Final Exam Review
***Revenue
An increase in owner's equity resulting from the operation of a business. Measurement: Sales of products or services to customers Deferred Revenue -is a liability
Times Interest Earned Ratio
net income + interest expense + tax expense / interest expense Which of the following ratios best measures financial leverage?d. Debt to equity ratio
Earnings per Share
net income - preferred dividends / weighted average common shares outstanding
Straight-Line Depreciation
(cost - salvage value) / useful life How much depreciation should be recorded in the first year for a delivery truck purchased on April 1 with a cost of $30,000, an expected life of five years, and an estimated residual value of $5,000? Assume the straight-line method is used.b. $ 3,750Annual depreciation would be: $5,000 = ($30,000 − $5,000) ÷ 5 years
Double-Declining-Balance
(cost-accumulated depreciation) x 2/useful life How much depreciation should be recorded for the first year for a delivery truck with a cost of $30,000, an expected life of six years, and an estimated residual value of $6,000? Assume the doubledeclining-balance method is usedb. $ 10,000 The straight-line rate for a six-year asset is 1/6. This rate would be doubled to 2/6 (or 33.33%). If an asset is sold at the end of its first year of use, which depreciation method would result in the highest amount of gain (or lowest amount of loss) assuming the asset is used fairly evenly over its life?b. Double-declining-balance
Changes in current assets and current liabilities
- Increase in a current asset + Decrease in a current asset + Increase in a current liability - Decrease in a current liability' Increase in accounts receivable is the amount of revenue reported in the income statement but not yet collected in cash Which of the following would be included as an adjustment to net income in the operating activities section of a statement of cash flows using the indirect method?a. Depreciation expense Which of the following items would be added back to net income in the operating activities section of a statement of cash flows (using the indirect method)?c. Increase in the balance in accounts payable
Inventory Cost Methods
-Specific Identification-Matches each unit of inventory with its actual cost -First In, First Out (FIFO)-Assumes first units purchased are first ones sold -Last In, First Out (LIFO)-Assumes last units purchased are first ones sold -Weighted Average Cost-Assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items.
Steps in Preparing the Statement of Cash Flows
1) Determine the change in each balance sheet account. 2) Identify the cash flow category to which each account relates. 3) Create schedules that summarize the operating, investing, and financing cash flows.
Business Structures
1. Corporation is a company that is legally separate from its owners. The advantage of being legally separate is that the stockholders have limited liability (DisA-double taxation) 2. Sole proprietorship is a business owned by one person. 3. Partnership is a business owned by two or more persons
Lower of cost and net realizable value (LCNRV)
1. if cost< LCNRV, lower of cost/ NRV cost vs NRV 2. if cost < LRV, greater of NRV or LCNRV At the end of the year, a company reports the following inventory amounts ($ per unit): Item # of Units Cost Net Realizable Value A 100 $4 $8 B 150 $8 $6 The amount to report for ending inventory using the lower of cost and net realizable value is: The lower of cost and net realizable value is: Item A = $4 per unit (cost) Item B = $6 per unit (net realizable value) Ending inventory = $1,300 $1,300 = (100 units × $4) + (150 units × $6) At the end of the year, a company reports the following inventory amounts ($ per unit): Item # of Units Cost Net Realizable Value A 100 $4 $8 B 150 $8 $6 The year-end adjustment using the lower of cost and net realizable value would include: a. A credit to Inventory for $300 b. A debit to Cost of Goods Sold for $400 c. A debit to Inventory for $500 d. A credit to Cost of Goods Sold for $700 Concept Check 6-10 Recorded cost of inventory = (100 units × $4) + (150 units × $8) = $1,600. Lower of cost and NRV = (100 units × $4) + (150 units × $6) = $1,300. The year-end adjustment to reduce inventory from its cost of $1,600 to NRV of $1,300 is: Cost of Goods Sold 300 Inventory 300
The two functions of financial accounting
1. measure business activities of a company 2. communicate those measurements to external parties for decision making purposes
Outstanding check
A check issued by a company and recorded on its books but not yet paid by its bank. Subtracted from the bank's cash balance.
