Final Exam (Conceptual Questions) Flashcards
What is a Real Accounts vs a Nominal Account?
Real = permanent (assets, liab.)
Nominal = temporary (revenues, expenses)
Where is Net Income (loss) transferred to after nominal accounts are reduced to zero?
Retained Earnings
When are revenues recorded? Expenses recognized?
Revenues = when performed (performance obligation satisfied)
Expenses = when incurred (matching principle)
What is the usefulness of the Income Statement?
Evaluate past performance
Predict future performance
Help assess risk or uncertainty of achieving future cash flows
What is the formula for Earnings Per Share?
Net Income - Preferred Dividends / # Wt. Avg. Common Stock Shares Outstanding
What must happen if there are Changes in Accounting Principle (e.g. LIFO to FIFO)?
Must restate prior years (shown retrospectively)
What happens if there are Changes in Accounting Estimates?
No restatement to prior years (shown prospectively)
How are Correction of Errors shown?
Shown as prior period adjustment; must restate prior years
How are Net Sales calculated? (EXPECT THIS ON TEST)
Gross Sales - Sales Discounts - Sales Returns and Allowances
What are assets and liabilities recorded at on the Balance Sheet?
Either historical cost or fair value
What are Assets listed in order of?
Liquidity
What are Liabilities listed in order of?
Maturity
What is the Usefulness of the Balance Sheet?
Compute rates of return
Evaluate capital structure
Assess risk and future cash flows
Analyze liquidity, financial flexibility of the company
What is the purpose of the Statement of Cash Flows?
Provide relevant information about the cash receipts and cash payments of an enterprise during a period
What is Present Value?
The value now of a future amount
Amount invested now to produce a known future value
always smaller than the future value
What is Future Value?
Value at a future date of a given amount invested now
always greater than the present value
What is an Annuity
Requires periodic payments or receipts (called “rents”) of the same amount
When does an Ordinary Annuity occur?
End of each period
When does an Annuity Due occur?
Beginning of each period
What is a Non-trade Receivable and an example?
Amounts owed to the business for reasons other than the normal sale of merchandise or services
E.g. income tax refunds receivable, advances to officers and employees
TRUE OR FALSE: There is a requirement that the cost flow assumption (e.g. FIFO, LIFO, weighted-average) adopted be consistent with the actual physical movement of goods
False
What is Specific Identification?
Identifying each item sold and each item in inventory
E.g. jewelry
When does title pass in FOB Shipping Point?
When shipped
When does title pass in FOB Destination?
When received
What is the purpose of Net Realizable Value (NRV) and its formula?
For purposes of inventory valuation
Inventory decline in value could go below the original (historical) cost, but the market value exceeds NRV
Accounts Receivable - Allowance for Doubtful Accounts
What is the basis for recording the acquisition of PP&E?
Historical cost
Reflects fair value
Involves actual transactions as is the most reliable
What are the types of Costs Subsequent to Acquisition?
Additions
Improvements and replacements
Rearrangements and reinstallation
Repairs (usually expensed)
What should happen if PP&E is disposed?
Asset and Accumulated depreciation is relieved from books
Recognize gain or loss
What is the formula for depreciable base?
Cost - Salvage Value
What happens if there is a Revision of Depreciation Rate or Life?
Report changes in current year and prospectively (no restatement)
What is Depletion (Amortization) and what method is used?
Process of recording the consumption of natural resources
Units-of-Production method used
What are Characteristics of Intangibles?
Long-lived
Result in future benefit
May be amortized over current and/or future years
What is the formula for Valuation (e.g. patent valuation)?
Purchase Price + Legal Fees + Other Incidental Costs
What are the Types of Intangibles?
-Marketing Related: trademarks
-Customer Related: customer lists
-Artistic Related: copyrights
-Contract Related: franchise and licensing agreements
-Technology Related: patents
What must companies do when R&D is incurred?
Expense it
What is Limited Life vs Indefinite Life?
Limited Life = amortize over useful life; credit intangible asset
Indefinite Life = no amortization; test for impairment
What is the formula for Goodwill?
Purchase Price - Fair Value of Net Assets
Fair Value of Net Assets = (FV Assets - FV Liab)
What are Characteristics of Liabilities?
Present obligation that entails settlement by probable future transfer or use of cash, gods, or services
Unavoidable obligation
Transaction or other event creating the obligation has already occurred
What happens if there is a Gain Contingency?
Do NOT recognize, NO journal entry
What are the three possible Loss Contingencies and what should you do for each?
- Probable:
-Estimable: accrue on balance sheet as liability
-Not Estimable: footnote disclosure - Possible: footnote disclosure
- Remote: ignore
