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ACCTING 306 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

_______ have future economic benefit.

A

Assets

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2
Q

Liabilities are probable _________ __________ of economic benefits arising from present obligations to transfer assets or provide services.

A

future sacrifices

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3
Q

Equity = total _______ - total ________

A

assets

liabilities

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4
Q

What financial statement reports a company’s financial position at a point in time?

A

balance sheet

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5
Q

T or F: The balance sheet provides an organized array of assets, liabilities, and shareholder’s equity.

A

True

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6
Q

What is another name for the balance sheet?

A

statement of financial position

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7
Q

Define liquidity.

A

The ability to convert an asset into cash.

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8
Q

__________ is a term that defines how well a company is able to pay off its liabilities.

A

Solvency

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9
Q

T or F: Financial flexibility is a measurement of a company’s ability to move it’s assets around.

A

False, its their ability to alter cash flows to take advantage of unexpected investment opportunities.

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10
Q

Does book value equal market value and why or why not?

A

No, market value is represented by trading price and assets are typically measured at historical costs rather than their fair market value.

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11
Q

List the two classifications of assets.

A
  1. current assets
  2. long-term assets
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12
Q

T or F: Paid-in capital and retained earnings are two classifications of stockholder’s equity

A

True

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13
Q

__________ and ____________ liabilities are the two classifications of liabilities on the balance sheet.

A

current

long-term

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14
Q

What is a limitation of the balance sheet.

A

Not all valuable resources are captured (employees, location of office, reputation etc).

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15
Q

Current assets are converted to cash within the coming year or within __________________ of the business, whichever is longer.

A

normal operating cycle

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16
Q

How are components of current assets listed on the balance sheet?

A

Most liquid to least liquid (in decreasing order)

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17
Q

The cash on the balance sheet also includes:

A
  • bank drafts
  • cashier’s checks
  • money orders
  • cash equivalents (highly liquid assets)
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18
Q

How do we know if a short-term investment is a current asset?

A

If the company has the ability and intent to sell it within the next 12 months, or operating cycle, whichever is longer.

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19
Q

Which receivables can be both short-term and long-term?

A

Nontrade - loans or advances to an individual or entity

Notes - supported by a formal agreement that specifies payment terms.

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20
Q

What three items are in the inventory account and how are they disclosed?

A
  • Raw materials
  • Work in process
  • Finished goods

Either on the balance sheet or disclosure note

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21
Q

What is the order of current assets on the balance sheet?

A
  1. Cash and cash equivalents
  2. Short-term investments
  3. Accts Rec
  4. Inventories
  5. Prepaid expenses
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22
Q

List some examples of long term assets.

A

Investments, PP&E, and intangible assets.

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23
Q

___________ are assets that are not used directly in the operations of the business.

A

investments

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24
Q

What kind of assets fall under PP&E? (property, plant and equip)

A

Tangible, long-lived assets used in the operations of the business.

