Accounting Chapter 2 Flashcards
Consistency
Use of the same accounting principles and methods from year to year within a company.
Classified Balance Sheet
A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.
Current Assets
Assets that companies expect to convert to cash or use up within one year of the operating cycle, whichever is longer.
Current Liabilities
Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.
Earning per share (EPS)
A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the average number of common shares outstanding during the year.
Financial Accounting Standards Board (FASB)
The primary accounting standard-setting body in the United States.
Free cash flow
Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.
Intangible assets
Assets that do not have physical substance
International Accounting Standards Board (IASB)
An accounting standard-setting that issues standards adopted by many countries outside of the United States.
International Financial Reporting Standards (IFRS)
Accounting standards, issued by the IASB, that have been adopted by many countries of the United States.
Long-term Investments
Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company’s operations; and (3) long-term notes receivable.
Long-term liabilities (long-term debt)
Obligations that a company expects to pay after one year.
Operating cycle
The average time required to purchase inventory, sell it on account, and then collect cash from customers - that is- go from cash to cash.
Profitability rations
Measures of the operating success of a company for a given period of time.
Property, plant, and equipment.
Assets with relatively long useful loves that are currently used in operating the business.
Public Company Accounting Oversight Board (PCAOB)
The group charged with determining auditing standards and reviewing the performance of auditing firms.
Ratio
An expression of the mathematical relationship between one quantity and another.
Ratio Analysis
A technique that expresses the relationship among selected items of financial statement data.
Securities and Exchange Commission (SEC)
The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.
Solvency Ratios
Measures of the ability of the company to survive over a long period of time.
Statement of stockholder’s equity
A financial statement that presents the causes of changes to a stockholder’s equity during the period, including those that caused retained earnings to change.
Verifiable
The quality of information that occurs when independent observers, using the same methods, obtain similar results.
A classified balance sheet helps users evaluate:
the company’s ability to pay its debt and the claims of short-term creditors.
A classified balance sheet generally contains the following standard classifications:
Current Assets Long-term Investments Property, Plant, and Equipment Intangible Assets Current Liabilities Long-term Liabilities Stockholder's Equity
Current assets are listed in the order of
In which the company expects to convert them into cash (order of liquidity)
Long-term investments are assets that can be converted into cash within one year.
True
False
True
Examples are investments of stocks and bonds of other corporations
Is Land Depreciated?
No.
What are Intangible Assets?
Rights, privileges, and competitive advantages, they have no physical substance. Examples include:
Franchises, patents, copyrights, and trademarks or trade names.
What are examples of Long-term Liabilities?
Bonds Payable, mortgages payable, long-term notes payable, lease liabilities, and obligations under employee pension plans. Any obligations expected to be paid after one year.
What is the Earnings Per Share (EPS) equation?
EPS= Net Income - Preferred Stock Dividends / Average Common Shares Outstanding
Liquidity is the ability to
…Pay short-term obligations as the come due.
What is the Working Capital equation?
Working Capital = Current Assets - Current Liabilities
What is the Current Ratio equation?
Current Ration = Current Assets / Current Liabilities
What is the Debt to Total Assets Ratio equation?
Debt to total assets ratio = Total Liabilities / Total Assets
_______ ratios measure the ability of a company to survive over a long period of time.
a. Liquidity
b. Solvency
c. Profitability
Solvency
________ ratios measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
a. Liquidity
b. Solvency
c. Profitability
Liquidity
________ rations measure the income or operating success of a company for a given period of time.
a. Liquidity
b. Solvency
c. Profitability
Profitability
Short-term creditors such as bankers and suppliers are most interested in a company’s ________ ratios.
a. Liquidity
b. Solvency
c. Profitability
Liquidity
The Statement of Cash Flows presents information about cash inflows and outflows from:
- Operating Activities
- Investing Activities
- Financing Activities
What is the Free Cash Flow equation?
Free Cash Flow = Cash Provided by Operations - Capital Expenditures - Cash Dividends
Explain the meaning of Generally Accepted Accounting Principles.
The basic objective for financial reporting is to provide information useful for decision making. GAAP are the agreed-upon accounting rules which most U.S. companies use in preparing financial statements.
Relevance
If the information has the ability to make a difference in a decision scenario, it is relevant.
