ACCTG331 Exam 1 Chapter 1-4
refers to the process of including additional pertinent information in the financial statements and accompany notes.
Disclosure
Decreases in equity of a particular enterprise resulting from transfers to owners.
Distributions to owners
Called shareholders' equity or stockholders' equity for a corporation, it is the residual interest in the assets of an entity that remains after deducting its liabilities.
Equity (or net assets):
$166,000 $130,000 (net income) + $40,000 (depreciation expense) - $10,000 (increase in accounts receivable) + $6,000 (increase in accounts payable) = $166,000
Laser world's income statement reported total revenues of $850,000 and total expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the following: Account Receivable-beginning balance, $50,000 and ending balance, $60,000; Accounts payable-beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash flows from operating activities were:
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Liabilities:
Intangible assets.
Long-lived assets used in the operations of the business refer to property, plant, and equipment, and:
is the process of associating numerical amounts with the elements.
Measurement
Debiting an expense When an expense is incurred, it is recorded as a debit to a temporary shareholder's equity account, in this case salaries expense.
Recording an expense for salaries incurred and paid in cash would be recorded by:
Confirmatory Value
Relevance requires that information possess predictive and/or:
Losses
Represent decreases in equity arising from peripheral or incidental transactions of an entity.
Role is to offer credibility to financial statements Can express OPINION on the compliance of financial statements with GAAP
Role of an Auditor They can also express _______
Securities and Exchange Commission was created after the stock market crash on 1929, has the authority to set accounting and reporting standards for companies who securities are publicly traded.
SEC means Why was it created?
has the authority to establish standards dealing with auditing, quality controls, ethics, independence, and other activities relating to the preparation of audit reports.
Sarbanes Oxley Act oversight
$6,000,000 ROA = net income / assets, so 12% = $720,000 / assets, so assets = $6,000,000
Smith Company earns a 12% return on assets. If net income is $720,000, average total assets must be:
Income before taxes
The multiple-step income statement and a single-step income statement would report the same subtotal for which of the following amounts?
useful in decision making
The primary objective of financial reporting is to provide information that is
Representational faithfulness
The qualitative characteristic that means there is agreement between a measure and a real-world phenomenon is:
Cash, short term investments, and account receivables
The readily converted to cash assets for quick ratios:
Management's Discussion and Analysis (MD&A)
The section of a company's annual report that provides management's views on significant events, trends, and uncertainties pertaining to a company's (a) operations, (b) liquidity, and (c) capital resources is
Equation for Times Interest Earned Ratio
(Net income + interest expense + income taxes) / interest expense
a journal
A chronological record of all economic events affecting a firm is provided by a:
a ledger
A collection of storage areas, called accounts, used to keep track of increases and decreases in financial positions elements is:
2.5% ROE = PM x AT x EM 18.4% = PM x 3.5 x 2.1 PM= 2.5%
A company reports return on equity of 18.4% asset turnover of 3.5, and an equity multiplier of 2.1. Using the Dupont framework, compute the company's profit margin.
The ability of a company to convert its assets to cash to pay its current obligations
A company's liquidity most often refers to
1. Prepayments, sometimes referred to as deferrals 2. Accruals 3. Estimates
Adjusting entries are necessary for three situations:
The financial statements are presented in conformity with generally accepted accounting principles (GAAP)
An "unqualified" opinion in the auditor's report provides the opinion that
= (net income + interest expense + income taxes) / interest expense
The times interest earned ratio equation is
Financial Accounting
The type of financial information to EXTERNAL decision makers is referred to as:
Periodicity.
The underlying assumption that assumes that the life of a company can be divided into artificial time periods is:
1. Operating income 2. Nonoperating income 3. Income tax expense
Three major components of the income statement are:
1. Operations 2. Liquidity 3. Capital Resources
Three management's responsibilities
indicates that information is available to users early enough to allow them to use it in their decision process
Timeliness
means that users can comprehend the information within the context of the decision being made.
Understandability
implies that different knowledgeable and independent measurers would reach consensus regarding whether information is a faithful representation of what it is intended to depict.
Verifiability
Record Adjusting Entries and Post to the Ledger Accounts
What is step 6 of the accounting process
Prepayments.
When cash precedes either expense or revenue recognition Ex: a company may buy supplies in one period but use them in a later period. What type of situation is it in adjusting entries?
The new standard is applied only to the current period and all future periods, and the cumulative effects of prior periods is shown as an adjustment to retained earnings.
Which of the following describes the modified retrospective approach to implementing a change in accounting principle?
