Chapter 3

Question 1

Other Assets

Answer 1

Long-term assets that are not suitable for reporting under any of the previous classifications

Question 2

Accounts Payable

Answer 2

The flip side of accounts receivable—when one company sells on credit, creating for itself an account receivable, the company on the other side of the transaction is buying on credit, creating an account payable.

Example sentence: The company has $10,000 in accounts payable to be paid next month.

Question 3

Accounts Receivable

Answer 3

Amounts owed to a business by its credit customers and are usually collected in cash within 10 to 60 days.

Question 4

Accumulated Depreciation

Answer 4

Reflects the wear and tear, or depreciation, of these items since they were originally purchased.

Question 5

Accumulated Other Comprehensive Income

Answer 5

The grouped together and reported changes which companies experience increases and decreases in equity each year because of the movement of market prices or exchange rates

Question 6

Additional Paid-in Capital

Answer 6

Invested by stockholders that exceeds the par value of the issued shares.

Question 7

Asset

Answer 7

Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events.

Question 8

Asset Mix

Answer 8

The proportion of total assets in each asset category, is determined to a large degree by the industry in which the company operates.

Question 9

Balance Sheet

Answer 9

A listing of an organization’s assets and of its liabilities at a certain time.

Question 10

Capital Lease Obligations

Answer 10

A long-term liability in the balance sheet.

Question 11

Cash

Answer 11

Coins and currency as well as the balances in company checking and savings accounts.

Question 12

Common Stock

Answer 12

Stockholders’ equity investment

Question 13

Current Assets

Answer 13

Cash, accounts receivable, and inventory.

Question 14

Current Liabilities

Answer 14

Those obligations expected to be paid within one year, the most common being accounts payable.

Question 15

Current Portion of Long-term Debt

Answer 15

Some liabilities, such as mortgages, are payable in equal monthly installments over a specified number of years. The portion of these liabilities that is payable within 12 months from the balance sheet date.

Question 16

Deferred Income Tax Liability

Answer 16

The income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed.

Question 17

Derivative

Answer 17

A financial instrument, such as an option or a future, that derives its value from the movement of a price, an exchange rate, or an interest rate associated with some other item.

Question 18

Disclosure

Answer 18

Convey the details in a narrative note without ever including anything in the financial statements themselves.

Question 19

Equity

Answer 19

Residual interest in the assets of an entity that remains after deducting its liabilities.

Question 20

Executory Contract

Answer 20

It is an exchange of promises about the future.

Question 21

Financing Mix

Answer 21

The percentage of total financing (liabilities plus equity) in each individual category.

Question 22

Intangible Assets

Answer 22

Assets that have no physical or tangible characteristics.

Question 23

Inventory

Answer 23

The name given to goods held for sale in the normal course of business.

Question 24

Investment Securities

Answer 24

Composed of publicly traded stocks and bonds.

Question 25

Liability

Answer 25

Probable future sacrifice of economic benefit arising from a present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Question 26

Long-term Debt

Answer 26

Long-term notes, bonds, mortgages, and similar obligations on the balance sheet

Question 27

Long-term Investments

Answer 27

Those assets that you expect to still be around next year when you prepare the balance sheet again.

Question 28

Noncontrolling Interest

Answer 28

Arises when a corporation has subsidiaries that are not 100 percent owned by the corporation.

Question 29

Par Value

Answer 29

The market value of the shares at issuance.

Question 30

Preferred Stock

Answer 30

Stockholders’ equity investment

Question 31

Prepaid Expenses

Answer 31

Payments in advance for business expenses.

Question 32

Property, Plant, and Equipment

Answer 32

Exactly what the label implies: land, buildings, machinery, tools, furniture, fixtures, and vehicles used by a company in conducting its business activities.

Question 33

Recognition

Answer 33

Boil down all the estimates and judgments into one number and report that one number in formal financial statements.

Question 34

Retained Earnings

Answer 34

The cumulative amount of a corporation’s profits that have been reinvested on behalf of the stockholders

Question 35

Short-term Loans Payable

Answer 35

Formal, interest-bearing loans that are expected to be paid within one year.

Question 36

Stockholders’ Equity

Answer 36

The difference between assets and liabilities in a corporation

Question 37

Transaction Analysis

Answer 37

The process of determining how an economic event impacts the financial statements

Question 38

Treasury Stock

Answer 38

The repurchased shares when a company buys its own shares

Question 39

Unearned Revenue

Answer 39

Represents Sears’s obligation to provide service to customers who have paid Sears for a service they have not yet received.

Question 40

Valuation

Answer 40

Once it has been determined that an item should be recognized in financial statements, the question then arises about what dollar amount to assign to the item.