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25
What are some examples of PP&E?
Land, buildings, equipment, machinery, furniture and natural resources (they become depleted).
26
These assets generally represent exclusive rights to provide a product or service and are valuable resources in generating future revenues.
intangible assets
27
What contra asset account is paired with intangible assets?
accumulated amortization
28
List examples of intangible assets.
Patents, copyrights, trademarks, franchises or goodwill.
29
Which account represents a catch-all classification of assets that were not reported in one of the other long-term classifications?
Other Long-term Assets Prepaids are often included here.
30
What is the key to understanding which category an asset is reported in?
management intent
31
List some current liabilities.
Accounts payable, notes payable, deferred rev, accrued liabilities, and currently maturing portion of LT debt.
32
T or F: Accounts payable are usually due in 30 to 60 days.
True.
33
Notes payable are ________ promises to pay cash at a future date and require explicit interest in addition to the obligation amt.
written
34
These liabilities represent obligations created when expenses are incurred but will be payed in the next reporting period.
accrued liabilities (ex: accrued salaries payable, int payable, or tax payable)
35
Long-term liabilities are due to be settled or have a contractual right to be settled in more than ____ ______.
one year
36
How is stockholder's equity calculated?
Assets - Liabilities = SE.
37
What two factors primarily increase SE?
paid-in capital (amt shareholders have invested) Ret earnings (accumulted net Inc - divs)
38
At the end of each year, companies with public securities are required to provide shareholders with a ___________ report.
annual
39
What are the two disclosures that must be included in a company's annual report?
(1) Summary of significant accounting policies (2) Descriptions of subsequent events
40
What kind of items are included in the summary of significant accounting policies disclosure section?
Information about a company's choices for accounting methods (depreciation, inventory etc)
41
What information is included in the description of subsequent events in the disclosure section of a company's annual report?
Accounting events that occurred after fiscal year-end but before financial statements are issued that have a material effect on a company's financial position.
42
What section of the disclosure report section isn't always present, but might be?
Other noteworthy events and transactions.
43
What information is reported in "other noteworthy events and transactions?"
Related party transactions - transactions with owners, management, families Errors and fraud - unintentional errors or intentional, which is fraud Illegal acts - bribes, kickbacks, illegal contributions to political candidates etc.
44
The _________ _______ & ________ section of a K-1 provides management's views on significant events, trends, and uncertainties.
Management's Discussion & Analysis
45
Which statement includes compensation information for directors and top executives as well as invites to shareholder's annual meeting?
Proxy statement
46
List the three sustainability disclosures.
(1) Environmental - environmental impact (2) Social - issues of interest to broader stakeholders / society at large (3) Governance - company's actions & policies related to division of power w/in company
47
What are the 4 types of auditor reports?
(1) Unqualified (2) Unqualified w/ explanatory or emphasis (3) Qualified (4) Adverse or disclaimer
48
This auditor report says the financial statements "present fairly" and company operations conform with GAAP.
unqualified
49
This auditor report generally says the financial statements are good to go but might have additional information that needs to be emphasized.
Unqualified w/ an explanatory/emphasis paragraph
50
Which report is issued when the audit process has been limited or a departure from GAAP, but not serious enough to invalidate the financial statements?
qualified
51
What is an adverse or disclaimer audit report?
One where the financial statements or disclosures are misstated/misleading or the auditor isn't able to gather sufficient evidence that the financial statements conform to GAAP.
52
The income statement reports a company's profit during a particular _____________ ___________.
reporting period
53
When is "income from continuing operations" a section that is included on the income statement?
Only when the company has discontinued operations.
54
Revenues, expenses, gains, and losses that occur during the reporting period are included in which section of the income statement?
Income from continuing operations
55
List the sections of the income statement.
(1) Operating items - Operating Income (2) Nonoperating items - Income from continuing operations before tax (3) Income taxes - Income from continuing operations
56
What income is related to the primary revenue-generating activities of the company?
operating income
57
Non-operating income is related to the ___________ or __________ activities of the company.
peripheral incidental
58
T or F: Most real world income statements use the single-step statement format.
False, they typically use the multi-step income statement.
59
What does earnings quality mean?
To what extent does the reported income predict the company's future earnings.
60
T or F: When analysts are determining the earnings quality of a company, they separate their earnings into temporary earnings and permanent earnings.
True
61
What is income smoothing and is it against GAAP?
When expenses are overestimated in CY but later underestimated which makes future income look higher. It is not against GAAP.
62
Classification shifting is when you shift __________ expenses to _____________ expenses. This is done to make operating ___________ appear higher.
operating nonoperating income
63
Not all items included in operating income is indicative of a company's ____________ earnings.
permanent
64
Some examples of costs that are unusual or infrequent but are included in included in operating expense section are __________________________ and _____________________.
restructuring costs other unusual items - goodwill and asset impairments
65
T or F: Restructuring costs are those that materially change the scope of business operations.
True
66
What are discontinued operations?
Operations that are going out of business either because the business is being sold or disposed of.
67
Discontinued operations are reported when both a _____________ of an entity or _______ of components has been sold or disposed of and the disposal represents a ______________ shift and will have a ________________ on a company's operations.
component; group strategic; major effect
68
Where are discontinued operations reported?
Below income from continuing operations
69
When income from discontinued operations is reported, what are the 2 parts that are included?
Income or loss from operations (of that component) until it was sold Gain or loss on disposal
70
What is income tax benefit?
It is taxes paid on discontinued operations that acts as a benefit.
71
A component held for sale is like to be sold within a ___________.
year
72
What are discontinued operations?
When an component of an entity has been sold/stopped and is being disposed of.
73
Disposal will have a _________ shift which in turn has a major ________ on a company's operations and financial results.
strategic effect
74
What are the two components in discontinued operations?
1) Income/loss from ops 2) Gain/loss on disposal of assets
75
What is OCI (other comprehensive income)?
Other gains and losses reported on an income statement, which ultimately will provide comprehensive income
76
What are two popular ways that comprehensive income is presented?
1) Single, continuous statements 2) Two separate, but consecutive statements
77
When is the statement of cash flows prepared?
Each period when the balance sheet and income statement are presented.
78
What does the statement of cash flows help people do?
Assess future probability, liquidity, and LT solvency.
79
What is one odd item in the OE on the statement of cash flows?
Interest and dividends from investment.
80
____________ _________ are the cash flows from activities reported on the income statement.
Operating activities
81
What are the two formats used to report operating activities?
Indirect and direct
82
The __________ reporting method of operating activities starts with net income and works backwards to convert that amount to cash basis.
indirect
83
List the three components of the direct reporting method for a statement of cash flows.
1) Revenue (adjusted with A/R) 2) General and admin expenses 3) Income tax expense

ACCTING 306 (3 decks)

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