Financial Accounting Flashcards
What are the 2 forms of Business we’re discussing in the class?
Proprietorship & Partnership and Corporation
What are the Tax and Liability implications of a Proprietorship & Partnership?
Unlimited Liability, No Taxation
What are the liability and tax implications for a Corporation
Limited Liability and the Corporation is taxed
What is the Separate Entity assumption?
We treat the business and the owners as separate entities, focusing on the accounting for the businesses, not the owners.
What is the Unit of Measurement assumption?
The currency in which the company is operating.
What is the Going Concern assumption?
We presume that the company will continue to operate.
What is the Periodicity assumption?
We presume that we can arbitrarily pick any time period that we want to and report the financial results for that time period.
What is the Materiality assumption?
The only information that needs to be disclosed in financial statements is information that will be useful for those who rely on the financial statements to make decisions.
Who are users of financial reports?
Investors (stockholders)
Creditors (banks)
Government Agencies (SEC)
Company Management
Financial Analysts
What are the 6 qualities of financial statements?
Understandability
Timeliness
Full disclosure
Comparability
Objectivity
Decision relevance
What are the required financial statements?
Balance sheet
Income statement
Statement of cash flows
What is the Accounting Formula?
Assets = Liabilities + Owners’ Equity
What is the definition of Assets?
Resources owned or rights to receive resources.
What are 3 types of assets?
Physical - cash, buildings, inventory, equipment
Intangible - copyrights, patents, trademarks
Legal rights - right to receive payment
What are some common asset accounts?
Cash
Accounts/Notes receivable
Inventory
Investments
Buildings & Equipment
Copyrights/patents
How are assets ordered on the balance sheet?
In order of most liquid to least liquid. Cash first. Intabgibles last.
What are the 4 types of Valuation?
Historical Cost
Sales Value
Replacement Cost
General Price-level adjustment cost
What valuation is given by the Cost Principle?
Assets are valued at their historical cost
What are liabilities?
Obligations owed to creditors
What are common types of liability accounts?
Accounts/notes payable
Interest payable
Accrued Sales
Deferred (unearned) Revenues
Classified balance sheets break assets and liabilities into what categories?
Current Assets/Liabilities (less than 1 year) and Long Term Assets/Liabilities
What is Capital Stock?
What the company received when selling shares of its stock
What are retained earnings?
Accumulated earnings - dividends
What are dividends?
Distribution of earning that occur when the board of directors decide to give the shareholders a bone
What is the formula for retained earnings??
Beginning Retained Earnings
+ Net Income
- Dividends
What is the formula for (simplified) Statement of Stockholders’ Equity?
Beginning Stockholders’ Equity
+ Net Income
- Dividends
+ Issuance of Capital Stock
Classify the account: Cash
Current Asset
Interest Expense
Expense
Sales Returns
Contra-Revenue
Wages Payable
Current Liability
Taxes Payable
Current Liability
Marketable Securities
Current Asset
Mortgage Payable
Long Term Liability
Common Stock Paid in Capital
Equity
Rent Expense
Expense
Deferred Revenues
Current Liability
Interest Payable
Current Liability
Discount on Bonds Payable
Contra-Liability (Long Term)
Common stock at part value
Equity
Prepaid Expenses
Current Asset
Allowance for Doubtful Accounts
Contra-Asset (Current)
Retained Earnings
Equity
Land
Long term asset
Bonds Payable
Long term liability
Treasury Stock
Contra-Equity
Sales
Revenue
Premium on Bonds Payable
Long Term Liability
Dividends Payable
Current Liability
Bad Debt Expense
Expense
Salaries Expense
Expense
Building and Equipment
Long Term Asset
Current Portion of Mortgage Payable
Current Liability
Cost of Goods Sold (COGS)
Expense
Sales Discounts
Contra-Revenue
Inventory
Current Asset
Goodwill
Long Term Asset
Depreciation Expense
Expense
Current Portion of Bonds Payable
Current Liability
Salaries Payable
Current Liability
Utilities Expense
Expense
Interest Revenues
Revenue
True or False: A Balance sheet shows the claims owners have against the assets of the firm
TRUE
True or False: Depreciation is a liability on the Balance Sheet
FALSE
True or False: Intangible assets are NOT an an example of a current asset
TRUE
What is the formula for Net Income Before Interest and Taxes?
