Module 2

Question 1

Current assets or liabilites

Answer 1

those expected to be used or paid within one year.

Question 2

Examples of current assets

Answer 2

• Cash
• Receivables
• Inventories
• Prepaid expenses
• Trading securities (securities purchased with the intent to resell within a year)

Question 3

Examples of noncurrent assets

Answer 3

• Investments
• Property, Plant, and Equipment (e.g., land, building, machinery, tools)
• Intangible Assets (e.g., goodwill, patents, trademark, franchises.
• Other Noncurrent Assets (e.g., long-term receivables, deferred tax assets)

Question 4

Examples of current liabilities

Answer 4

• Accounts and notes payable
• Salaries payable
• Wages, interest, and taxes payable
• Current portion of long-term obligations
• Callable obligations

Question 5

Examples of noncurrent liabilities

Answer 5

• Long-Term Debt (e.g., mortgages, bonds)
• Long-Term Lease Obligations
• Deferred Tax Liability
• Other Noncurrent Liabilities (e.g., pension plans)

Question 6

Components of Owner’s Equity

Answer 6

• Generally divided into three parts:
  
  • Contributed capital
    
    • Capital stock—The sum of:
      
      • Common stock: —The number of common shares ´ the par value
      • Preferred stock: —The number of preferred shares ´ the par value
    • Additional paid-in capital: amount paid in by a stockholder over the par value of the stock
  • The equity originating from earnings is referred to as retained earnings
  • Treasury stock
  • Other Comprehensive Income

Question 7

Cost of Goods Sold Formula

Answer 7

Beginning inventory

+ Purchases

• Ending inventory

=Cost of goods sold

Question 8

Contingent Liabilities

Answer 8

• Past activities or circumstances may give rise to possible future liabilities although obligations do not exist on the balance sheet date.
• If the future payment is considered probable, the liability should be recorded by a debit to a loss account and a credit to a liability account.
• If future payment is possible, the contingent nature of the loss is disclosed in a note to the financial statements.
• If the future payment is remote, no accounting action is necessary

Question 9

Common Stock

Answer 9

Common stockholders are the real owners of the corporation:

• They vote for the board of directors
• Have legal ownership of the corporate assets after the claims of all creditors and preferred stockholders have been satisfied.

Question 10

Preferred Stock

Answer 10

In essence, preferred stock is an investment that has some of the characteristics of a loan:

• Fixed periodic payment
• No vote for the board of directors
• Higher priority than common stock in case of bankruptcy liquidation

Question 11

Retained Earnings

Answer 11

• is the amount of undistributed earnings of past periods. It equals:

Retained Earnings = Net income – dividends

• Dividends are paid from retained earnings. If a company annually pays out all its net income, there will be no retained earnings.
• A company can never pay dividends in excess of retained earnings!

Question 12

Accounts Payable

Answer 12

• arises when a business purchases goods or services on credit.
• It is really just the flip side of an account receivable—when you have a payable, the business you owe has a receivable.
• Credit terms generally require that the purchaser pay the amount due within 30 to 60 days and seldom require the payment of interest.
• Accounts payable do not require a formal agreement or contract.

Question 13

Notes Payable

Answer 13

• typically arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract (like when you sign a contract to lease an apartment or buy a car).
• This formal agreement or contract is what distinguishes the note payable from an account payable.

Question 14

Current Portion of a Long-Term Debt

Answer 14

• The current portion of long-term debt is the amount of long-term debt principal that is due within the next year.
• At the end of each accounting period, the long-term debt that is due during the next year is reclassified as a current liability.
• Since the reclassification of most long-term debt as current does not usually change the accounts or amounts involved, journal entries are not required.

Question 15

Things to Remember About Retained Earnings

Answer 15

• The income statement and balance sheet are connected by way of Retained Earnings. At the end of each year, the income statement is “closed” and net income is transferred to the balance sheet as “Retained Earnings.”
• If a company declares a dividend, the dividend comes out of Retained Earnings.
• Therefore:
  
  • Retained Earnings=Net Income-Dividends

Question 16

Income Statement Formats

Answer 16

• Companies prepare their income statements in one of two different formats: single-step income statements (aka “unclassified income statements”) or multiple-step income statements (aka “classified income statements”).
  
  • In a single-step income statement, there are only two categories: total revenues and total expenses.
  • A multiple-step income statement provides classifications of revenues and expenses into operating and nonoperating items.

Question 17

Gross profit

Answer 17

Revenue from sales – Cost of goods sold

Question 18

Gross profit percentage

Answer 18

• is computed by dividing gross profit by revenue.
• The gross profit percentage provides a measure of profitability that allows comparisons for a firm from year to year.

Question 19

trade discount

Answer 19

a discount offered at the time of sale to encourage the customer to buy.

Question 20

cash (sales) discount

Answer 20

a discount offered at the time the payment is due to encourage customers to pay early.

Question 21

Cash discounts are expressed as 3/15, n30 (read three fifteen, net 30).

Answer 21

This means that there is a 3% discount if payment is received within 15 days. If payment is received from day 15 to 30, the whole amount is due. This implies that if payment is received after 30 days there will be interest.