- Provides a basis for forecasts
- Confirms or Corrects prior expectations
- Timely
Reliability
If information can be depended on, it is reliable.
- Is verifiable
- Is a faithful representation
- Is neutral
Comparability
When different companies use similar accounting principles.
Consistency
Company uses the same accounting methods from year to year.
Information is free of error and bias.
a. Relevance
b. Reliability
c. Comparability
d. Consistency
Reliability
Company uses the same accounting principles and methods from year to year.
a. Relevance
b. Reliability
c. Comparability
d. Consistency
Consistency
Different companies use the same accounting principles.
a. Relevance
b. Reliability
c. Comparability
d. Consistency
Comparability
Information that makes a difference in a decision.
a. Relevance
b. Reliability
c. Comparability
d. Consistency
Revelance.
What are the key assumptions and principles the FASB relies on?
Monetary Unit Assumption Economic Entity Assumption Time Period Assumption Going Concern Assumption Cost Principle Full Disclosure Principle
Monetary Unit Assumption
Include in the accounting records only those things that can be expressed in terms of money.
Economic Entity Assumption
Every economic entity can be separately identified and accounted for
Time Period Assumption
Allows the life of the business to be divided into artificial time periods. These can be months, quarters, semi-annual periods, or annual periods as required by the business to evaluate its operations.
Going Concern Assumption
Assumes businesses will be in existence for the foreseeable future. Allows use of capitalizing costs when recording assets.
Cost Principle
Dictates that assets be recorded at their cost.
Full Disclosure Principle
Requires all circumstances and events that would make a difference to financial statement users to be disclosed.
Companies should record assets at cost.
a. Monetary Unit
b. Economic Entity
c. Time Period
d. Going Concern
e. Cost
f. Full Disclosure
g. Materiality
h. Conservatism
Cost
The economic life of a business can be divided into artificial time periods
a. Monetary Unit
b. Economic Entity
c. Time Period
d. Going Concern
e. Cost
f. Full Disclosure
g. Materiality
h. Conservatism
Time Period
When preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets or income.
a. Monetary Unit
b. Economic Entity
c. Time Period
d. Going Concern
e. Cost
f. Full Disclosure
g. Materiality
h. Conservatism
Conservatism
The business will remain in operation for the foreseeable future
a. Monetary Unit
b. Economic Entity
c. Time Period
d. Going Concern
e. Cost
f. Full Disclosure
g. Materiality
h. Conservatism
Going Concern
Only transaction data that can be expressed in money is included in accounting records
a. Monetary Unit
b. Economic Entity
c. Time Period
d. Going Concern
e. Cost
f. Full Disclosure
g. Materiality
h. Conservatism
Monetary Unit
Current assets are economic resources that are expected to be converted to cash or used up by the business within one year or the normal operating cycle, whichever is shorter.
True
False
This statement is false. Current assets are expected to be converted to cash or consumed within the next year or the normal operating cycle, whichever is longer.
A company purchased a tract of land on which it expects to build a production plant on in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?
A long-term investment
Property, plant, and equipment
Land expense
An intangible asset
Land or a building which is currently not used in operation is considered to be a long-term investment.
A company purchased a tract of land on which it expects to build a production plant on in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?
Current liabilities are $10,000, long-term liabilities are $20,000, common stock is $50,000, and retained earnings totals $70,000. How much is total stockholders’ equity?
$140,000
$150,000
$120,000
$70,000
Common stock and retained earnings are both elements of stockholders’ equity. Common stock of $50,000 plus retained earnings of $70,000 equals $120,000 in stockholders’ equity.
$120,000
For 2014, Stoneland Corporation reported net income, $24,000; net sales, $400,000; and average shares outstanding, 6,000. There were no preferred stock dividends. How much was the 2014 earnings per share?
$66.67
$16.67
$4.00
$0.06
Net income ($24,000) divided by average shares outstanding (6,000) = $4.00/share.
$4.00
At December 31, 2014, Shorts Company had retained earnings of $2,184,000. During 2014, the company issued stock for $98,000, and paid dividends of $34,000. Net income for 2014 was $402,000. How much was the retained earnings balance at the beginning of 2014?