Political pressure has not been exerted relevant to accounting for stock compensation.
Which of the following is NOT true about accounting for stock compensation? - Some types of stock compensation previously resulted in little compensation expense recognition. - Political pressure has not been exerted relevant to accounting for stock compensation. -Stock compensation has historically been important to many high-tech companies. - Stock compensation typically results in some expense recognition.
The exclusive right to use a franchiser's trademark or tradename. Land held for future expansion and investment in equity securities are classified as long-term investments, natural resources would be part of property, plant, and equipment.
Which of the following is an intangible asset reported in the balance sheet? - Land that is being held for future company expansion. - Investment in equity securities of another company. - Natural resources such as minerals mines. - The exclusive right to use a franchiser's trademark or tradename
Cost effectiveness because the benefit of the information being provided must exceed the costs of doing so.
Which of the following is considered a practical constraint on the qualitative characteristics?
The balance sheet reports the change in financial position.
Which of the following is not a characteristic of the balance sheet? - The major classification of the balance sheet are assets, liabilities, and owners' equity. - The balance sheet reports the change in financial position - Assets generally are listed in order of their liquidity. - The balance sheet provides information useful in assessing liquidity.
Because these amounts typically will be collected within one year. Accounts receivables usually are collected (converted to cash) within 30 to 60 days.
Which of the following provides the best explanation for why accounts receivables are normally classified as current assets in the balance sheet?
investments are assets that are not used directly in the operations of the business.
Why are investments not long-lived assets?
Accounts Payable
are obligations to suppliers or merchandise or of services purchased on account , with payment usually due in 30 to 60 days.
Notes Payable
are written promises to pay cash at some future date (I.O.U.s).
statement of financial position
balance sheet refers to
Underlying of the framework. The benefits of providing information must outweigh the cost.
cost effectiveness constraint
Report long-term assets and liabilities before current assets and liabilities
Balance sheets prepared using International financial reporting standards often
Accumulated Other Comprehensive Income
refers to changes in stockholders' equity other than transactions with owners and other than transactions that affect net income. Third component of stockholder's equity.
Double-entry
refers to the DUAL EFFECT that each transaction has on the accounting equation.
Temporary Accounts
represent changes in the retained earnings component of shareholders' equity for a corporation caused by revenue, expense, gain, loss, and dividend transaction.
Permanent Accounts
represents assets, liabilities, and shareholder's equity at a point in time.
Increases in equity of a particular business enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interests in it.
Investments by owners
refers to the process of admitting information into the financial statements
Recognition
Gains
: Increases in equity from peripheral or incidental transactions of an entity.
Debiting an asset
A sale of merchandise on account would be recorded by:
American Institute of Certified Public Accountants. Provides code of ethics/ professional conduct.
AICPA means: Provides ________
Standards. oversight; enforcement.
AICPA set _________. The SEC has ________ and ___________ authority.
Bonds Payable
An item not generally classified as a current liability is
Deferred Revenues
Are created when a company receives cash from a customer in one period for goods or services to be provided in a future period. Ex: a landlord may collect rent a month in advance from a tenant. What type of situation is it in adjusting entries?
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.
Assets:
No change to the current ratio and decrease the acid test ratio.
Assuming a current ratio of 1.2 and an acid test of 0.80, how will the purchase of inventory with cash effect each ratio?
helps users see similarities and differences between events and conditions
Comparability
The change in equity from transactions with nonowners. Comprehensive Income = net income + other comprehensive income
Comprehensive Income equals:
1. in a single, continuous statement of comprehensive income 2. in two separate, but consecutive statements.
Comprehensive income can be reported in one of two ways :
refers to the same accounting practices being used over time to permit valid comparisons between reporting periods
Consistency
Assets Increase = add Assets Decrease = deduct Liabilities Increase = deduct Liabilities decrease = Add
Converting Cash Basis Income to Accrual Basis Income Assets - Liabilities -
Current assets divided by current liabilities
Current Ratio equation
Will have a higher balance after to closing Revenues are debited to reduce them to zero and the retained earnings account is credited. Expense are credited to reduce them to zero and the retained earnings account is debited. So, a net credit to retained earnings results from revenues for the period exceeding expenses, increasing retained earnings.
If revenues exceed expenses for the accounting period, the retained earnings account:
Assets will be overstated and income overstated The adjusting entry for depreciation is a debit to depreciation expense and a credit to accumulated depreciation. By not recording the expense, net income will be overstated. By not recording accumulated depreciation, the asset's book value will be overstated.
