Assets

Question 1

Asset

Answer 1

Anything and everything a business owns or provides as a service that has the potential to be turned into cash

Question 2

Marketable securities

Answer 2

Financial assets that can be easily bought and sold on a public market

Ex. Stocks, bonds, mutual funds

Question 3

Current assets

Answer 3

Also called short-term assets

Cash and items that will be converted into cash quickly, typically within a year

Ex. Cash and equivalents, accounts receivable, inventory, prepaid expenses, investments, notes receivable

Question 4

Fixed assets

Answer 4

Also called long-term assets

Used by the business for operational purposes long term (for more than a year) and not intended to be sold

Question 5

Property, plant, and equipment (PP&E)

Answer 5

Vehicles and equipment used to produce revenue; land and property the business owns

Vehicles and equipment depreciate over time

Question 6

Intangible assets

Answer 6

Intellectual property; assets with no physical manifestation

One type of fixed asset

Ex. Domain name, patents, trademarks, goodwill (reputation, prestige, name recognition of the business

Question 7

Operating lease

Answer 7

Paying rent for a specific period of time to use an asset, with no intention of the asset transferring hands at the end of the lease

Question 8

Capital/Financing Lease

Answer 8

Paying rent for a specific period of time to use the asset, and the business intends to take ownership of the asset at the end of the lease.

Question 9

Are operating leases recorded as expenses or assets?

Answer 9

Expenses

Question 10

Are capital/financing leases recorded as expenses or assets?

Answer 10

Assets (because the owner intends to take possession of the asset at the end of the lease)

Question 11

What are the two categories for fixed assets?

Answer 11

1) Property, plant and equipment (PP&E)
2) Intangible assets

Question 12

Lease

Answer 12

Paying rent to use an asset

Question 13

What are the two categories for leases?

Answer 13

1) Operating lease
2) Capital/financing lease

Question 14

Inventory Valuation

Answer 14

-the process of assigning a cost to the inventory items listed in the balance sheet
-includes adjusting for errors like miscounting or inventory loss

Question 15

FIFO

Answer 15

First In, First Out
-an inventory valuation method where the first items purchased are the first items sold

Question 16

LIFO

Answer 16

Last In, First Out
-an inventory valuation method where the most recent items purchased are the first items sold

Question 17

AVCO

Answer 17

Average Cost Method
-an inventory valuation method obtained by finding the average cost per item
-popular with small businesses

Question 18

Straight-line depreciation

Answer 18

The same amount of depreciation expense is recorded each accounting period

Question 19

Accelerated depreciation

Answer 19

Asset is depreciated at a higher rate at the beginning of its life based on usage.

Question 20

Unit of Production Depreciation

Answer 20

A method of depreciation that considers how much an asset is actually used in an accounting period

Formula: divide the original cost of the equipment less its salvage value, by the expected number of units the asset should produce given its useful life. Then, multiply that quotient by the number of units (U) used during the current year.

Question 21

Depreciation

Answer 21

Spreading out the cost of an asset over its expected life

Question 22

What is the impact of FIFO on inventory and COGS if prices are increasing?

Answer 22

It makes inventory seem more valuable and makes COGS lower.

Question 23

What is the impact of LIFO on inventory value and COGS if prices are increasing?

Answer 23

It makes the inventory seem less valuable and makes COGS higher.

Question 24

Gross profit margin

Answer 24

The earnings a business makes per item sold

Question 25

Which inventory valuation method is most commonly used by businesses that work with perishable goods? Why?

Answer 25

FIFO, so that the goods are used in the order they are purchased and are less likely to go bad before they are sold.

Question 26

When is the Unit of Production Method of depreciation most helpful?

Answer 26

-when the asset’s value is more closely related to the number of units produced rather than the number of years it has been used, like for manufacturing and production equipment

Question 27

What are the tax benefits for the Units of Production method of depreciation?

Answer 27

-allows businesses to take higher depreciation expenses (and therefore tax deductions) when an asset is more heavily used, which can offset other high costs associated with greater production levels

Question 28

Inventory

Answer 28

-raw material used in the production of finished goods, AND
-the finished goods