Chapter Definitions Flashcards
Creditor
Person to whom a corporation owes money to
Liability
The obligation to repay the creditor
Loans Payable
When corporations borrow money with a promise to repay the amount plus interest
Bond Payable
Special form of loan payable used by corporations to obtain large amounts of money
Common Stock
Term used to describe the dollar amount a corporation receives for the distribution of shares
Assets
Creditors and shareholders have claims over assets or economic resources of the corporation. If the corporation is in financial distress the claims of the creditors must be paid first.
Net Income
Revenues greater than expenses
Net Loss
Expenses greater than revenue
Current liabilities
consists of obligations that will be satisfied within one year or the operating cycle. Such as, accounts payable, salaries payable, unearned Revenue, interest payable, income taxes payable
Long-term liabilities and shareholders equity
obligations of the company that will require payment Beyond one year or the operating cycle. Such things as, loans or notes payable, bonds payable
For shareholders equity primarily arises from two sources, contributed capital and retained earnings
Working capital
Working capital is a measure of liquidity computed as, working capital equals current assets minus current liabilities
Current ratio
An alternative measure of liquidity that allows meaningful comparisons to be made between different companies and is computed as, current ratio equals current assets divided by current liabilities
Relevance
Refers to whether information is capable of making a difference in the decision-making process, the material must help predict the future and provide feedback about prior expectations
Faithful representation
Refers to whether information Faithfully represents the economic event that it is intended to portray Faithfully presented information should be complete neutral and free from error
Qualitative characteristics are:
Comparability, verifiability, timeliness, understandability.
The four assumptions are:
Separate entity, continuity, piriyadha see or time., Unit of measure or monetary unit
The three principles are:
Historical cost, Revenue recognition, full disclosure.
Constraints:
Cost, prudence.
The elements of financial statements are:
Assets, liabilities, equity.
In company law the group to whom boards of directors we the most responsibilities are:
Shareholders
Why do members of aboard need to be independent of management
To avoid unbiased decision making
The principle that financial statements are prepared on the basis that the business will continue in operator is :
Going Concern
The need to calculate cost of sales is driven by:
Matching
A metal sheet manufacturer arranges to transport 200 Metal Sheets to his personal Cottage. He tells the bookkeeper to record the cost of Metal Sheets as cost of goods sold. Which characteristic of accounting information has not been respected?
Faithful representation
What statement best describes the statement of financial position (balance sheet)?
It provides information about the financial position of an entity at a specific point in time
In 2012, Smith’s corner store had an increase in profit margin of $28,000 however the profit margin percentage decreased. This is most likely caused by:
An increase in volume and a decrease in selling price
Pike limited bought a new delivery truck for its business. The truck sells for 75,000 because Pike bought a demonstrator model, they paid $65,000. While driving it home from the sales lot, the driver had an accident, and damages were estimated at $1,000. At what value should the truck be recorded on Pikes statement of financial position?
$65,000
What is considered an asset for accounting purposes?
- employees who work for the company
- Research into new products for the company
- a building owned by the company that is rented out
- advertising spent on attracting customers to the company
A building owned by the company that is rented out.
which of the following statements about equipment depreciation is true?
- Depreciation is the allocation of the cost of equipment to expense.
- Depreciation represents the reduction in the market value of the asset.
- Depreciation is the cash paid each month to use a piece of equipment.
- Depreciation is the same under both cash-based and accrual based accounting.
Depreciation is the allocation of the cost of equipment to expense.
company has current assets of $200,000 and current liabilities of $150,000. If they use cash to pay off some accounts payable, what would be the effect on their current ratio?
The current ratio would increase.
Users of financial accounting information are normally external to the firm. Is this a true statement?
Yes
Information that is free from bias is an aspect of which of the following accounting information characteristics?
- Faithful representation
- timeliness
- relevance
- comprehensibility
Faithful representation
Which of the following best describes the role of the external auditor?
- to assess the management performance
- to assess the internal controls of an organization
- to evaluate all Financial transactions of an organization
- to express an opinion on the fair representation of financial statements
To express an opinion on the fair representation of financial statements
Lenox limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year. What is the gross profit percentage for the year?
- 4.8%
- 8%
- 36%
- 64%
36%
a company has a demand of 10,000 units of product a. The order cost for this product is $100 and it’s a annual carrying cost per unit is $1.20. What is the economic order quantity for product a?
