Chapter Definitions

Question 1

Creditor

Answer 1

Person to whom a corporation owes money to

Question 2

Liability

Answer 2

The obligation to repay the creditor

Question 3

Loans Payable

Answer 3

When corporations borrow money with a promise to repay the amount plus interest

Question 4

Bond Payable

Answer 4

Special form of loan payable used by corporations to obtain large amounts of money

Question 5

Common Stock

Answer 5

Term used to describe the dollar amount a corporation receives for the distribution of shares

Question 6

Assets

Answer 6

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.

Question 7

Net Income

Answer 7

Revenues greater than expenses

Question 8

Net Loss

Answer 8

Expenses greater than revenue

Question 9

Current liabilities

Answer 9

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

Question 10

Long-term liabilities and shareholders equity

Answer 10

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

Question 11

Working capital

Answer 11

Working capital is a measure of liquidity computed as, working capital equals current assets minus current liabilities

Question 12

Current ratio

Answer 12

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

Question 13

Relevance

Answer 13

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

Question 14

Faithful representation

Answer 14

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

Question 15

Qualitative characteristics are:

Answer 15

Comparability, verifiability, timeliness, understandability.

Question 16

The four assumptions are:

Answer 16

Separate entity, continuity, piriyadha see or time., Unit of measure or monetary unit

Question 17

The three principles are:

Answer 17

Historical cost, Revenue recognition, full disclosure.

Question 18

Constraints:

Answer 18

Cost, prudence.

Question 19

The elements of financial statements are:

Answer 19

Assets, liabilities, equity.

Question 20

In company law the group to whom boards of directors we the most responsibilities are:

Answer 20

Shareholders

Question 21

Why do members of aboard need to be independent of management

Answer 21

To avoid unbiased decision making

Question 22

The principle that financial statements are prepared on the basis that the business will continue in operator is :

Answer 22

Going Concern

Question 23

The need to calculate cost of sales is driven by:

Answer 23

Matching

Question 24

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?

Answer 24

Faithful representation

Question 25

What statement best describes the statement of financial position (balance sheet)?

Answer 25

It provides information about the financial position of an entity at a specific point in time

Question 26

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:

Answer 26

An increase in volume and a decrease in selling price

Question 27

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?

Answer 27

$65,000

Question 28

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

Answer 28

A building owned by the company that is rented out.

Question 29

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.

Answer 29

Depreciation is the allocation of the cost of equipment to expense.

Question 30

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?

Answer 30

The current ratio would increase.

Question 31

Users of financial accounting information are normally external to the firm. Is this a true statement?

Answer 31

Yes

Question 32

Information that is free from bias is an aspect of which of the following accounting information characteristics?

• Faithful representation
• timeliness
• relevance
• comprehensibility

Answer 32

Faithful representation

Question 33

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

Answer 33

To express an opinion on the fair representation of financial statements

Question 34

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%

Answer 34

36%

Question 35

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

Answer 35

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

Question 36

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

Answer 36

a) lead time

Question 37

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

Answer 37

d) return on investment

Question 38

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

Answer 38

d) to accelerate the cash flow cycle

Question 39

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

Answer 39

Days inventory outstanding

59. 1 + Days sales outstanding
60. 5 - Days payables outstanding
61. 8 = 70.8 days

Answer:
d) 70.8 days

Question 40

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.

Answer 40

compares the dividends received by shareholders and the increase in the share price with the original shareholder investment.

Question 41

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.

Answer 41

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.

Question 42

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.

Answer 42

uses modified after tax operating profit compared to a minimum required rate of return based on WACC and modified total capital.

Question 43

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?

Answer 43

Accounting standards for private Enterprises

Question 44

Economic events should be recorded in the accounting records if

Answer 44

The event impact the financial statement elements and is reliably measurable

Question 45

The biggest advantage of the corporate form of ownership is

Answer 45

Limited liability for its owners

Question 46

inventory is purchased on account and subsequently sold, including a standard markup, for cash, what effect does this have on the accounting equation?

Answer 46

Assets, liabilities and shareholders Equity increase

Question 47

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.

Answer 47

The company is expected to continue operations into the foreseeable future

Question 48

information that makes a difference in business Decisions by helping user predict future events or provide feedback on prior expectations is considered

Answer 48

Relevant

Question 49

What is one purpose of the report of the independent auditor?

Answer 49

to provide an unbiased opinion regarding whether or not the financial statements are a fair presentation of the financial health of the company

Question 50

According to Lipman a best practice for board compensation is to

Answer 50

Include a meaningful portion of long-term equity in the company

Question 51

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

Answer 51

A $21,000 decrease in the operating section

Question 52

Under accrual accounting, when are revenue and expenses recognized?

Answer 52

Revenue is recognized when earned expenses are recognized when the costs are incurred

Question 53

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?

Answer 53

Equity remained unchanged

Question 54

An overdrawn bank account would be classified as ________ on the statement of financial position

Answer 54

A liability

Question 55

What is a limitation of using financial ratios?

Answer 55

Ratios are signals only and do not provide information regarding the underlying reasons for changes

Question 56

Financial ratios become more meaningful when they are

Answer 56

Compared to Industry benchmarks or averages and analyzed over several periods

Question 57

Financial ratios become more meaningful when they are

Answer 57

Compared to Industry benchmarks or averages and analyzed over several periods

Question 58

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?

Answer 58

The temperate Garden is collecting money for receivables faster which should improve cash flow

Question 59

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

Answer 59

Market value added

Question 60

Not for profit organizations often have a large board of directors because

Answer 60

To increase the base of potential donors and fundraisers

Question 61

The gross margin is a _____ ratio while the current ratio is a ____ ratio and the debt to equity ratio is a _______ ratio

Answer 61

Profitability, liquidity, solvency

Question 62

Shareholder wealth is increase through a combination of

Answer 62

Dividends and stock price appreciation