Treasury Stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use. Treasury Stock: Decreases stockholders' equity
Depreciation
A decrease or loss in value' Allocation of an asset's cost to expense over time
Statement of Cash Flows
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time. Operating Cash Flow-cash transactions involving revenue and expense activities Ex.Paying electricity bill for the month. Investing Cash Flow-cash transactions for the purchase and sale of investments and long-term assets Financing Cash Flow-cash transactions with lenders and stockholders
***Income Statement
A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time. (If revenues > expenses, then net income----If revenues < expenses, then net loss)
***Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date. Best reveals to investors and creditors information about a company's debt
Chart of accounts
A list of all account names used to record transactions
Note Receivable
A promissory note that a business accepts from a person or business. Similar to accounts receivable but include a written debt agreement, or note Normal debit balance ------------------- Interest Calculation and Collection of Notes Receivable Interest =Face value x Annual interest rate x Fraction of the year (6/12) ------------------ A company accepts a note receivable of $5,000 on September 1, 2021, that matures in 10 months and has stated interest of 6%. What amount of interest revenue will the company record in 2021 and 2022?a. 2021 = $100; 2022 = $150 2021: Interest Revenue = $5,000 × 6% × 4/12 = $100 2022: Interest Revenue = $5,000 × 6% × 6/12 = $150
Accrued Expenses
Accrued expenses occur when a company has used costs in the current period, but the company hasn't yet paid cash for those costs. • The company has used these costs to operate the company in the current period and is obligated to pay them. • An adjusting entry is needed to (1) record the liability to be paid and (2) recognize the cost as an expense If a company pays an employee $100 per day for a five-day work week that runs from Monday to Friday, and December 31 is a Tuesday, what is the amount of the salaries adjustment, assuming that Friday is payday? $200 $200 (= $100 per day × 2 days) If a company borrowed $20,000 on November 1 at the rate of 6% annually, how much interest expense should be accrued at the year-end date of December 31, assuming no accrual has yet been made this year? 200 Note Payable × Annual Interest Rate × Fraction of the Year $200 = $20,000 × 6% × 2/12 An adjusting entry would be needed for which of the following transactions? Accrued salaries, Services provided but unbilled, and Interest accrued on a loan payable
Employer Costs
Additional (matching) FICA tax on behalf of the employee • Employers also pay federal and state unemployment taxes on behalf of employees FUTA and SUTA • Fringe benefits: Additional employee benefits paid for by the employer Which of the following items is typically paid by the employer only?c. Federal and state unemployment taxes
Advantages and Disadvantages of a Corporation
Advantages -Limited personal liability -Greater ability to raise funds Disadvantages -Costly to organize -Possible double taxation of income Which of the following is a primary advantage of forming a corporation?c. Increased ability to raise capital and transfer ownership
Retained Earnings
An amount earned by a corporation and not yet distributed to stockholders. Earnings retained in the corporation and not paid out as dividends
***The Accounting Equation
Assets = Liabilities + Equity Assets = resources of the company (Measurement). -Examples: Cash, Land, and Equipment Liabilities = Amounts Owed, creditors' claims to resources (Measurement) -Examples: Accounts Payable, Notes Payable, Salaries Payable,Utilities Payable, and Taxes Payable Stockholders' equity = Stockholders Investments, owners' claims to resources (Measurement) -Examples: Common Stock, Retained Earnings The expanded accounting equation demonstrates that: 1. Revenues increase retained earnings 2. Expenses decrease retained earnings 3. Dividends decrease retained earnings, Retained earnings is a component of stockholders' equity.
Debit and Credit Effects on Accounts in the Basic Accounting Equation
Assets- Debit (increase) Credit (Decrease Liabilities- Debit (Decrease) Credit (Increase) Equity (Decrease) Credit (Increase) 1. Left side—Assets increase with debits. 2. Right side—Liabilities and stockholders' equity increase with credits. • The opposite is true to decrease the balance of any of these accounts.