$1,914,000
$2,552,000
$1,816,000
$2,454,000
$1,816,000
The beginning balance of retained earnings is the ending balance minus net income plus dividends. Working backwards, $X + $402,000 - $34,000 = $2,184,000. Therefore, beginning retained earnings = $1,816,000.
The following ratios are available for Leer Inc. and Stable Inc.
Current Ratio Debt to Assets Ratio Earnings per Share
Leer Inc. 2:1 75% $3.50
Stable Inc. 1.5:1 40% $2.75
Compared to Stable Inc., Leer Inc. has
higher liquidity, higher solvency, but profitability cannot be compared based on information provided. lower liquidity, higher solvency, and higher profitablility. higher liquidity, lower solvency, and higher profitability. higher liquidity and lower solvency, but profitability cannot be compared based on information provided.
higher liquidity and lower solvency, but profitability cannot be compared based on information provided.
The current ratio measures liquidity and higher means the company is more liquid. The debt to assets ratio measures solvency and higher is not always better. We don’t know how many outstanding shares each company has so we cannot compare profitability.
Which of the following ratios measures the ability of the company to survive over a long period of time?
Profitability ratios
Liquidity ratios
Current ratios
Solvency ratios
Solvency ratios
For what purpose might a company use free cash flow?
Pay additional dividends
Acquire property, plant, and equipment
Pay off debts
All of the answer choices are correct
All of the answer choices are correct
What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U. S.?
Generally accepted accounting standards
Generally accepted accounting principles
General accounting principles
Generally accepted auditing principles
Generally accepted accounting principles
A company can change to a new method of accounting if management can justify that the new method results in terms of
less likelihood of clerical errors.
a higher net income.
more meaningful financial information.
a lower net income for tax purposes.
more meaningful financial information.
Which of these measures is an evaluation of a company’s ability to pay current liabilities?
None of these answer choices are correct
Both earnings per share and current ratio
Current ratio
Earnings per share
Current ratio
What is measured by current assets minus current liabilities?
Solvency
Cash flow
Working capital
Profitability
Working capital
The following balances and amounts were taken from the financial statements of Ortiz, Inc.
Accounts payable $35,000 Cash provided by operations $90,000 Accounts receivable 37,500 Net income 36,000 Average common shares 20,000 Salaries and wages payable 8,000 Average current liabilities 110,000 Stockholders’ equity 240,000 Average and total assets 600,000 Total current assets 300,000 Average total liabilities 320,000 Total current liabilities 120,000 Cash 100,000
How much is Ortiz’s current ratio?
- 27
- 38
- 50
- 40
2.50
The current ratio is total current assets divided by total current liabilities; ($300,000 / $120,000) = 2.5 to 1
Which of the following ratios measures the ability of the company to survive over a long period of time?
Profitability ratios
Current ratios
Solvency ratios
Liquidity ratios
Solvency ratios
The following balances and amounts were taken from the financial statements of Ortiz, Inc.
Accounts payable $35,000 Cash provided by operations $90,000 Accounts receivable 37,500 Net income 36,000 Average common shares 20,000 Salaries and wages payable 8,000 Average current liabilities 110,000 Stockholders’ equity 240,000 Total assets 600,000 Total current assets 300,000 Average total liabilities 320,000 Total current liabilities 120,000 Cash 100,000
How much is the debt to assets ratio?
20%
60%
30%
40%
60%
If a company has the ability to pay obligations that are expected to become due within the next year or operating cycle whichever is longer, what is the term that describes this measure?
Solvency
Liquidity
Working capital
Profitability
Liquidity
The following balances and amounts were taken from the financial statements of Ortiz, Inc.
Accounts payable $35,000 Cash provided by operations $90,000 Accounts receivable 37,500 Net income 36,000 Average common shares 20,000 Salaries and wages payable 8,000 Average current liabilities 110,000 Stockholders’ equity 240,000 Average and total assets 600,000 Total current assets 300,000 Average total liabilities 320,000 Total current liabilities 120,000 Cash 100,000
How much is working capital?
$280,000
None of the answer choices are correct
2.50
$180,000
$180,000
Working capital is current assets minus current liabilities. $300,000 - $120,000 = $180,000
The following balances and amounts were taken from the financial statements of Ortiz, Inc.
