exam practice questions Flashcards
inventory turnover
how many times a year a company is replenishing its inventory, should be increasing
what is capitalization
- recording a cost as an asset instead of expensing it immediately on the income statement.
- done when the cost is expected to provide future economic benefits to the company beyond the current accounting period.
- equipment
intangible assets
trademarks, patents, franchisses, worth money as an asset to the company but not something you can physically touch such as equipment
when doing double declining formula
if it is 2017-2019, its 3 years, so you have to do the formula 3 times
what is residual value
estimated amount the company will receive when it disposes of the asset
gross profit =
net sales - COGS
Cost of goods sold is reported
as an expense on the income statement
Depreciation of assets refers to the process of
allocating the cost of the asset to the periods of use
what is included in the cost of equipment
-insurance while in transit
- sales tax paid when purchased
- installation costs
where are payable accounts recorded
liabilities on the balance sheet
where are supplies reported
current asset on the balance sheet
the journal entry to record declaration of a dividend,
credit to dividends payable
net profit margin
determines the percentage of revenue that ultimately makes it to net income after deducting expenses, increase is good
gross profit margin/gross profit %
percentage of revenue that exceeds the cost of goods sold (COGS). It provides insights into how efficiently a company is producing and selling its goods or services.
to determine dividends paid to preferred stock holders
Preferred par value x % x amt of preferred shares
what is included in operating activities
cash received and paid for day to day activities with customer, suppliers, employees and landlords, dividends paid is not included
the purchase of equipment by issuing a note payable would be classifies on the statement of cash flows as an
non cash transaction
interest received is a _______ activity
operating activity
financing activity
cash received and paid for exchanges with lenders and stockholders
investing activity
cash paid and received from buying and selling investments and long lived assets
accrued revenues recorded at the end of the current period
often result in cash receipts from customers in the next period
what is the proper journal entry for recording cash paid for rent three months in advance
debit prepaid rent and credit cash
what is book value of assets, how do you calculate?
this is the value of an asset after accumulated depreciation is accounted for. Cost - depreciation
how do you calculate the amt of interest to be accrued
face value X % X (months passes/12 months) =, count months carefully
what type of account is expenses
stock holders equity because they increase and decrease retained earnings
when bonds are first issued the liability is entered in ________account at _______
entered in bonds payable account at face value
when do cash dividends become a liability of the corporation
declaration date
what is the journal entry on declaration date of dividends
debits dividends, credit dividend payable
what is treasury stock
stock that has been repurchased by the company, a contra stockholder equity account
what is the price-earnings ratio
Compares the price of a company’s stock to the earnings per share . Shows what the market is willing to pay today for a stock based on its past/future earnings
what is the earnings per share ratio
how much money a company makes for each share of stock, increase is good
what is return on equity (ROE)
How much net income a company generates per dollar of invested capital, increase is good
what is fixed asset turnover ratio
indicates how much revenue the company generates in sales for each dollar invest in fixed assets, higher the better
what is current ratio
measures the company ability to pay its current liabilities, higher the better
what weighted average process of inventory
COGS on income states is price of all units sold/units sold, to find the average price per unit and calculate how many units were sold. Inventory
what is LIFO process
COGS on income statement is newest cost, newest inventory. Inventory on balance sheet is oldest cost, oldest inventory
what is FIFO process
COGS on income statement is the oldest cost, oldest inventory cost. Inventory on balance sheet is the, newest cost, newest inventory
dividends paid is a
financing activity
dividends received is a
operating activity
interest paid is a
operating activity
interest received is a
operating expense
year to year percentage change =
new NI - old NI / old NI
what is accrual baed accounting?
revenues and expenses are reordered as they are earnings and incurred
Accrual basis accounting the only method allowed under GAAP, true or false?
True
what are temporary accounts
accounts that are closed at the end of an accounting period, revenues and expenses
what are permanent accounts
non revenue and non expense accounts, they dont get closed at the end of a period they continue to grow
what are dividend in arrears
amount of dividend owed but not yet paid
what are fixed assets
long term assets
asset turnover ratio
measures the efficiency of a company’s assets in generating revenue or sales, higher the better
receivable turnover ratio
how many times on average this process of selling and collecting on credit sales is repeated during the period, higher the better
debt to assets ratio
indicates proportion of total assets that creditors finance, below one is safe, above 2 is risky.
times interest earned ratio
Company’s ability to meet its interest and debt obligations based on its current income high ratio meets company is less risky. ratio of 5 means the biz is able to meet the total interest payments owed on its outstanding long term debt 5 times over
IFRS and GAAP are concerned with
when an item should be recognized
how it should be classified
the amount at which each item should be measured
does GAAP or IFRS say to report fixed assets at fair value
IFRS
days to collect
measures the average number of days it takes for a company to collect payment after a sale has been made. It is an important indicator of how efficiently a company manages its accounts receivable. lower the better
days to sell
how long it takes for inventory to be sold, lower the better
what is ratio analysis
conducted to understand relationships among various items reported in one or more of the financial statements same year
what are the three categories of ratios
profitability ratio, liquidity, solvency
what are profitability ratios
examine a companys ability to generate income
what are liquidity ratios
helps us determine if a company has sufficient current assets to repay liabliliites when due
solvency ratios
examine a company ability to pay interest and repay debt when done
vertical/common size analysis
list each line item as a percentage of a base figure within the statement. The first line of the statement always shows the base figure at 100%, with each following line item representing a percentage of the whole.