Internal controls. Ch4
Attempt to eliminate the opportunity element of fraud. A company's plans to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information Components of Internal Control-control environment, risk assessment, control activities, information and communication, monitoring Limitations of Internal Control--costs should not exceed benefit-human element-size of the business
Types of Common Stock
Authorized-Shares available to sell (= Issued + Unissued) Issued- Shares actually sold (= Outstanding + Treasury) Outstanding -Share issued and held by investors Treasury-Shares issued and repurchased by the company.
Aging Method
Basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts Which of the following is true about the aging method?d. Older accounts are less likely to be collected.
Operating Activities—Indirect
Begin with net income • List adjustments to net income to arrive at operating cash flows • Most popular method • Easier and less costly
Financing Alternatives Ch 9
Capital structure: mixture of liabilities and stockholders' equity a business uses Debt financing: borrowing money Equity financing: obtaining investment from stockholders • Cost of financing Debt: interest expense (tax-deductible) Equity: dividends (not tax-deductible) • Examples of debt Notes, leases, and bonds Which of the following statements is true?c. Interest paid on debt is a tax-deductible expense
Accounts Receivable
Cash owed to the company by its customers from sales or services on account Also called trade receivables The effect of writing off a specific account receivable is: A reduction in the Allowance for Uncollectible Accounts.
Deposits outstanding.
Cash receipts of the company that have not been added to the bank's record of the company's balance It adjusts the bank's balance of cash in a bank reconciliation
Allowance For Uncollectible Accounts
Contra asset reported in the balance sheet Reduces the balance of accounts receivable Estimated uncollectible accounts Reduce assets (accounts receivable) Increase expenses (bad debt expense) Which of the following is true regarding Allowance for Uncollectible Accounts? It is subtracted from the balance of Accounts Receivable in the balance sheet. When writing off an uncollectible account:c. Total assets are unchanged. When an entry is made to write off an uncollectible account, c. Net accounts receivable is unchanged. On December 31 before adjusting entries, a company's balance of Allowance for Uncollectible Accounts is a credit of $2,000. What does a "credit" balance prior to adjusting entries indicate?d. Last year's estimate of bad debts was too high. On December 31 before adjusting entries, a company reports the following balances: Accounts Receivable $100,000 Allowance for Uncoll. Accts. $2,000 (credit) The company estimates bad debts to be 20% of accounts receivable. The adjusting entry would include: a. A debit to Bad Debt Expense = $18,000
Features of Preferred Stock
Convertible: shares can be exchanged for common stock Redeemable: shares can be returned to the corporation at a fixed price Cumulative: shares receive priority for future dividends if dividends are not paid in a given year Which of the following is a primary advantage of owning preferred stock?Preference over common stockholders in the distribution of assets in the event of dissolution
Current vs. Long-Term Liabilities Ch 8
Current-Usually payable within one year from the balance sheet date Long-Term- Payable in more than one year from the balance sheet date Which of the following is typically considered a current liability?a. Salaries payable
Deferred Revenues
Deferred revenues arise when a company receives cash in advance from customers, but products and services won't be provided until a later period. • When a company receives cash before providing services to customers, it owes the customer a service in return. This creates a liability. • In the period those services are provided, the liability is settled, and an adjusting entry is needed to (1) decrease the liability to its remaining amount owed and (2) recognize revenue.