Capital expenditures $55,000 Cash provided by operations $ 90,000 Cash 100,000 Net Income 80,000 Cash dividends paid 20,000
How much is free cash flow?
$5,000
$35,000
$25,000
$15,000
$15,000
Free cash flow is computed by subtracting capital expenditures and cash dividends from cash provided by operations. $90,000 - $55,000 - $20,000 = $15,000
For what purpose might a company use free cash flow?
Pay off debts
Acquire property, plant, and equipment
All of the answer choices are correct
Pay additional dividends
All of the answer choices are correct
Cash flows from operating activities are $200,000; cash flows from financing activities are $150,000; capital expenditures are $90,000; and dividends are $20,000. How much is free cash flow?
$110,000
$180,000
$40,000
$90,000
$90,000
Free cash flow is cash provided by operating activities adjusted for capital expenditures and dividends paid. $200,000 ‒ $90,000 ‒$20,000 = $90,000.
In 2014, Bombay Corporation had cash receipts of $21,000 and cash disbursements of $12,000. The company’s ending cash balance at December 31, 2014 was $33,000. What was the beginning cash balance?
$24,000
$30,000
$45,000
$42,000
$24,000
The ending balance plus cash disbursements less cash receipts equals the beginning balance. $33,000 + $12,000 - $21,000 = $24,000
What are generally accepted accounting principles?
Fundamental truths that can be derived from the laws of nature
The guidelines used to resolve ethical dilemmas
A set of accounting rules and practices that have authoritative support
Usually established by the Internal Revenue Service
A set of accounting rules and practices that have authoritative support
What organization issues International Financial Reporting Standards?
International Accounting Standards Board
Financial Accounting Standards Board
International Auditing Standards Committee
IFRS
International Accounting Standards Board
What is the primary accounting standard-setting body in the United States?
Financial Accounting Standards Board
IFRS
Securities and Exchange Commission
Public Company Accounting Oversight Board (PCAOB)
Financial Accounting Standards Board
What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U. S.?
General accounting principles
Generally accepted auditing principles
Generally accepted accounting standards
Generally accepted accounting principles
Generally accepted accounting principles
Going concern is the qualitative characteristic of accounting information that allows a statement reader to compare a company’s performance from one year to the next.
True
False
This statement is false. The going concern assumption states that the business will remain in operation for the foreseeable future.
Consistency means that a company uses the same accounting principles and methods as the other companies in the same industry.
True
False
This statement is false. Consistency means that a company uses the same accounting principles and methods from year-to-year.
The monetary unit assumption assures that all important information needed by investors, creditors, and managers is contained in the financial statements.
True
False
This statement is false. The monetary unit assumption requires that only those things that can be expressed in monetary terms are included in the accounting records. Some important information needed by investors, creditors, and managers is not reported in the financial statements.
The historical cost principle requires that if a company buys a building for $2,000,000 in 2012 that increases in value to $2,900,000 in 2014, the company will have to report the building at $2,000,000 in the balance sheet for 2014.
True
False
This statement is true. The historical cost principle requires that an asset continue to be reported at original cost over the life of the asset.
Which of the following is not a characteristic of relevance?
Verifiability
Materiality
Confirmatory value
Predictive value
Verifiability
Which of the following is not a fundamental quality of useful accounting information?
Faithful representation
Relevance
Neutrality
Verifiability
Verifiability
Which of the following are constraints that allow a company to modify generally accepted accounting principles without jeopardizing the usefulness of the financial statements?
Consistency and comparability
Relevance and faithful representation
Timeliness and neutrality
Cost constraint
Cost constraint
An item is ________ if it is likely to influence the decision of an investor or creditor.
faithful representation
comparable
material
consistent
material
A company can change to a new method of accounting if management can justify that the new method results in terms of
a lower net income for tax purposes.
less likelihood of clerical errors.
more meaningful financial information.
a higher net income.
more meaningful financial information.
What is the primary criterion by which accounting information can be judged?
Usefulness for decision making
Comparability
Consistency
Predictive value
Usefulness for decision making
Verifiability is an ingredient of
Faithful Representation Relevance
No No
Yes Yes
Yes No
No Yes
No No