Income before Interest and Taxes = Gross Margin - Operating Expenses
Gross Margin = Sales - COGS
True or False: A firm’s balance sheet provides a representation of the current market value for the company
FALSE
A Balance sheet dated December 31, 2021 represents the financial position of the firm when.
Only for December 31, 2021
Describe the accounting equation without using the formula
Resources of the firm equal the creditor’s and owner’s claim to those resources
What is accrual basis accounting?
In this form of accounting, revenues are recognized when earned rather than when the cash is collected
True or False: The income statement represents a snapshot of the firm’s account balances at a point in time
FALSE that’s the balance sheet
What is the effect on assets and liabilities on the payment of a liability?
Assets decrease and Liabilities decrease
What is the formula for the Interest Coverage ratio?
Earnings before interest and taxes /
Interest expense
What is the formula for Return on Assets?
Net Income / Average total Assets
What is the formula for the Current Ratio?
Total current assets / Total Current Liabilities
What is the formula for the Quick Ratio?
Cash + Marketable Securities + Receivables / Total Current Liabilities
What is the formula for Return on (Average) Assets?
Net Income / Average total assets
What is the formula for Asset Turnover Ratio?
Sales / Average Total Assets
What is the formula for Gross Margin %?
Net income / Sales
What is the formula to determine retained earnings?
RE = RE_beginning - Net Income - Dividend
How do you calculate a new Bad Debt Expense?
It’s the weighed average of the amount receivable to get the ending allowance, then subtract the current balance in the allowance to get the bad debt expense.
How do you determine the gain or loss on a bond if it’s retired early?
Cash required to retire the bonds - carrying value of the bonds
How do you determine the dividends received by Common Shareholders?
The common shareholders get what’s left after the premium shareholder’s percent and anything that was retained get paid out.
How do you calculate total stockholder’s equity from the following accounts: Common Stock, Paid-In Capital in Excess of Par, Retained Earnings, Treasury Stock
Common Stock + Paid-In Capital in Excess of Par + Retained Earnings - Treasury Stock
How do you Calculate Goodwill?
Goodwill Created = total amount paid - total fair value (Assets - Liabilities)
If bonds are issued at a PREMIUM, the stated interest rate is what in relation to the market rate of interest?
The stated interest rate for the bond is HIGHER than the market rate of interest
Financial statements must be consolidated when a company owns more than what percent of another company?
More than 50% of another company
Who owns the retained earnings of a firm?
The common shareholders
The direct write off approach for uncollectible accounts is…
inconsistent with the matching principle
If company A is a wholly owned subsidiary of Company B with their own ledgers, who should prepare the consolidated financial statements?
Only Company B
In periods of RISING prices, FIFO produces…
A lower cost of goods sold, higher net income, higher ending inventory costs, and higher gross margins
When do Contingent liabilites need to be recorded as a liability?
Only when the loss is probable and can be reasonably estimated.
If 25% of the common stock of an investee company is purchased as an investment, what is the appropriate method of accounting for the investment?
The Equity Method
How should ownership of <20% of a company’s stock be reported on the financial documents?
It should be the same as Short-Term Investments
For Software Development, when should the R&D costs be expensed?
Software R&D are expensed until “technological feasibility” is reached. Then it can be capitalized and amortization begins on General Release.
What is the formula for Working Capital?
Working Capital = Current Assets - Current Liabilities
What is the Face Value of a bond?
Amount to pay when the bond matures (not necessarily the initial selling price of the bond)
What is the carrying value of a bond?
Bonds Payable +/- Premium/Discount
What are 4 properties of Bonds?
- Must repay bonds
- Must pay interest
- Interest reduces net income
- No dilution of ownership
What are 4 properties of Capital Stock?
- No repayment of stock
- Need not pay dividends
- Dividends DO NOT reduce net income
- Dilutes ownership
What are the 4 types of Ratios?
- Liquidity
- Capital Adequacy (Financial Leverage)
- Asset Quality (Asset Management)
- Earnings (Profitability)
Current Ratio and Quick Ratio measure what?
They are liquidity Ratios
True of False: Liquidity Ratios >1 are better
TRUE This shows that the company is liquid enough to cover it’s current liabilities
The Debt Ratio and the Interest Coverage Ratio are what types of ratios?
Capital Adequacy Ratios
