Sunday, July 8, 2012

Accounting Cycle Multiple Choice Question

Which of these statements related to the accounting cycle are incorrect?

a. Reported financial statements are generally produced from the accounting worksheet.
b. A post-closing trial balance is prepared prior to closing temporary journal accounts.
c. Accounting Adjusting entries are recorded in the accounting  journal and then they are posted to the general ledger.
d. The post-closing trial balance is prepared by an accountant who examines the ledger balances subsequent to the closing of these accounts.

Accounting Answer:

B as the post closing trial balance is the last step in the cycle and is prepared to prove the equality of permanent accounts (Assets - Liabilities-Owner's Equity"Capital")

Saturday, July 7, 2012

Calculate Present Value of Security

How to calculate the present value of a security held for investment purposes:

What is the present value of an investment  security that will pay $5,000 in 20 years if securities of equal risk available on the market pay 7% annually?  


Future Value   =          $5,000
Years               =          20
Discount %      =          7%

Use the following equation to calculate present value:

Present Value =          Future Value X (Present Value Interest Factor (PVIF) )
                        =          $5,000             X (1/1.07) ^ 20 years
                        =          $5,000 X 0.258
                        =          $1,290

Friday, July 6, 2012

Equity Multiplier Total Assets Turnover

A manufacturing company has a Return on assets (ROA) of 10%, a 2% Profit Margin (PM), and a return on equity (ROE) that is  equal to 15%. 

Answer the following accounting questions with the above information:

What is the company’s total assets turnover? 
What is the firms Equity Multiplier?

Accounting Answer:

Return on Equity (ROE)    =  15%
Return on Assets        =          10%
Profit Margin              =          2%
Equity Multiplier       =          Need to Solve for 
Total Assets Turnover           =    Need to Solve for 

Use the following accounting equations and financial ratios:

Return on Equity (ROE)   =          Return on Assets (ROA)  X Equity Multiplier
15%                                 =          10% * E.M

Equity Multiplier            =               15/10   =          1.5
Return on Assets (ROA)   =          Proft Margin X Total Assets Turnover
10%                                   =          2%  X Total Assets Turnover
Total Assets Turnover       =          10/2     =          5

Wednesday, July 4, 2012

Tax Earned Journal Entry

What is the correct journal entry for tax on interest earned into the general ledger?

If the tax is $20 then the correct journal entries for entering the tax are:

DEBIT: Interest Payable Account $10
CREDIT: Cash $10.

If there is interest in the bank statement not yet recorded in the cash accounting ledger and for example it is $50, use the following journal entries to make the correction:

DEBIT: Cash (Cash-book) $50
CREDIT: Interest Received Account $50.

Debt Ratio Equity Multiplier

A small manufacturing company has an equity multiplier of 2.5. All of the manufacturing company’s assets are financed by a bank with a combination of long-term debt and equity.

Calculate the company’s debt ratio using this accounting information?

Accounting Answer:

If company has an equity multiplier of 2.5, this means that the company has $2.5 of asset against every dollar of equity that is issued in the form of common stock.

The first step is to calculate the Equity Ratio of the company:

Formula of Equity Ratio is : 1/Equity Multiplier

Equity Ratio = 1 / 2.5 = 0.40 = 40%

Therefore, if the company's assets are 40% financed by common equity, then the remaining 60% of assets are financed by debt, thus debt equity ratio will be 0.60 or 60%. That is the correct answer to the accounting problem.

Monday, July 2, 2012

Market to Book Ratio Formula

A retailer currently values its stock price at  $75 per share.This large retailer has $10 billion in total assets. 

To get more detailed, its balance sheet currently shows $1 billion in current liabilities, $3 billion in long-term debt, and finally $6 billion in common equity outstanding.

The retailer also has 800 million shares of common stock currently outstanding. What is the retailers market value- to-book ratio? Calculate this ratio using the above information. 

Accounting Answer:

Market to Book Ratio Formula Market Value Per Share/(Common Equity/Outstanding Shares)

FMV of Stock Price  =  $75
Common Equity of retailer =  $6,000,000,000
Current Outstanding Shares  =  800 Million

Next step, plug the numbers into the formula described above for Market/Book Ratio:

= Market value per share/ (Common Equity/Outstanding Shares)
= $75/($6,000,000,000/$800,000,000)
= $75/7.5

Answer to Accounting Problem: Market to Book Ratio = 10

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.