Chapter 3 stice def

Question 1

Define Assets in terms of Balance Sheet

Answer 1

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

Question 2

Define Liablity in terns of Balance Sheet?

Answer 2

Probable Future sacrafice 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 3

Define Equity in terms of Balance sheet?

Answer 3

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise the equity is the owership interest.

Question 4

What is the net asset equation?

Answer 4

Assets -Liabilities=net equity

Question 5

What is a Balance sheet?

Answer 5

A balance sheet is a listing of an organizations assets and liabilites as of a certain point in time.

Question 6

What is the most common current assets?

Answer 6

Cash, Receivables and inventories

Question 7

What is working Capital Equation?

Answer 7

Current assets (CA)-Current Liabilites (C/A) = Working Capital.

Question 8

What do ratios allow?

Answer 8

Comparisons across time and across companies

Question 9

What are the three most liquidable assets?

Answer 9

Cash, Investment securities, and Net Accounts Receivables.

Question 10

Define Trading Securities?

Answer 10

Debt and equity securities (often called bonds and stocks) that are purchsed mainly wit the intent of reselling the securities in the short term. They are considered current assets

Question 11

What is the circular operating cycle?

Answer 11

Cash to-Purchases to-Inventories to-Sales to-Receivables to-Collections-back to Cash….

Question 12

Define Deffered Income Tax Assets?

Answer 12

Expected future benefits from tax deductions that have been recognized as expenses in the income statement but not yet deducted for income tax purposes.

Question 13

What is a sinking fund?

Answer 13

A sinking fund consists of cash and investment securites that have been accumulated for the stated purpose of repaying a specific fund..in other words…Assets that have been accumulated in order to repay a loan/

Question 14

What is the current Ratio?

Answer 14

Is computed by dividing the total current assets by current liabilites CA/CL

Question 15

What is the quick ratio aka acid test ratio?

Answer 15

Cash+Securities+Receivables/Current Liabilites=Quick Ratio.

Question 16

Debt Ratio?

Answer 16

Total Liabilites / Total Assets=Debt ratio should be lest than 50 percent

Question 17

Asset Mix?

Answer 17

Asset mix is calcualted by dividing each asset amount by the sum of total assets. Example-Building and Equipment/Total Assets

Question 18

Asset Turnover?

Answer 18

It gives the overal measure of company efficency-Sales/Total assets=Asset Turnover.

Question 19

Return on assets?

Answer 19

Net income/Total Assets.

Question 20

Return on Equity?

Answer 20

Net income/Stockholders equity

Question 21

What type of information is typically found in the notes section of the balance sheet?

Answer 21

Summary of significant accounting policies.
Additional information (both numerical and descriptive) to support summary totals found on the financial statements, usually the balance sheet. This is the most common type of note used.
Information about items that are not reported on the basic statements because the items fail to meet the recognition criteria but are still considered to be significant to users in their decision making.
Supplementary information required by the FASB or the SEC to fulfill the full disclosure principle.

Question 22

What is a subjective acceleration clause?

Answer 22

A subjective acceleration clause is a
provision in a debt instrument that specifies some general conditions permitting a lender to unilaterally accelerate
the due date

Question 23

What is an objective acceleration clause?

Answer 23

An objective acceleration clause is a
provision in a debt instrument that specifies conditions that can cause the
debt to be immediately callable, for example, failure to earn a certain return
on the assets or to make an interest
payment.

Question 24

How do these clauses in debt instruments affect the classification of a liability?

Answer 24

If a noncurrent debt instrument contains a subjective acceleration clause
and the invoking of the clause is
deemed probable, the liability should
be classified as current. If invoking of
the clause is deemed reasonably possible but not probable, the obligation
should continue to be reported as a
noncurrent liability with a note to describe the contingency. If a debt in-

Question 25

Distinguish between contingent liabilities and estimated liabilities

Answer 25

Contingent liabilities could or could not give
rise to actual obligations; estimated liabilities are known to exist but the amount is
not definitely known. A company could, for
example, win or lose a lawsuit, but it is actually liable for income tax. The exact
amount of the income tax is unknown until
the final tax return is completed. The tax liability could have to be estimated at the
time financial statements are prepared

Question 26

How do the Equity sections of proprietorships, partnerships, and corporations differ from one another

Answer 26

With a proprietorship, owner’s equity is reported with a single capital account. In a
partnership, separate capital accounts are
established for each partner. In a corporation, a distinction is made between contributed capital and retained earnings.

Question 27

What are the three major categories in a corporation’s Equity section?

Answer 27

The three major categories in a corporation’s Equity section are
(a) Contributed capital, including both capital stock at par and additional paid-in
capital
(b) Retained earnings
(c) Other equity, such as treasury stock,
unrealized gains and losses on availablefor-sale securities, foreign currency translation adjustments, and unrealized gains
and losses on derivatives

Question 28

Under what circumstances may offset balances be properly recognized on the balance sheet?

Answer 28

Offset balances are used to adjust the
gross amount of balance sheet items to arrive at proper valuations. For example, allowance for bad debts is properly offset
against the gross amount of accounts receivable to show the net amount estimated
collectible. It is generally not proper to offset an asset account against a liability or
owners’ equity account because such an
offset would not be for the purpose of correctly valuing either account but rather to
condense financial data at the expense of
adequate disclosure.