Chap_2_Ae

CHAPTER 2 - SOLUTIONS TO APPLICATION EXERCISES 1. 2. 3. $82,000 Cost principle Materiality principle There are multiple correct answers for this question. Below are a few examples. Cash Flow from Operations Cash inflow – Increase in accrued payroll Cash outflow – Increase in accounts receivables Cash Flow from Investing Activities Cash inflow – Sale of long-term investments Cash outflow – Purchase of furniture, fixtures, and equipment Cash Flow from Financing Activities Cash inflow – Increase in owner’s equity Cash outflow – Payment of long-term debt Depreciation expense will reduce income but uses no cash; therefore, it must be added back on the statement of cash flow. The amortization expense account will be treated the same as the depreciation expense account and added back on the statement of cash flow. Cash outflow Cash outflow Cash Flow from Investing Activities The first step is to calculate the amount estimated to be uncollectible. $12,600 X 1.0% = $126 $7,000 X 1.5% = $105 $1,350 X 10% = $135 $875 X 20% = $175 $2,270 X 50% = $1,135 The second step is to add up the estimated uncollectible amounts to determine the total. $126 + $105 + $135 + $175 + $1,135 = $1,676 Advantages There are no surprises created by invoices arriving late, monthly journal entries, and special adjusting entries involving expenses booked by the accounting department. Payroll costs are controlled daily, allowing management to make changes in the weekly staffing schedule before it is too late. Management can utilize financial flexing if actual revenues are running behind forecast. This system focuses on teamwork, encouraging department heads to step in and assist in helping the hotel meet cash flow goals for the month. The interests of the management team and ownership are aligned because both groups are clearly focused on achieving budgeted cash flow each month. This system provides timely financial data which allows management to react to problems without delay. Disadvantages This system requires detailed financial reports which can be time-consuming to produce. Management in a department with weak financials may find additional pressure from their colleagues. 4. 5. 6. 7. 8. 9. 10. According to the revenue recognition principle Esther should not record the $9,000 revenue entry in June. The revenue recognition principle states that revenues should be recorded in the month they are earned, not when the contract is signed. Students should download and turn in a copy of the latest quarterly filing from a hospitality company.