If the required adjusting entry for depreciation expense is omitted:
Current assets Supplies are a current asset since they will most likely be consumed/used within the next year or operating cycle whichever is longer.
In a classified balance sheet, SUPPLIES would be classified among:
Retained earnings will be greater if the gain is reported as part of net income
In the current year, a company has a gain of $50,000. The company's accountant is deciding whether to report this gain as part of non-operating income in the income statement or as part of other comprehensive income. Which of the following is true? - Total shareholders' equity will be greater if the gain is reported as part of other comprehensive income. - Net income will be same under either choice. - Retained earnings will be greater if the gain is reported as part of net income. - Total assets will be greater if the gain is reported as part of other comprehensive income.
left
In the double-entry system, debit means:
Obligations expected to require the creation of other current liabilities.
Included in the category of current liabilities would be
Revenues:
Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
Perpetual Inventory System
Inventory and cost of goods sold accounts are continuously updated for purchase, sale, and return of merchandise.
Periodic Inventory System
Inventory and cost of goods sold are updated at the end of the reporting period.
current assets readily converted to cash (quick assets) divided by current liabilities
Quick Ratio equation
$200,000 The operating income of the component ($450,000) would be reported as part of discontinued operations. The amount by which the asset's fair value is less than their book value is included as an impairment loss (-$250,000). Income from discontinued operations = $450,000 - $250,000 = $200,000
On May 31, 20x1, Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. By the end of the year, the assets have not been sold. The book value of those assets equals $1,000,000, and the company estimates their fair value to be $850,000. The component generated operating income for the year of $450,000. In its income statement for the year ended December 31, 20X1, for what amount would the company report income from operations of a discontinued component. (ignoring taxes)
Loss of $75,000 The gain on the sale of assets of $200,000 ($1,200,000-$1,000,000) minus the operating loss of $300,000 equals pretax loss on discontinued operations of $100,000. Net of a 25% tax benefit ($25,000 = $100,000 x 25%), the loss reduces to $75,000.
On May, 20X1, the Arlene Corporation adopted a plan to sell its cosmetics line of business, considered a component of the entity. The assets of the component were sold on October 13, 20X1 for $1,200,000. The book value of those assets equaled $1,000,000 at the time of the sale. The component generated an operating income loss of $300,000 from January 1, 20X1, through disposal. The company's tax rate is 25%. For what amount would the company report income from discontinued operations?
Expenses:
Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations
Equation for Debt to Equity Ratio
TOTAL liabilities divided by stockholder;s equity
Asset Amount depreciable asset such as building or equipment
The ACCUMULATED DEPRECIATION is a contra (valuation) account to:
$225,000 [$250,000 (income before income taxes) + $50,000 (loss on discontinued operations)] x [1.0 - 0.25 (tax rate)] = $225,000
The Compton Press Company reported income before taxes of $250,000. This amount included a $50,000 loss on discontinued operation. The amount reported as income from continuing operations, assuming a tax rate of 25% is:
$42,000 Amount Borrowed x 12% x 3/12 = $1,260. Amount borrowed x 0.03 = $1,260. $1,260 / 0.03 = $42,000
The Esquire Clothing Company borrowed a sum of cash on October 1, 2018, and signed a note payable. The annual interest rate was 12% and the company's year 2018 income statement reported interest expense of $1,260 related to this note. What was the amount borrowed?
1. Economic Entity 2. Going Concern 3. Periodicity 4. Monetary Unit
The FOUR Underlying Assumptions:
Monitoring the development of GAAP within the accounting profession and using its stature to influence that development.
The SEC exerts a continuing influence on the establishment of accounting standards. It does so primarily by:
Operating income
The application of intraperiod income taxes requires that income taxes be apportioned to each of the following items except:
Usually one year, because the operating cycle typically is less than one year.
The basis used to classify assets as current or long-term is:
Comprehensive income
The change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Transferring revenue and expense balances to retained earnings. Revenues, expenses and other temporary equity accounts are closed, reduced to $0, with the balances transferred to retained earnings.
The closing process involves:
Develop a single set of global accounting standards
The main objective of the IASB is to:
The proxy statement
The compensation of directors and top executives is disclosed in
Prepaid expenses
The cost of assets acquired in one period and expensed in a future period. Ex: payment made by a company or insurance for future periods is an asset to the company, prepaid insurance. The asset is expensed in the future period when the asset expires. What type of situation is it in adjusting entries?
Statements of Financial Accounting Concepts
The document that set forth FUNDAMENTAL CONCEPTS on which financial accounting and reporting standards will be based are