- 1414
- 1291
- 373
- 403
Ordering Costs = 10,000 / 1414 = 7.072 X 100 = 707.21
Carrying Cost = 1414/2 X 1.20= 848.20
Total = 1,555.61
Ordering Costs = 10,000 / 1414 = 7.746 X 100 = 774.59
Carrying Cost = 1291/2 X 1.20= 774.6
Total = 1,549.19
Ordering Costs = 10,000 / 373 = 26.8 X 100 = 2680.96
Carrying Cost = 1414/2 X 1.20= 223.80
Total = 2,904.76
Ordering Costs = 10,000 / 403 = 24.81 X 100 = 2,481.38
Carrying Cost = 1414/2 X 1.20= 241.80
Total = 2,723.18
Answer: 1291
What key factor is taken into consideration when considering inventory replenishment?
a) lead time
b) supplier data
c) trade and other payables
d) cash conversion cycle
a) lead time
What is a key factor for determining whether a credit policy should be changed?
a) days of working capital
b) cash conversion ratio
c) cash flow cycle
d) return on investment
d) return on investment
What is the goal of managing working capital?
a) to reduce the level of trade and other payables
b) to improve relationships with customers
c) to accelerate the movement of retained earnings
d) to accelerate the cash flow cycle
d) to accelerate the cash flow cycle
Hauser Corporation has the following metrics for 2016.
Amount in days 2016 Days sales outstanding 36.5 Days payables outstanding 24.8 Days inventory outstanding 59.1
What is the cash conversion cycle for 2016?
a) 2.2 days
b) 61.3 days
c) 47.4 days
d) 70.8 days
Days inventory outstanding
- 1 + Days sales outstanding
- 5 - Days payables outstanding
- 8 = 70.8 days
Answer:
d) 70.8 days
One approach to VBM described in one of the article reads “Creating Shareholder Value” is: Total shareholder return.
Explain how value is measured in this approaches to VBM.
compares the dividends received by shareholders and the increase in the share price with the original shareholder investment.
One approach to VBM described in one of the article reads “Creating Shareholder Value” is: Market value added
Explain how value is measured in this approaches to VBM.
difference between total market capitalization (number of share issued time share price plus the market value of debt) an the total invested in the business by debt and equity providers.
One approach to VBM described in one of the article reads “Creating Shareholder Value” is: Economic value added
Explain how value is measured in this approaches to VBM.
uses modified after tax operating profit compared to a minimum required rate of return based on WACC and modified total capital.
Hazel just received her quarterly financial statements for her business from her accountant. The statements consists of a balance sheet, income sheet, cash flow statement and statement of retained earnings. Based on these titles Hazel’s company reports under?
Accounting standards for private Enterprises
Economic events should be recorded in the accounting records if
The event impact the financial statement elements and is reliably measurable
The biggest advantage of the corporate form of ownership is
Limited liability for its owners
inventory is purchased on account and subsequently sold, including a standard markup, for cash, what effect does this have on the accounting equation?
Assets, liabilities and shareholders Equity increase
Which of the following is a valid assumption from an accounting perspective?
- Boards of directors are independent from the organization.
- financial statement should only be prepared at year end.
- the company is expected to continue operations into the foreseeable future.
- accounting policy should be changed regularly.
The company is expected to continue operations into the foreseeable future
information that makes a difference in business Decisions by helping user predict future events or provide feedback on prior expectations is considered
Relevant
What is one purpose of the report of the independent auditor?
to provide an unbiased opinion regarding whether or not the financial statements are a fair presentation of the financial health of the company
According to Lipman a best practice for board compensation is to
Include a meaningful portion of long-term equity in the company
during the accounting period accounts receivable increased by $15,000 and accounts payable decreased by $6,000. On the statement of cash flows this would be reflected as
A $21,000 decrease in the operating section
Under accrual accounting, when are revenue and expenses recognized?
Revenue is recognized when earned expenses are recognized when the costs are incurred
During the months Glenda’s School of magic invoice $9,000 for student fees for the month, paid $1,000 for inventory, pay $2,000 for salaries earned during the month, paid$2,000 for rent, $1,000 for the current month and $1,000 for next month and declared dividends in the amount of $6,000. There were no other transactions. What is the change in equity for the month?
Equity remained unchanged
An overdrawn bank account would be classified as ________ on the statement of financial position
A liability
What is a limitation of using financial ratios?
Ratios are signals only and do not provide information regarding the underlying reasons for changes
Financial ratios become more meaningful when they are
Compared to Industry benchmarks or averages and analyzed over several periods
Financial ratios become more meaningful when they are
Compared to Industry benchmarks or averages and analyzed over several periods
the temperate Gardens account receivable conversion ratio was 33.7 last year and is 28.4 this year what does that tell us about the temperate Garden?
The temperate Garden is collecting money for receivables faster which should improve cash flow
value-based management emphasizes shareholder value and there are several approaches taken. The approach that uses the difference between, total market capitalization plus the market value of the depth and the total Capital invested in the business by debt and Equity provider is
Market value added
Not for profit organizations often have a large board of directors because
To increase the base of potential donors and fundraisers
The gross margin is a _____ ratio while the current ratio is a ____ ratio and the debt to equity ratio is a _______ ratio
Profitability, liquidity, solvency
Shareholder wealth is increase through a combination of
Dividends and stock price appreciation