Other Current Liabilities
Deferred revenues: liability account used to record cash received in advance of the sale or service • Sales tax payable: sales taxes collected from customers by the seller • Current portion of long-term debt: debt that will be paid within the next year
Dividends
Distributions to stockholders, usually in the form of cash payments. Dividends are not expenses Subtract
Bad Debt Expense
Expense reported in the income statement
Employee Costs
Federal and state income taxes • FICA taxes 7.65% (6.2% + 1.45%) Collectively, Social Security and Medicare taxes • Employees may have additional amounts withheld from their paychecks for health, dental, disability, and life insurance
Financial Statements
Financial reports that summarize the financial condition and operations of a business. Are periodic reports published by the company for the purpose of providing information to external users Primary financial statements (B-E-C-I) Income statement Statement of stockholders' equity Balance sheet Statement of cash flows
Additional Inventory Transactions
Freight charges- Freight-in (shipments from suppliers) Freight-out (shipments to customers) Purchase discounts-Discount offered by seller to buyer for quick payment • Purchase returns -Buyer returns unwanted or defective inventory Which of the following transactions would increase the balance of the inventory account for a company using the perpetual inventory system?Costs of incoming freight charges on merchandise inventory
The Formula to Calculate Interest
I(Interest) =P(Principle)R(Rate)T(Time) Note Payable × Annual Interest Rate × Fraction of the Year=Intererst
Effects of Transactions on the Basic Accounting Equation-Ch2
If total assets increase, then liabilities or stockholders' equity increases by the same amount. • If total assets decrease, then liabilities or stockholders' equity decreases by the same amount. For each transaction, ask these three questions: 1. What is one account affected by the transaction? Does this account increase or decrease? 2. What is a second account affected by the transaction? • Does this account increase or decrease? 3. Do assets equal liabilities plus stockholders' equity?
Inventory Ch 6
Includes items a company intends for sale to customers in the ordinary course of business. Generally reported as a current asset in the balance sheet Manufacturing company- raw materials, work in process, and finished goods Merchandising company-wholesaler and retailer Which of the following inventory accounts consists of items for which the manufacturing process is complete?d. Finished Goods
Investing Activities
Increase or decrease in investments • Increase or decrease in long-term assets, such as: Property Plant Equipment Intangible Assets Which of the following cash transactions would be included in the investing activities section of a statement of cash flows?a. Purchasing a building Which of the following cash transactions would be included in the financing activities section of a statement of cash flows?b. Payment of dividends
Average Days in Inventory
Indicates the approximate number of days the average inventory is held Average Days in Inventory = 365/inventory turnover ratio
Adjusting Entries
Journal entries recorded to update general ledger accounts at the end of a fiscal period Accrual-basis accounting creates timing differences between revenue recognition and cash inflows, and between expense recognition and cash outflows
Acquisitions Ch 7
Land-includes the cost of the land and all expenditures necessary to get the land ready for its intended use Ex. Clearing, filling, and leveling the land, Land improvements are amounts spent to improve the land Ex. Parking lots and sideways Buildings: administrative offices, retail stores, manufacturing facilities, and storage warehouses Ex.Remodeling costs Equipment: machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures
Bank Reconciliation
Matches the balance of cash in the bank with the balance of cash in the company's own records Book balance + note collected − NSF check − bank service fees = Cash balance Cash transactions recorded by the company, but not yet recorded by its bank: Deposits outstanding: cash receipts of the company that have not been added to the bank's record of the company's balance Checks outstanding: checks the company has written that have not been subtracted from the bank's record of the company's balance Which of the following items would be found on the "bank side," or the left-hand side, of the bank reconciliation?b. Deposits outstanding How would an NSF check from a customer be treated on a bank reconciliation?d. Deduction on the company side How would an NSF check from a customer be recorded in the accounting records?a. Debit Accounts Receivable; Credit Cash
Financial Accounting Ch1
Measure business activities and communicate those measures to external users to make decisions.Accounting information provided to external users
Return on Equity
Net Income / Average Stockholders' Equity
Internal purposes
Not published to external parties Not required to follow an order of listing
Average Collection Period
Number of days the average accounts receivable balance is outstanding 365/accounts receivable turnover
Receivables Turnover Ratio
Number of times during a year the average accounts receivable balance is collected Net Credit Sales / Average Accounts Receivable Which of the following would be true for a company that has an accounts receivable turnover of 10? The company would have an average collection period of 36.5 days. The average collection period is computed as 365 divided by the accounts receivable turnover of 10 (= 36.5 days)
Sales Discounts
Offer a customer a reduction if payment is made within a specified period of time • F.Y.Eye offers terms of 2/10, n/30 on $2,000 owed; Customer pays on March 10 (w/in 10 days) Sales Discounts = Contra revenue account Reported with total revenues in the income statement, but with a negative balance Which of the following computations would be used to compute Net Revenue? Total Revenue - Sales Discounts - Sales Allowances
Cash Flow Activities CH11
Operating activities: cash receipts and cash payments for transactions relating to revenue and expense activities Investing activities: cash transactions involving the purchase and sale of long-term assets and current investments Financing activities: inflows and outflows of cash resulting from the external financing of a business (transactions with lenders and with stockholders)
Fraud Triangle
Opportunity — the situation allows the fraud to occur. Motivation — someone feels the need to commit fraud, such as the need for money. Rationalization — justification for the deceptive act by the one committing the fraud.
