Chapter 2 Quiz

Question 1

What is the order in which assets are listed on the balance sheet?

Answer 1

1. ) Current
2. ) Long -term
3. ) PP&E
4. ) Intangible assets

Question 2

What is the order in which liabilities are listed on the balance sheet?

Answer 2

1. ) Current liabilities

2. ) Long-term liabilities.

Question 3

What are some examples of short-term assets?

Answer 3

1. ) Cash
2. ) Accounts receivable: accounts, notes, rent, etc.
3. ) Inventory: supplies or merchandising inventory
4. ) Prepaid expenses/accounts: prepaid insurance, rent, expenses.

Question 4

What are some examples of long term investments/assets?

Answer 4

1. ) Real Estate

2. ) stock investments

Question 5

What is the difference between depreciation and accumulated deappreciation?

Answer 5

depreciation: allocating the cost of assets to a number of years.
Accumulated depreciation: The total amount of depreciation expensed thus far in the asset’s life.

Question 6

What are some examples of short term liabilities?

Answer 6

1. ) Accounts payable
2. ) Salaries/wages payable.
3. ) interest payable
4. ) Taxes payable
5. ) Rent payable.
6. ) Unearned revenue

Question 7

What is a long term liability and what are some examples?

Answer 7

• Things that are to be paid after 1 year.

like: bonds, mortgage, Long-Term notes payable.

Question 8

What does the profitability ratio explain?

Answer 8

• This is a measure of income or operating success of a company in a given period.

Question 9

What does the liquidity ratio explain?

Answer 9

This is a measure of a company’s short-term ability to pay its maturing obligations and to meet unexpected needs for cash.

Question 10

Whit does the Solvency ratio explain?

Answer 10

Measure the ability of the company to survive over a long period of time.

Question 11

The profitability ratio is known as?

include the equation

Answer 11

Earnings per share:

- Equation: (Net income - dividends) / Avg. Common shares outstanding.

Question 12

The liquidity ratioSS are known as?

include the equation

Answer 12

• Working capital:
  Equation: current assets - current liabilities
  ————————————————————————
  Current Ratio:
  Equation: Current Assets / current liabilities

Question 13

What is the solvency ratio?

Answer 13

Debt to Total Asset Ratio:

Equation: Total Liabilities / Total Assets

Question 14

What is GAAP?

Answer 14

Generally accepted accounting principles: set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes.

Question 15

Who determines the guidelines for GAAP?

Answer 15

Standard-setting bodies:
SEC: securities and Exchange Commission
FASB: Financial Accounting Standards Board
IASB: International Accounting Standards Board
PCAOB: Public Company Accounting Oversight Board.

Question 16

What are intangible Assets?

- list some examples?

Answer 16

Assets that don’t have physical substance

EX: goodwill, copyrights, patents and trademarks

Question 17

What is an industry average comparison?

Answer 17

• This is based on average ratios for particular a industry

Question 18

What is an intercompany comparison?

Answer 18

It is a ratio based on competitor in the industry

Question 19

What is an intra-company comparision?

Answer 19

A comparison of one company’s performance over 2 give years.

Question 20

What is the monetary unit assumption?

Answer 20

It is a guiding principle of the FASB:

• Only matters involving financial, economic and accounting will be included

Question 21

What is the economic entity assumption?

Answer 21

It is a guiding principle of the FASB:

• • Every economic entity must be identified and accounted for.

( Tracking economic events to particular companies.)

Question 22

What is the periodicity assumption?

Answer 22

It is a guiding principle of the FASB:

• • The life of the business can be broken down into artificial time segments and that useful reports over that time period can be prepared

Question 23

What is the “going concern” assumption?

Answer 23

It is a guiding principle of the FASB:

• The business will remain in operation into the foreseeable future.

Question 24

What is the historical cost principle?

Answer 24

It is a guiding principle of the FASB:

• Dictates the companies record assets at their cost.
  ( Belief that items should be reported on the balance sheet at the price that was paid to acquire them.)

Question 25

What is the fair value principle?

Answer 25

It is a guiding principle of the FASB:

• Requires that companies disclose all financially relevant information.
• The price of an asset in the marketplace as determined by the laws of demand and supply

Question 26

What is materiality?

Answer 26

• This is a company specific asset.

- An item is considered material when its size makes it likely to influence the decision of an investor or creditor.

Question 27

What is comparability?

Answer 27

If one company uses a different method to report items, they need to disclose their accounting methods.
- The disclosure would be done in the financial statement notes.

Question 28

Relevance:

Answer 28

Help with forecasts, is timely, confirms or
corrects a prior expectation.

• The quality of information that indicates the information makes a difference in a decision.

Question 29

 Consistency:

Answer 29

Need to assume the process is the same year

over year, so the numbers are useful.

Question 30

 Faithful Representation:

Answer 30

State what really happened accurately with nothing important omitted and make sure
it is NEUTRAL.

Question 31

Full Disclosure principle?

Answer 31

The reporting of all information that would make a difference to the financial statements.

Question 32

What does it mean to be timely in the accounting world?

Answer 32

Information that is available to decision-makers before it loses its capacity to influence decisions.

Question 33

What is the operating cycle?

Answer 33

The average time required to purchase inventory, sell it on account, and then collect cash from customers- that is to go from cash-cash.

Question 34

What is a cost constraint?

Answer 34

The constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.