Chapter 1 Flashcards
Swiss Group reports net income of $36,000 for the year. At the beginning of the year, Swiss Group had $180,000 in assets. By the end of the year, assets had grown to $230,000.
What is Swiss Group’s return on assets for the current year? Did Swiss Group perform better or worse than its competitors if competitors average an 13% return on assets?
Return on assets = Net income / Average total assets
= $36,000 / [($180,000 + $230,000)/2]
= 17.6%
Interpretation: Swiss Group’s return on assets of 17.6% is markedly better than the 13% return of its competitors. Accordingly, its performance is assessed as superior to its competitors.
The primary objective of financial accounting is to:
Provide accounting information that serves external users.
The group that sets international preferred accounting practices is called the:
IASB
The Securities and Exchange Commission (SEC) has given the task of setting GAAP to the:
FASB
The rule that requires financial statements to assume that the business will continue operating instead of being closed or sold is the:
Going-concern assumption
If a company is considering the purchase of a parcel of land that was originally acquired by the seller for $85,000, is currently offered for sale at $150,000, is considered by the purchaser as easily being worth $140,000, and is finally purchased for $137,000, the land should be recorded in the purchaser’s books at:
$137,000.
The accounting principle that requires accounting information to be based on actual cost and requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange, is the:
Measurement (Cost) principle.
A limited liability company (LLC):
A. Has owners called members
B. Is subject to additional business income tax.
C. Includes a general owner with unlimited liability.
D. Is the same as a corporation.
E. Must have more than one owner
A. Has owners called members
If a company uses $1,300 of its cash to purchase supplies, the effect on the accounting equation would be:
One asset increases $1,300 and another asset decreases $1,300, causing no effect.
An example of an investing activity on a statement of cash flows is:
Purchase of land
Net Income:
A. Decreases equity
B. Represents the amount of assets owners put into a business.
C. Equals assets minus liabilities.
D. Occurs when revenues exceed expenses.
E. Represents creditor claims against assets.
D. Occurs when revenues exceed expenses.
Creditors’ claims on assets are called:
Liabilities
On May 31 of the current year, the assets and liabilities of Riser, Incorporated are as follows: Cash $20,500; Accounts Receivable, $7,250; Supplies, $650; Equipment, $12,000; Accounts Payable, $9,300. What is the amount of equity as of May 31 of the current year?
$31,100.
Assets = Liabilities + Equity
Cash + Accounts Receivable + Supplies + Equipment = Accounts Payable + Equity
$20,500 + $7,250 + $650 + $12,000 = $9,300 + Equity
$40,400 = $9,300 + Equity; Equity = $31,100
If the liabilities of a business increased $75,000 during a period of time and the owner’s equity in the business decreased $30,000 during the same period, the assets of the business must have:
Increased $45,000.
Assets = Liabilities + Owner’s Equity
Change in Assets = Change in Liabilities + Change in Owner’s Equity
Change in Assets = + $75,000 − $30,000
Change in Assets = Increase of $45,000
Rushing had net income of $240 million and average total assets of $2,000 million. Its return on assets (ROA) is:
12%.
Return on Assets = Net Income/Average Total Assets
Return on Assets = $240 million/$2,000 million = 0.12 = 12%
Use the following information as of December 31 to determine equity.
Cash $ 57,000
Buildings 175,000
Equipment 206,000
Liabilities 141,000
$297,000.
Assets = Liabilities + Owner’s Equity
Cash + Equipment + Buildings = Liabilities + Owner’s Equity
$57,000 + $206,000 + $175,000 = $141,000 + Owner’s Equity
$438,000 = $141,000 + Owner’s Equity; Owner’s Equity = $297,000
A company purchases equipment for $75,000 cash. This represents a(n):
Investing activity
A company borrows $125,000 from the Northern Bank and receives the loan proceeds in cash. This represents a(n):
Financing activity.
A company reported total equity of $145,000 at the beginning of the year. The company reported $210,000 in revenues and $165,000 in expenses for the year. Liabilities at the end of the year totaled $92,000. What are the total assets of the company at the end of the year?
$282,000.
Assets = Liabilities + Owner’s Equity
Assets = $92,000 + (Beginning Equity + Revenues − Expenses)
Assets = $92,000 + ($145,000 + $210,000 − $165,000)
Assets = $92,000 + $190,000; Assets = $282,000
Doc’s Ribhouse had beginning equity of $52,000; net income of $35,000, and withdrawals by the owner of $12,000. The owner made no investments during the year. Calculate the ending equity.
$75,000.
Ending Equity = Beginning Equity + Net Income − Withdrawals
Ending Equity = $52,000 + $35,000 − $12,000 = $75,000
The expense recognition principle, also called the matching principle:
Prescribes that a company record the expenses it incurred to generate the revenue reported.
The full disclosure principle:
Prescribes that a company report the details behind financial statements that would impact users’ decisions.
