 28,000 units during the year. 2. Repeat requirement 1 assuming that Cast Iron purchased only 15,000 units. 3. Why does the number of units purchased affect your answers to the above requirements? 4. Repeat requirements 1 and 2 assuming that Cast Iron uses the FIFO inventory cost method rather than the LIFO method. 5. Why does the number of units purchased have no effect on your answers to requirements 1 and 2 when the FIFO method is used?

Listed below are eight technical accounting terms introduced in this chapter.

$$\begin{array}{lll}\text { Retail method } & \text { FIFO method } & \text { Lower-of-cost-or-market } \\ \text { Gross profit method } & \text { LIFO method } & \text { Specific identification } \\ \text { Flow assumption } & \text { Average-cost method } & \end{array}$$

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if the statement does not correctly describe any of the terms.
b. The only flow assumption in which all units of merchandise are assigned the same per-unit cost.

Lucy Rose works at the College of Fort Worth and is paid $12 per hour for a 40-hour work-week and time-and-a-half for hours above 40.

Requirements

1. Compute Rose's gross pay for working 60 hours during the first week of February.
2. Rose is single, and her income tax withholding is 15% of total pay. Rose's only payroll deductions are payroll taxes. Compute Rose's net (take-home) pay for the week. Assume Rose's earnings to date are less than the OASDI limit.
3. Journalize the accrual of wages expense and the payment related to the employment of Lucy Rose.

For each company, calculate the missing amount.

$$\begin{matrix} \text{Company} & \text{Sales Revenue} & \text{Cost of Goods Sold} & \text{Gross Profit} & \text{Operating Expenses} & \text{Net Income}\\ \hline \text{Lennon} & \text{$\$ 18,000$} & \text{(a)} & \text{$\$ 8,000$} & \text{$\$ 3,500$} & \text{$\$ 4,500$}\\ \text{Harrison} & \text{$20,000$} & \text{$\$ 11,000$} & \text{(b)} & \text{$6,000$} & \text{$3,000$}\\ \text{McCartney} & \text{$13,000$} & \text{$9,000$} & \text{$4,000$} & \text{(c)} & \text{$1,500$}\\ \text{Starr} & \text{$16,000$} & \text{$6,000$} & \text{$10,000$} & \text{$6,500$} & \text{(d)}\\ \end{matrix}$$

Listed below are eight technical accounting terms introduced in this chapter.

$$\begin{array}{lll}\text { Retail method } & \text { FIFO method } & \text { Lower-of-cost-or-market } \\ \text { Gross profit method } & \text { LIFO method } & \text { Specific identification } \\ \text { Flow assumption } & \text { Average-cost method } & \end{array}$$

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if the statement does not correctly describe any of the terms.
a. A pattern of transferring unit costs from the Inventory account to the Cost of Goods Sold that may (or may not) parallel the physical flow of merchandise.