IS: sales = 100%
BS: Assets = 100%
year to year change %
(current yr total - prior yr total)/prior years total
horizontal trend analyses
used to evaluate a company’s performance over time. By comparing prior-period financial results with more current financial results, a company is better able to spot the direction of change in account balances and the magnitude in which that change has occurred.
fraud is
an attempt to deceive others for personal gain
3 types of fraud
corruption, asset misappropriation, financial statement fraud
what is bank reconciliation
comparing your company’s bank statements to your own records, ensuring all transactions are accounted for
goods available for sale =
beginning inventory + purchases
specific identification
individually identifies and records the cost of each item sold as a part of COGS. EX, items sold were $70 and 95$, one $75 was not, so COGS is (70+95) and 75 is added to inventory on balance sheet at end of period
lower of cost or market/net relizable value rule
when inventory falls below its recorded cost the amount recorded for inventory is written down to its lower mark/net realizable value
what type of account is COGS
expense, debit to increase, credit to decrease
journal entry for a mark down item
after calculating write down per item and multiplying by the amt of units that is how much you debit COGS as you will not be making that money it is not costing you and you credit inventory that same amt as you inventory has lost value
what are bad debts
money that is owed to the company but is unlikely to be paid bad debts expense
expense matching principle
record expenses in same accounting period as the related revenue
what is the allowance method
record an estimate of bad debt expense with an adjust entry at the end of the accounting period
allowance method two step process
- make an end of period adjustment to record the estimated bad debts in the period credit sales occur
- write off specific customer balances when they are known to be uncollectible
bad debts journal entry
debit: bad debt expense credit: allowance for doubtful accounts
write off journal entry
debit: allowance for doubtful accounts
credit: accounts receivable
net reliable value of accounts receivable
accounts receivable - allowance for doubtful accounts
estimate for allowance of doubtful accounts is reordered
at the end of period journal entry
estimate for write off is recorded
during the account period
percentage of credit sales method
estimates bad debt expense by multiplying historical % of bad debt losses by the current periods account sales(income statement approach)
aging of accounts receivable
based on the age of each amt in accounts receivable. as time goes on more and more money is less likely to be paid. focuses on estimating ending balance in the allowance for Doubtful accounts
account recoveries
collection of previously written off account, reverse the write off, record collection of account receivable
journal entry for recovery
1) D: account R +800
C: allowance for DA 800
2) D:cash +800
C: account R - 800
interest =
principal x Interest rate x time (proportion of a year
Establish a note receivable
to establish you journal the principal first
D: notes receivable +100k
C: cash -100k,
accruing interest earned on a note at year end
= principal x % x time
D: interest receivable
C: Interest revenue
record interest received at maturity
D: cash (total amt owed)
C: interest receivable (amt that was accrued at year end
C: interest revenue (left over amount from end of yr to maturity
factoring receivables
sell outstanding accounts receivable to another company. Your company receives cash for the recievables it seems to the factor
intangible assets with a limited life are subject to
amortization ex, patents
straight line method and double declinging method account for
the whole year so consider partial periods
recording for disposal of tangible assets
D: cash
D: accumulated D (book value)
C: equipment (book value)
C: gain on disposal (gain if cash received is greater than the assets book value) if it were a lost debit loss on disposal
bond issued at face value
D cash face val
C bonds payable
bond issued at premium
total received = issued x $ of bonds x 1.0726 (107.26%)
d cash
c bonds payable face value
c premium on bonds payable
advantages of equity
doesn’t have to be repaid, dividends are optional
advantages of debt
intersect on debt is tax deductible. debt doesn’t change stockholder control
stock issuance
D cash
C common stock par value
C additional paid in capital (Total value - par)
repurchase of stock
D treasury stock
C cash
Reissuance of treasury stock
D cash
C treasury
C aditinoal
dividends declaration
D dividends
C dividends payable
dividends payment
D dividends payable
C cash
Dividends year end closing
D retained earnings
C dividends
what is needed for statement of cash flows
comparative balance sheets
income statement
additional details concerning selected accounts
additional transactions that dont involve cash
indirect reporting of operating cash flows
start with net income
- adjust for items that are included in net income but not involving cash (depreciation)
- adjust for items that are not included in net income but do involve cash (current assets/current liabilities)
Changes in current assets/liabilities
- non cash current assets Increase, subtract from NI
- non cash current assets decrease, add to NI
- current liabilities increase, add to NI
- current liabilities decrease, subtract from net income
operating cash flows must be
positive over the long run for a company to be successful, will be negative in the beginning
investing cash flows is usually
negative for healthy companies, will be positive when there is a decline
evaluating financing cash flows
can’t evaluate with just a (+) or a (-), consider detailed line items with this section to asses the companys overall financing strategy. will be very high in the beginning