Public or Private Corporation CH10
Public-Allows public investment • More stockholders • Regulated by the SEC • Examples: Wal-Mart, Microsoft, Inte Private-No public investment • Fewer stockholders • Not regulated by the SEC • Examples: Cargill (agricultural commodities) Koch Industries (oil and gas), Mars
Detective Controls
Reconciliations - Management should periodically determine whether the amount of physical assets of the company (cash, concession items, movie t-shirts, etc.) agree with the accounting records. • Performance reviews - Reviews of actual vs. expected results, which can be applied to the employees as well as business processes. • Audits - Hire an independent auditor to assess the internal control procedures to detect any deficiencies or fraudulent behavior of employees.
Multiple-step income statement
Reports multiple levels of profitability. Gross profit = net revenues (or net sales) - cost of goods sold. Operating income = gross profit -operating expenses. Income before income taxes = operating income + nonoperating revenues - nonoperating expenses. Net income = all revenues - all expenses. A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the FIFO method if 120 units were sold in January? 500 Using FIFO, the first 120 units purchased are assumed to be sold. Cost of goods sold equals: 100 × $4 = $400 (Beginning inventory) 20 × $5 = $100 (Purchase on Jan. 15) A company has the following inventory transactions: Jan. 1 Beginning inventory 100 units @ $4 each Jan. 15 Purchase 100 units @ $5 each Jan. 31 Purchase 100 units @ $6 each What would be the cost of goods sold under the LIFO method if 120 units were sold in January Using LIFO, the last 120 units purchased are assumed to be sold. Cost of goods sold equals: 100 × $6 = $600 (Purchase on Jan. 31) 20 × $5 = $100 (Purchase on Jan. 15)
***Net income
The difference between total revenue and total expenses when total revenue is greater Revenue - Expenses =Net Income Other common names for net income include earnings or profit Add
Revenue and Expense Recognition CH3
Revenue recognition Revenue is recorded in the period in which goods and services are provided to customers. Revenue recognition principle • Expense recognition Any costs used to help generate revenues are recorded as expenses in the same period as those revenues. Cash baisis net income =Cash received from Customers -Cash paid for salaries Accured Net Icome=Revenue earned-Salaries expense\
Inventory Sales
Sales Revenue = Selling price • Cost of goods sold (expense) = Purchase cost (FIFO)
Sales Tax Payable
Sales tax collected from customers by the seller, representing current liabilities payable to the government
Bonds
Secured-Bonds are backed by collateral. Unsecured-Bonds are not backed by collateral. Term-Bond issue matures on a single date. Serial-Bond issue matures in installments. Callable-Issuing company can pay off bonds early. Convertible-Investor can convert bonds to common stock. Which of the following bonds always matures on a single date?A term bond
Physical Controls
Separation of duties - Fraud is prevented by not allowing the same person to be responsible for both controlling the asset and accounting for the asset. • Physical controls - Assets and accounting records must be kept safe and accessible only to authorized personnel. • Proper authorization - Fraud is prevented when unauthorized individuals are not allowed to use company resources. • Employee management - The company should provide employees appropriate guidance in how to perform their jobs as well as in their responsibilities for internal control. • E-commerce controls - Passwords should be required to conduct electronic business transactions, and firewalls and antivirus software should be kept current
Factors Used in Calculating Depreciation
Service life (or useful life)—The estimated use the company expects to receive from the asset before disposing of it. •Residual value (or salvage value)—The amount the company expects to receive from selling the asset at the end of its service life. •Depreciation method—The pattern in which the asset's depreciable cost (original cost minus residual value) is allocated over time.
