Accounting Solutions from Reading Questions - Chapter 7 module 2

What is meant by GAAP?

Generally Accepted Accounting Principles. The various methods, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements

types of business

product companies and service comapnies

what are 2 synonyms for net income?

profits or earnings

what is an alternative terms of income?

profits, earnings

3 examples of non current assets

Long-term investments (land held for future office site), PP&E (land, buildings, store furniture and fixtures, accumulated depreciation), intangibles(copyright, franchise, patent, goodwill, trademark, trade name)

capital stock

Indicates the owners' contribution to a corporation

share of stock

A certificate that acts as evidence of ownership in a corporation

bond

A certificate that represents a corporation's promise to repay a certain amount of money and interest in the future

What is the difference between current and noncurrent assets?

A current asset is cash or other assets expected to be realized in cash or sold or consumed during the operating cycle or within the year, whichever is longer. A noncurrent asset is any asset that does not meet the definition of a current asset.

What is the difference between current and long-term liabilities?

A current liability is an obligation that will be satisfied within the next operating cycle or within one year, whichever is longer. A long-term liability is any obligation that does not meet the definition of a current liability.

dividends

A distribution of the net income of a business to its stockholders.

How many income statements and of which years does the SEC require a publicly held company to show in its annual report?

A minimum of three income statements of the three most recent years,

How many balance sheets and of which years does the SEC require a publicly held company to show in its annual report?

A minimum of two balance sheets of the two most recent year-ends.

give 3 examples of current liabilities

Accounts payable, salaries and wages payable, income taxes payable, interest payable, short-term bank loans payable.

What kinds of activities are involved in the investing activities category?

Acquisition and sale of long-term or noncurrent assets.

what is the sarbanes - oxley Act?

An act of Congress passed in direct response to the corporate financial statement scandals such as Enron and WorldCom passed in 2002.

What is an event?

An event is a happening of consequence to an entity.

What is an external event? Give 2 examples.

An external event involves interaction between an entity and its environment. Examples: payment of wages to an employee, sale to customer

What is an internal event? Give an example.

An internal event occurs entirely within an entity. Example: use of a piece of equipment

Why is it important for accountants to be ethical?

Because decision makers are relying on the information they provide

business entity vs. non - business entity

Business entities are organized to earn a profit; non-business entities are organized for some purpose other than to earn a profit.

Give 3 examples of operating activities.

Cash collected from customers Cash payments for store supplies Cash payments for income taxes Cash collected in interest Cash payments for salaries and wages Cash payments for insurance Cash payments for inventory and expenses Cash payments for interest Cash payments for advertising

What 3 types of activities are reported on the Statement of Cash Flows?

Cash flows from Operating, Investing, and Financing activities.

Give 3 examples of investing activities.

Cash purchase or cash sale of long-term investments; property, plant and equipment; and intangibles.

3 examples of current assets

Cash, marketable securities, accounts receivable, merchandise inventory, prepaid insurance (and other prepaid expenses), store supplies, etc.

Into what categories does a classified Blanace Sheet separate both Assets and Liabilities?

Current and Non-current or Current and Long-Term

what is operating activities?

Earning revenues and incurring expenses while providing products and services to customers

For the most part the accounting profession establishes it own rules through a private sector group called

FASB Financial Accounting Standards Board

What is the purpose of the Management Discussion and Analysis in the annual report?

Gives management an opportunity to discuss and explain items on the financial statements.

On a multiple step income statement, how is gross profit calculated for a merchandising business?

Gross profit = sales - cost of goods sold

List the major differences between the 2 formats that are used to present the income statement

In the single-step format all the expenses and losses are added together and then deducted in a single step from all the revenues and gains to arrive at net income. The multiple-step format shows classifications of revenues and expenses as well as important subtotals.

On a multiple step income statement, how is income before taxes calculated?

Income before taxes = operating income + other revenue or gains - other expenses or losses

On a multiple step income statement, how is income from operations calculated?

Income from operations = gross profit - operating expenses

Name a non-operating expense and a non-operating revenue.

Interest expense and interest revenue.

who or what is IASB?

International Accounting Standards Board

What kinds of activities are included in the financing activities category? Give an example.

Issuance and repayment of long-term liabilities; issuance and repurchase of stock; payment of dividends

In addition to the financial statements, name 2 other elements that are included in a company's annual report.

Letter to stockholders Company's Product and Markets section Auditors' report Management Discussion and Analysis Notes to the Financial Statements

On a multiple step income statement, how is net income calculated?

Net income = income before taxes - income tax expense

Why are notes necessary as part of the financial statements?

Notes satisfy the need for full disclosure on the financial statements. (See the Conceptual Framework)

what are the type of business organizational forms?

sole proprietorship partnership corporation

What is the formula for profit margin?

Profit margin = Net income/Sales

who is responsible for setting auditing standards?

Public Company Accounting Oversight Board (PCAOB)

what is financing activities?

Raising cash by issuing stock (equity from stockholders) or borrowing cash (liability to creditor)

What is an alternate term for profit margin?

