Terms

Question 1

Define Current Assets

Answer 1

assets that are expected to be realized in cash or consumed within one year

Question 2

Define Non-Current Assets

Answer 2

assets that are NOT expected to be realized in cash or consumed within one year

Question 3

3 issues related to assets

Answer 3

• Recognition: at what point do you consider it an item to be an asset for accounting purposes?
• Valuation: the monetary amount assigned to an asset in the valance sheet
• classification: assets are souped into like categories

Question 4

Define Asset

Answer 4

a future economic benefit that the firm controls due to past events or transactions (i.e., it will generate future cash inflows or reduce future cash outflows)

Question 5

An asset is included in the balance sheet when

Answer 5

1. the firm owns or controls the rights to use the item
2. the right to use arises from a past transaction or exchange
3. the amount of future benefit can be measured with a reasonable degree of precision (measurable)

Question 6

Define Liability

Answer 6

a claim on assets by creditors that represents an obligation to make future payment of cash, goods, or services (i.e., consume resources)

Question 7

A liability is included in the balance sheet when

Answer 7

1. the future sacrifice is probable.
2. the amount of the obligation is known or can be reasonably estimated.
3. the transaction or event that caused the obligation hs occurred.

Question 8

Is this a liability?

Signed contract to buy product in the future

Answer 8

This is not a liability. While, condition 1 and 2 are satisfied, but not 3. When a company signs an agreement to purchase materials from a supplier, it commits to making a future cash payment of a known amount. However, the obligation to pay for the materials is not considered a liability until the materials are delivered. This would not be disclosed on the balance sheet, but would be disclosed in the footnotes if material.

Question 9

Is this a liability

Receipt of payment from customer in advance of providing service

Answer 9

Yes. You agreed to provide a service (future sacrifice) for which you have already been paid (amount is known) and cash has changed hands (the transaction that caused the obligation has occurred).

Question 10

Is this a liability

Taxes payable

Answer 10

Yes. You will have to pay taxes (future sacrifice is probable). The amount you will have to pay has been reasonably estimated. You earned income for which the tax is based on (the event that caused the obligation has occurred).

Question 11

Is this a liability

Product warranties

Answer 11

Yes, usually. The likelihood of warranties and the actual expense of warranties can usually be estimated based on prior product history. Thus, condition 1 and 2 can be met. The sale of the product satisfies condition 3.

Question 12

Is this a liability

Filing of a lawsuit against the company

Answer 12

It depends. Meeting conditions 1 and 2 in this case depends on the likelihood of a bad outcome and the ability to estimate the obligation. If the obligation is probable AND the amount estimable, then a company will recognize this obligation, called a contingent liability. If an obligation is only reasonably possible, regardless of the company’s ability to estimate the amount, the contingent liability is not reported on the balance sheet, but is disclosed in the footnotes.

Question 13

Current ratio

Answer 13

Current ratio = current assets / current liabilities

Question 14

Working capital

Answer 14

Working capital = $ of current assets - $ of current liabilities

Question 15

Rules of thumb (current ratio)

Answer 15

Current ratio > 1 and working capital > 0

Question 16

Shareholders’ Equity

Answer 16

is the residual claim on assets by owners after settling claims of creditors

Question 17

When recording transactions you either:

Answer 17

1. Manipulate both sides of the equation by equal amounts

2. Increase AND decrease the SAME side of the equation by equal amounts

Question 18

(Example) An increase in assets will be accompanied by either

Answer 18

A decrease in another asset (+ Asset A, - Asset B)
An increase in a liability OR (+ Asset A, + Liability A)
An increase in shareholders’ equity (+Asset A, + SE)

Question 19

Debits

Answer 19

are defined as increases to asset accounts or decreases to liabilities or
shareholders’ equity (the left side of the t-account);

Question 20

Credits

Answer 20

are defined as increases to liabilities or shareholders’ equity or
decreases to asset accounts (the right side of the t-account)