Notes Payable
Short-term or long-term liabilities that a business promises to repay by a certain date. On October 1, a company signs a $10,000, 5%, 6- month note payable. How much interest would be recorded by December 31 of the same year?b. $125 Interest = $10,000 × 5% × 3/12 = $125
Inventory Turnover Ratio
Shows the number of times the firm sells its average inventory balance during a reporting period Inventory Turnover Ratio=cost of goods sold/average inventory Net sales are $100,000 and cost of goods sold is $70,000. Inventory balances for the past two years are $10,000 and $20,000. What is the inventory turnover? a. 4.67 times per year
6 Steps in Measuring External Transactions Ch2
Step 1 • Use source documents to identify accounts affected by an external transaction. Step 2 • Analyze the impact of the transaction on the accounting equation. Step 3 • Assess whether the transaction results in a debit or credit to account balances. Step 4 • Record the transaction in a journal using debits and credits. Step 5 • Post the transaction to the general ledger. Step 6 • Prepare a trial balance.
***Statement of stockholders' equity
Stockholders' Equity = Common Stock + Retained Earnings Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings Total Stockholders' Equity = Common Stock + Retained Earnings (Beg + End )- Dividends
General Ledger Account
The General ledger- provides, in a single collection, each account with its individual transactions and resulting account balance. Posting-is the process of transferring the debit and credit information from the journal to individual general ledger accounts.
***Expenses
The cost of assets consumed or services used in the process of generating revenues. Measurement: Costs of providing Sales (products and services and other business activities) during the current period. Examples: Salaries Expense, Utilities Expense Which statement best describes when expenses should be recorded? Expenses are recorded when the cost is used to help produce revenue
Cost of goods sold
The cost of the inventory sold. Reported as an expense in the income statement Cost of goods sold is:a. Reported in the income statement Starting inventory + purchases − ending inventory = cost of goods sold.
Debt to Equity Ratio
Total Debt/Total Equity
Sales Returns and Allowances
Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods. Sales Return-Customer returns goods previously purchased Sales Allowances-Customer does NOT return a product The effect of a sales allowance will result in which of the following:b. A decrease to net income
***Investing activities
Transactions involving the purchase and sale of resources that are expected to benefit the company for several years Examples: -Purchase land -Purchase building. Investing cash flows Ex.Cash received from the sale of a used company truck.
***Operating activities
Transactions that relate to the primary operations of the company Examples: -Provide services to customers. -Pay rent for the current period. Operating Cash Flow Ex.Cash paid for supplies.
***Financing activities
Transactions the company has with investors and creditors Examples: -Borrow from the bank -Issue common stock to investors -Pay dividends to stockholders. Financing Cash Flow Ex.Cash received from the issuance of common stock.
Credit Sales CH5
Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account. The formula for average collection period is: 365 days divided by the receivable turnover ratio.
Writing Off Accounts Receivable
When it becomes clear the customer will not pay, the company writes off the customer's account balance as uncollectible The write-off has no effect on total assets (balance sheet) or total expenses (income statement) The write-off: Reduces the balance of Accounts Receivable Reduces the balance of the Allowance for Uncollectible Accounts
Trial balance
a list of accounts and their balances at a given time
Working Capital
current assets - current liabilities
***Generally Accepted Accounting Principles (GAAP)
a set of accounting standards that is used in the preparation of financial statements 1. Economic Entity (Separate Entity ) 2. Monetary Unit (Stable Monetary Unit) 3. Periodicity (Fixed Time period) 4. Going Concern Fundamental qualitative characteristics • Enhancing qualitative characteristics • Cost constraint • Underlying assumptions
Acid-Test Ratio
cash + current investments + accounts receivable / current liabilities The current ratio is: b. Computed as current assets divided by current liabilities
Current Ratio
current assets divided by current liabilities
Current Portion of Long-Term Debt
debt that will be paid within the next year A home improvement store sells some merchandise to a customer. The price of the merchandise is $200 and the sales tax rate is 6.5%. How much would be recorded in the sales tax payable account?a. $13.00 $200 × 0.065 (or 6.5%) = $13.00 Which of the following statements is true with respect to warranty liabilities?The warranty liability account is debited as actual repairs are made During its first year of business, Oceanic, Inc. has sales of $300,000 and pays warranty claims of $10,400. Oceanic offers a one-year warranty and anticipates that warranty costs will total 5% of sales. What is the balance in Oceanic's Warranty Liability account at the end of the first year?b. $4,600
Activity-Based Depreciation
depreciable cost/total units expected to be produced
Cash Dividends
distributions of cash to stockholders that reduce retained earnings How does the stockholders' equity section of the balance sheet differ from the statement of stockholders' equity? a. The stockholders' equity section shows the balances at a point in time and the statement of stockholders' equity shows activity over time.
