Accounting Chapter 2

Measures income of operating success of a company for a given period of time

Profitability Ratios

According to the FASB, useful information should possess two fundamental qualities, relevance and faithful representation.

Qualities of Useful Information

expresses the relationship among selected items of financial statement data.

Ratio analysis

Accounting information is considered _________ if it wouldmake a difference in a business decision.

Relevant

All of the following are qualities of useful information except relevance. flexibility. faithful representation. materiality.

flexibility.

In what order are current assets listed?

By liquidity

Transactions are recorded in the periods in which the events occur.

Accrual-Basis

investments of assets into the business by the stockholders.

Common stock

___________results when different companies use the same accounting principles.

Comparability

Information that confirms or corrects prior expectations

Confirmatory Value

____________ means that a company uses the same accounting principles and methods from year to year.

Consistency

Or historical cost principle, dictates that companies record assets at their cos

Cost

In a classified balance sheet, how are assets usually classified? Current assets; long-term assets; property, plant, and equipment; and intangible assets Current assets; long-term investments; property, plant, and equipment; and common stock Current assets; long-term investments; tangible assets; and intangible assets Current assets; long-term investments; property, plant, and equipment; and intangible assets

Current assets; long-term investments; property, plant, and equipment; and intangible assets

States that every economic entity can be separately identified and accounted for.

Economic Entity

Indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Fair Value

Information accuratly depicts what really happened.

Faithful Representation

Requires that companies disclose all circumstances and events that would make a difference to financial statement users.

Full disclosure

The business will remain in operation for the foreseeable future.

Going Concern

Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? -Periodicity assumption -Going concern assumption -Monetary unit assumption -Economic entity assumption

Going concern assumption

Which of the following is considered property, plant, and equipment on a classified balance sheet? Investment in Intel Corporation stock Land Copyright Supplies

Land

If a company has the ability to pay obligations that are expected to become due within the next year or operating cycle whichever is longer, what is the term that describes this measure? Profitability Solvency Working capital Liquidity

Liquidity

Investments in stocks and bonds of other companies that are held for more than one year.

Long Term Investments

Requires that only those things that can be expressed in money are included in the accounting records

Monetary Unit

Verifiability is an ingredient of Faithful Representation----------Relevance No Yes No No Yes Yes Yes No

No------No

States that the life of a business can be divided into artificial time periods.

Periodicity

Information that help provide accurate expectations about the future.

Predictive Value

income retained for use in the business.

Retained earnings

Which of the following ratios measures the ability of the company to survive over a long period of time? Profitability ratios Solvency ratios Liquidity ratios Current ratios

Solvency ratios

Which of the following is an example of an intangible asset? Prepaid expenses Property, plant, and equipment Trademarks Accounts receivable

Trademarks

What is the primary criterion by which accounting information can be judged? Consistency Comparability Predictive value Usefulness for decision making

Usefulness for decision making

Information is _________ if independent measures, using the same methods, obtain similar results. Verifiable Relevant Consistent Understandable

Verifiable

What is measured by current assets minus current liabilities? Working capital Profitability Solvency Cash flow

Working Capital

Which of the following is a measure of liquidity? Earnings per share Debt to assets ratio Working capital Profit margin

Working capital

The convention of consistency refers to consistent use of accounting principles -within industries. -throughout the accounting periods. -among firms. -among accounting periods.

among accounting periods.

The periodicity assumption states that the economic life of a business can be divided into perpetual time periods. equal time periods. cyclical time periods. artificial time periods.

artificial time periods.

Liabilities are generally classified on a balance sheet as -present liabilities and future liabilities. -small liabilities and large liabilities. -tangible liabilities and intangible liabilities. -current liabilities and long-term liabilities.

current liabilities and long-term liabilities.

A current asset is -an asset which is currently being used to produce a product or service. -usually found as a separate classification in the income statement. -the last asset purchased by a business. -expected to be converted to cash or used in the business within a relatively short period of time

expected to be converted to cash or used in the business within a relatively short period of time

Accounting information should be neutral in order to enhance relevance. faithful representation. consistency comparability.

faithful representation

In order for accounting information to be relevant, it must -be used by a lot of different firms. -have very little cost. -help predict future events or confirm prior expectations. -not be reported to the public.

help predict future events or confirm prior expectations.

Earnings per share is computed by dividing net income by the ending common shares outstanding. less preferred stock dividends by the ending common shares outstanding. by the average common shares outstanding. less preferred stock dividends by the average common shares outstanding.

less preferred stock dividends by the average common shares outstanding.

Measures short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash

liquidity ratios

The assumption that requires only those things that can be expressed in money are included in the accounting records is the -economic entity assumption. -monetary unit assumption. -going concern assumption. -periodicity assumption.

monetary unit assumption.

Ratios that measure the income or operating success of a company for a given period of time are liquidity ratios. solvency ratios. profitability ratios. trending ratios.

profitability ratios.

expresses the mathematical relationship between one quantity and another.

ratio

measures the ability of the company to survive over a long period of time

solvency ratios

Dividends appear on -he balance sheet only. -the retained earnings statement only. -the income statement only. -both the retained earnings statement and the balance sheet.

the retained earnings statement only.

For accounting information to be relevant, it must be _______.

timely

Information has the quality of ___________________ if it is presented in a clear and concise fashion.

understandability

Information that is presented in a clear fashion, so that users of that information can interpret it is an example of. comparability. understandability. relevance. faithful representation.

understandability.

Information is __________ if we are able to prove that it is free from error.

verifiable