Accounting Test 2

How does authorized stock differ from outstanding stock?

Authorized stock is the maximum number of shares of stock that the corporate charter allows for the corporation to issue. Outstanding stock is issued stock in the hands of the stockholders.

What is Cost of Goods Sold (COGS), and where is it reported?

Cost of Goods Sold is the cost of merchandise that has been sold to the customer. It is shown on the income statement as an expense.

What types of transactions are reported in the non-cash investing and financing activities section of the statement of cash flows?

Investing and financing transactions that do not involve cash are called non-cash investing and financing activities. Examples of these non-cash investing and financing activities include issuing stock in exchange for plant assets, retirement of debt by issuing stock, or purchasing plant assets with long-term notes payable.

What are the three relevant dates involving cash dividends?

The three relevant dates involving cash dividends are the declaration date, date of record, and payment date.

How does cumulative preferred stock differ from noncumulative preferred stock?

With cumulative preferred stock, the owners must receive all dividends in arrears before the corporation pays dividends to the common stockholders. For noncumulative preferred stock, the corporation is not required to pay any passed dividends.

What are the four basic rights of stockholders?

1.) Participate in management by voting on corporate matters. 2.) Receive a proportionate part of any dividend that is declared and paid. 3.) Receive a proportionate share of any assets remaining after the corporation pays its debts and liquidates. 4.) Maintain their proportionate ownership in the corporation (a preemptive right).

The gross profit percentage is one of the most carefully watched measures of ________.

profitability

What are the two basic sources of stockholders' equity? Describe each source.

The two basic sources of stockholders' equity are paid-in capital and retained earnings. Paid-in capital represents amounts received from stockholders in exchange for capital. Common stock is the main source of paid-in capital. Retained earnings is equity earned by profitable operations that is not distributed to stockholders.

What is a corporation?

A corporation is a business organized under state law that is a separate legal entity.

What should the net change in cash section of the statement of cash flows always reconcile with?

The net change in the cash section of the statement of cash flows reconciles the statement of cash flows. It is computed by combining the cash provided for or used by operating, investing, and financing activities. This amount should equal the change in cash on the balance sheet.

How does the statement of cash flows help users of financial statements?

The statement of cash flows helps users do the following: •Predict future cash flows. •Evaluate management decisions. •Predict ability to pay debts and dividends.

What does the statement of cash flows report?

The statement of cash flows reports on a business's cash receipts and cash payments for a specific period.

Describe the multi-step income statement.

A multi-step income statement lists several important subtotals. In addition to net income (the bottom line), it also reports subtotals for gross profit and income from operations.

If current assets other than cash increase, what is the effect on cash? What about a decrease in current assets other than cash?

An increase in a current asset other than cash causes a decrease in cash. A decrease in a current asset other than cash causes an increase in cash.

Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.

Depreciation expense, depletion expense, and amortization expense all impact the income statement decreasing net income. None of these use cash at the time they are expensed, these expenses occurred when the asset was purchased. Therefore, to go from net income to cash flows, depreciation must be removed by adding it back to net income.

What does earnings per share report, and how is it calculated?

Earnings per share reports the amount of net income (loss) for each share of the company's outstanding common stock. It is calculated by taking net income minus preferred dividends divided by the weighted average number of common shares outstanding.

Describe the payment date

Payment of the dividend usually follows the record date by a week or two.

How does preferred stock differ from common stock?

Preferred stock gives its owners certain advantages over common stock. It receives dividend preference over common stockholders. It also receives assets before common stockholders if the corporation liquidates.

What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?

The long-term liability accounts and the equity accounts must be evaluated when completing the financing activities section of the statement of cash flows.

In a multi-step income statement, what is excluded from the calculation of operating income?

interest expense

A small increase in the gross profit percentage may indicate an important rise in income.

true

what is the correct formula for calculating gross profit percentage?

Gross profit / Net sales revenue

How is gross profit calculated, and what does it represent?

Gross profit is calculated as net Sales Revenue minus Cost of Goods Sold and it represents the mark-up on the merchandise inventory. It is the extra amount the company receives from the customer over what the company paid to the vendor.

What account is used to record the premium when issuing common stock? What type of account is this?

The account used to record the premium when issuing common stock is the Paid-In Capital in Excess of Par—Common. It is an equity account.

In a multi-step income statement, interest revenue and interest expense are included in operating income

false

What does the gross profit percentage measure? How is it computed?

The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. Gross profit percentage equals gross profit divided by net sales revenue.

On a multi-step income statement, merchandisers report operating expenses in two categories—selling expenses and administrative expenses

true

Operating income is gross profit minus operating expenses

true

The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.

true

What is the effect on the accounting equation when cash dividends are declared? What is the effect on the accounting equation when cash dividends are paid?

-When cash dividends are declared, a current liability increases (Dividends Payable) and Stockholder's Equity decreases (Retained earnings). -When cash dividends are paid, there is a decrease in both assets (Cash) and liabilities (Dividends Payable).

what is the correct order of subtotals that appear on a multi-step income statement?