Dividend Yield
dividends per share/stock price
Inventory Purchases
ending inventory - beginning inventory + COGS Debit inventory, Credit Accounts Payable
Prepaid Expenses
expenses paid in cash before they are used or consumed Prepaid expenses arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period. • There is a timing difference—cash is paid now and then later the expense is recognized. • These payments are recorded as assets at the time of purchase. • In the period these assets are used, an adjusting entry is needed to (1) decrease the asset's balance to its remaining (unused) amount and (2) recognize an expense for the cost of asset used. Which of the following is recorded with an adjusting entry associated with a prepaid expense?a. Credit an asset
Gross Profit Ratio
gross profit/net sales
Intangible assets
long-term assets patents(Granted for a period of 20 years), trademarks(Renewable for an indefinite number of 10- year periods), copyrights(Granted for the life of the creator plus 70 years)) that have no real physical form but do have value Franchises-pay for the exclusive right to use the franchisor's name and to sell its products within a specified geographical area Goodwill is the portion of the purchase price that exceeds the fair value of identifiable net assets (Net assets = assets acquired less liabilities assumed)
Installment Notes
obligations that require regular payments of principal and interest over the life of the loan Each installment payment includes both: 1. Interest on borrowed amount 2. Reduction of outstanding loan balance Tropical Paradise borrows $24,000 and agrees to a 5%, five-year installment loan with the bank. Payments of $452.91 are due at the end of each month. How much interest should be recorded for the first month?b. $100.00 $24,000 × 5% × 1/12 = $100.00
Amortization of Intangible Assets
operating - add to net income Which of the following intangible assets would not be subject to amortization? Trademarks with an indefinite life
Return on Assets
profit margin x asset turnover Return on assets = Profit margin × Asset turnover Net income Net income Net sales Average total assets Net sales Average total assets Papa's Pizza has the following items for the past year: Net sales are $24,128, net income is $2,223, total assets at the beginning of year are $14,898, and total assets at the end of year are $15,465. What is the profit margin?a. 9.2%
Basket Purchase
purchase of more than one asset at the same time for one purchase price A company makes a basket purchase of land, buildings, and equipment with estimated fair values of $70,000, $150,000, and $30,000, respectively. The purchase price is $210,000. How much should be recorded to the Land account?c. $ 58,800
Expenditures After Acquisition
repairs and maintenance, additions, improvements, litigation costs Capitalize = record an asset Which of the following costs would be expensed?Performing a tune-up on a delivery truck
Stockholder Rights
right to vote, right to receive dividends, right to share in the distribution of assets
Noncash Activities
significant investing and financing activities that do not affect cash Which of the following cash transactions would affect the amount of investing cash flows reported in the statement of cash flows?a. Sale of equipment
Price-Earnings Ratio (PE ratio)
stock price/earnings per share The PE ratio:Indicates how a stock is trading relative to its current earnings
Par Value
the amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity Legal capital per share of stock that's assigned when the corporation is first established Company A issues 20,000 shares of $5 par common stock at $12.50 per share. The entry to record the issuance would include which of the following?c. Credit to Additional Paid-in Capital of $150,000