GAAP accounting Assignment Answer

Q2-1. The balance sheet consists of assets, liabilities, and equity. Define each category and provide two examples of accounts reported within each category.

Solution:

• A company's assets are the resources it owns or controls. Assets are projected to deliver economic advantages in the future. Assets are the result of previous events or transactions. 
• A liability is a commitment that will need a financial sacrifice in the future.
• The difference between assets and liabilities is known as equity. It expresses the owners' claims to the company's profits and assets.

Some examples of each are as follows:

Assets- Cash, Receivables, Inventories,

Liabilities- Account Payable, Long-Term Debts.

Equity- Retained Earnings, treasury

Q2-3. GAAP is based on the concept of accrual accounting. Define and describe accrual accounting.

Revenues are recorded when they are generated, and costs are recorded when they are incurred, according to accrual accounting. When evaluating whether things are revenues or costs, accrual accounting does not use cash flows. This is why cash from operations differs from net income (a GAAP measure). It's about tying income and costs together. As a result, with accrual accounting, it makes no difference when money is received or paid.

Q2-6. What does the concept of liquidity refer to? Explain.

Liquidity refers to how easily a security may be bought or sold in the market at a price that reflects its present worth. In banking, liquidity refers to how easily a security or asset may be exchanged into cash at current price. The capacity of a corporation to pay off short-term commitments, such as accounts receivable, that are due in less than a year, is referred to as liquidity. The capacity of an organization to pay its long-term responsibilities is referred to as solvency. When considering whether to lend or invest money in a company, investment firms consider liquidity.

Q2-8. Assets are recorded at historical costs even though current market values might, arguably, be more relevant to financial statement readers. Describe the reasoning behind historical cost usage.

Historical costs are used by GAAP because they are less subjective than market prices. True market value can be skewed for two reasons: first, we may not be capable of measuring them (consider our inability to accurately determine the market value of a manufacturing facility), and second, managers may intervene in the reporting process to purposefully skew the results to meet a specific goal (like enhancing the stock price)

Q2-10. How does the quick ratio differ from the current ratio?

Quick and current ratios are liquidity measures that investors and analysts use to determine a company's capacity to satisfy short-term commitments. The current ratio is calculated by subtracting current assets from current liabilities. Only highly liquid assets or cash equivalents are counted as current assets in the fast ratio.

Q2-12. Define net working capital. Explain how increasing the amount of trade credit can reduce the net working capital for a company.

Working capital is used to fund operations and pay off short-term debt. Even if it runs into cash flow problems, a firm with sufficient working capital may continue to pay its workers and suppliers, as well as satisfy other commitments like as interest payments and taxes. Trade credit is a short-term B2B lending option that may help you free up operating cash and fund expansion. However, if you have a trade credit arrangement in place, you may acquire the items right away but keep your money it until payment is due, which could be days or weeks later. As a result, if you sell before that period, you will receive money before it can be spent.

Mini-exercises 27 & 28:

M2-27. Constructing a Retained Earnings Reconciliation from Financial Data

Following is financial information from Johnson & Johnson for the year ended December 31, 2017. Prepare the 2017 fiscal-year retained earnings reconciliation for Johnson & Johnson ($ millions).

The 2017 fiscal-year retained earnings reconciliation for Johnson & Johnson ($ millions).

M2-28. Analyzing Transactions to Compute Net Income

Guay Corp., a start-up company, provided services that were acceptable to its customers and billed those customers for $350,000 in 2018. However, Guay collected only $280,000 cash in 2018, and the remaining $70,000 of 2018 revenues were collected in 2019. Guay employees earned $200,000 in 2018 wages that were not paid until the first week of 2019. How much net income does Guay report for 2018? For 2019 (assuming no new transactions)?

Solution:

According to the revenue recognition principle, all income is recognized in 2018 when services are rendered. Similarly, the expenditure is recorded in 2018 when it is incurred, because the income was generated by incurring a liability. The recording of revenues, costs, and net income is unaffected by the timing of cash collections or payments.

Problem 59: Analyzing and Interpreting Balance Sheet Data and Interpreting Liquidity Measures. Selected balance sheet amounts for Apple Inc., a retail company, for four recent fiscal years follow:

1. a) Compute the missing balance sheet amounts for each of the four years shown.

The changes missing entries are highlighted in yellow

1. b) What asset category would you expect to constitute the majority of Apple’s current assets? Of its long-term assets?

Cash and Cash equivalent of the apple’s current assets is expected to have majority of apple current assets.

1. c) Is the company conservatively financed; that is, is it financed by a greater proportion of equity than of debt?

Yes, Apple is Financed well as its financial structure can be measured by the addition of Assets and Liability which is known as Equity. During year 2014 it was $1,11,547, 2015-119355, 2016-5151230, and 2017-134047. No, the company have more liabilities than its equity.

2017. d) Calculate the current ratio for 2014 and 2017.

Current ratio= current Assets / Current Liabilities

2. e) Assume the industry average is 2.0 for the current ratio. Comment on Apple’s current ratio relative to the industry.

The Industry Average is 2.0 which is considered as a good Industry Average as good industry Average. The good current ratio lies between 1.5 to 3 which means that the business has liquidity in sufficient way.