Gross profit, Operating income, Net income

What is subtracted from net sales revenue to arrive at gross profit on a multi-step income statement?

cost of goods sold

What is added to operating income to arrive at net income?

interest revenue

A company made net sales revenue of $530,000, and cost of goods sold totaled $238,500. Calculate its gross profit percentage

55% Explanation: A) Gross profit = Sales revenue - Cost of goods sold = $530,000 - $238,500 = $291,500 Gross profit percentage = Gross profit / Sales revenue = $291,500 / $530,000 = 55%

Gilbert, Inc. generated sales revenues of $1,400,000 in 2017. Its cost of goods sold amounted to Calculate Gilbert's gross profit percentage.

60% Explanation: B) Gross profit = Sales revenue - Cost of goods sold = $1,400,000 - $560,000 = $840,000 Gross profit percentage = Gross profit / Sales revenue = $840,000 / $1,400,000 = 40%

The gross profit percentage for Smith Clothing Retailer was 37.7% for the year ended December 31, 2016 and 42.5% for the year ended December 31, 2017. The industry average gross profit percentage, for both years, is 45.7%. Briefly discuss these findings.

: The gross profit percentage for Smith has improved from 37.5 percent for 2016 to 42.5 percent for 2017. This shows that the gross profit earned from merchandise inventory has increased and is providing more to cover the remaining operating expenses and provide for net income. This increase is a good step in reaching the industry average. Smith should work to continue this increase and to keep operating expenses under control. These two actions will improve net income.

If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

A loss on disposal of long-term assets would be removed from the net income on the statement of cash flows by adding it back in the operating section. The loss was originally included in net income, but the cash from the sale needs to be shown in the investing section of the statement of cash flows.

How is net sales revenue calculated?

Net Sales Revenue is calculated as Sales Revenue less Sales Returns and Allowances and Sales Discounts.

Describe the declaration date

On the declaration date the board of directors announces the intention to pay the dividend. The declaration of a cash dividend creates an obligation (liability) for the corporation.

Describe the three basic types of cash flow activities.

The three basic types of cash flow activities are: operating, investing, and financing. Operating activities are ones that create revenue or expenses in the entity's business. Investing activities increase or decrease long-term assets. Financing activities include cash inflows and outflows involved with long-term liabilities and equity.

On a multi-step income statement, the operating expenses are subtracted from ________ to arrive at operating income.

gross profit

Expenses that fall outside the regular operations of a business are ________.

included under the other revenues and expenses section of the income statement

List three characteristics of a corporation

-Is a separate legal entity -Has one or more owners -No personal stockholder liability for the debts of the corporation -Does not allow stockholders to bind the business to a contract -Has an indefinite life -Is a separate taxable entity -Allows for capital accumulation

Describe the date of record

Date of record is the date the corporation records the names of stockholders that receive dividend checks.

If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

An increase in current liabilities causes an increase in cash. A decrease in current liabilities causes a decrease in cash.

What is par value?

Par value is an arbitrary amount assigned by a company to a share of its stock.

Describe the five steps used to prepare the statement of cash flows by the indirect method.

The five steps used to prepare the statement of cash flows by the indirect method are: • STEP 1: Complete the cash flows from operating activities section using net income and adjusting for increases or decreases in current assets (other than cash) and current liabilities. Also, adjust for gains or losses on long-term assets and non-cash expenses such as depreciation expense. • STEP 2: Complete the cash flows from investing activities section by reviewing the long-term assets section of the balance sheet. • STEP 3: Complete the cash flows from financing activities section by reviewing the long-term liabilities and equity sections of the balance sheet. • STEP 4: Compute the net increase or decrease in cash during the year. The change in cash is the key reconciling figure for the statement of cash flows and must match the change in cash reported on the comparative balance sheet. • STEP 5: Prepare a separate schedule reporting any non-cash investing and financing activities.

What does the gross profit percentage measure, and how is it calculated?

The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. The gross profit percentage is computed as follows: Gross Profit / Net Sales Revenue

What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?

The long-term asset accounts must be evaluated when completing the investing activities section of the statement of cash flows.

What does the statement of retained earnings report?

The statement of retained earnings reports how the company's retained earnings balance changed from the beginning of the period to the end of the period.

What does the statement of stockholders' equity report? How does the statement of stockholders' equity differ from the statement of retained earnings?

The statement of stockholders' equity is another option for reporting the changes in stockholders' equity of a corporation. This statement has more information than the statement of retained earnings in that it reports the changes in all stockholders' equity accounts, not just retained earnings.

Describe the two formats for reporting operating activities on the statement of cash flows

The two formats for reporting the operating activities section are the indirect and direct methods. The indirect method starts with net income and adjusts it to net cash provided by operating activities. The direct method restates the income statement in terms of cash. It shows all the cash receipts and cash payments from operating activities.

What is treasury stock? What type of account is Treasury Stock, and what is the account's normal balance?

Treasury stock is a corporation's own stock that it has previously issued and later reacquired. Its normal balance is a debit. Treasury stock is a contra-equity account.

Where and how is treasury stock reported on the balance sheet?

Treasury stock is reported beneath retained earnings on the balance sheet as a reduction to total stockholders' equity.