Return on sales

What federal government agency has the ultimate authority to determine the rules for preparing financial statements by companies whose securities are sold to the general public?

SEC Securities and Exchange Commission

What are the 2 major subcategories of operating expenses?

Selling expenses and general and administrative expenses

management accounting

The branch of accounting concerned with providing management with information to facilitate planning and control.

financial accounting

The branch of accounting concerned with the preparation of financial statements for outsider use.

What is the conceptual framework for accounting?

The conceptual framework is a foundation for the specific principles and standards needed by the profession.

stockholder's equity

The difference between a corportions assets and liabilities

Where can you find the beginning balance for retained earnings to report on the statement of retained earnings?

The ending retained earnings on the previous period balance sheet.

What is the Statement of Cash Flows?

The financial statement that summarizes a company's cash receipts and cash payments during the period from operating, investing, and financing activities.

The statement of retained earnings provides a link between which 2 financial statements?

The income statement and the balance sheet

what does the income statement summarize?

The income statement summarizes the results of operations of an entity for a period of time.

accounting

The language of business. The process of identifying, measuring and communicating economic information to various users.

internal user

The management of a company directly involved in the operations of the business.

retained earnings

The part of stockholders' equity that represents the income earned less dividends paid over the life of an entity.

What is the operating cycle?

The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory.

What do consolidated financial statements reflect?

The position and results of all operations that are controlled by a single entity.

what is auditing?

The process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presented.

Name 2 formats that are used to present the income statement.

The single-step format and the multiple-step format.

On which financial statement are dividends reported?

The statement of retained earnings

external user (definition and examples)

Those not directly involved in the operations of a business. Examples: stockholders, bond holders and other creditors, government agencies, suppliers, financial analysts. Examples: Stockholders, creditors, government agencies

Name an important use of the income statement.

To evaluate the profitability of a business.

What is the purpose of the Statement of Retained Earnings?

To show the amount of and reasons for changes in Retained Earnings for the period

What is the purpose of the statement of cash flows?

To summarize the effects of a company's operating, investing and financing activities for the period.

Under what circumstances would a company have a net loss?

When Expenses > Revenues

who prepares the financial statements?

a company's accountants

what is investing activities?

acquiring assets to run the company

AICPA

an acronymn for the American Institute of Certified Public Accountants. c. The AICPA advises the FASB

write out the accounting equation

assets = liabilities + owners' equity

what are the 3 types of accounts reported on the balance sheet?

assets, liabilities and owners' equity

what is the formula for the current ratio?

current ratio = current assets/ current liabilities

what is a sole proprietorship?

single owner who has personal liability for the company debts. Profits from the business are reported and taxed on a Schedule C on the owner's individual tax return (Form 1040)

give 2 examples of contribued capital accounts

capital stock and paid in capital in excess of par value

What amount calculated on the Statement of Cash Flows is also reported on the Balance Sheet?

cash

what are the 2 sources of stockholders' equity?

contributed capital and earned capital

what does the statement of cash flows show?

is shows the sources of and uses for the cash for the period

what does the IASB do?

develops worldwide accounting standards

what amount calculated on the Statement of Retained Earning is carried over to the Balance Sheet?

ending retained earnings

Who expresses an opinion on the financial statements based on certain tests?

external auditor

what are the types of business activities?

financing, investing, and operating

3 provisions of the sarbanes - oxley act

i. Establish the PCAOB, Public Company Accounting Oversight Board to set auditing standards ii. Require external auditors to report directly to the company's auditing committee. iii. Prohibit public accounting firms that audit a company from providing any other services that could impair their ability to act independently in the course of their audit.

What amount calculated on the Income Statement is carried over to the Statement of Retained Earnings?

net income

how is net income calculated?

net income = revenues - expenses

If financial statements are audited, does that mean they have been certified as totally accurate?

no

give 2 examples of long term liabilties

notes payable, bonds payable

stockholder (shareholder)

one of the owners of a corporation (owns share(s) of the corporation's stock)

what is a corporation?

organized under the law of a particular state. Any number of owners (including just one). Owners (shareholders, stockholders) do not have personal liability for the company debts. Company profits are reported and taxed on a corporate tax return. Stockholders are taxed on any dividends received from the corporation and reported on Schedule B of the owner's individual tax return (form 1040). Since dividends are a distribution of the profits of the business, it is said the profits are double taxed, once at the corporate level and again at the individual level on the dividends received.

give an example of earned capital account

retained earnings

what 2 types of accounts are reported on the income statements?

revenues and expenses

alternative term for the balance sheet

statement of financial position

what are the alternate term of income statement?

statement of income

To whom do managers and auditors have an ethical responsibility?

stockholders and the public

what are the types of product companies?

suppliers manufacturers wholesalers retailers

Who is responsible for the financial statements?

the company management

Who is responsible for the content of the financial statements?

the company's management

Operating activities concern

the purchase and sale of a product.

what is a partnership?

two or more owners who have personal liability for the company debts. Profits from the business are reported and taxed on Schedule K on each partner's individual tax return (Form 1040)

what is the formula for working capital?

working capital = current assets - current liabilities