Accounting Online Ivy Software Chapter 2

The total cumulative amount of earnings that the company has retained and reinvested in its operations.

Retained Earnings

Cash

asset

The value of every __________ must be measurable with some degree of accuracy in monetary terms.

asset

plant and equipment

asset

They are considered _________ because they represent "probable future benefits."

assets

On the___________ the current assets are normally listed in order of liquidity, with cash, the most liquid asset, listed first.

balance sheet

A company does not necessarily have to be profitable during a particular year in order for it to pay these

dividends

Costs incurred by the company in the process of generating revenues.

expenses

Report Form

lists the assets on the left-hand side of the statement and the liabilities and owners' equity on the right-hand side

Investments are shown on the balance sheet at their

market value

long-term liabilities

mortgage payable

Investments

represent long-term holdings of securities.

order of assets on balance sheet

(Current Assets) 1.Cash 2.Certificate of Deposit 3.Accounts Receivable 4. Inventory 5. Prepaid Insurance (Total Current Assets) 1.Building 2.Land

The Financial Accounting Standards Board has stated that a complete set of financial statements for an entity should show its:

1. Financial position at the end of the period 2. Cash flows for the period 3. Earnings for the period 4. Comprehensive income for the period 5. Investments by and distributions to owners during the period

order of current liabilities

1.Accounts payable 2.Wages payable 3.Income tax payable 4.Interest payable

current assets

1.Cash 2.Accounts receivable, 3. accrued interest receivable, 4. office supplies, 5.prepaid expenses

Long-term assets

1.notes, 2.receivable, 3.property, machinery

current liabilities

1.trade pay 2. accrued rent payable 3. accrued salaries

Goober Pyle purchased machinery for his auto shop at a cost of $5,000 with a note from the bank. Accordingly (a)liabilities increased $5K and assets increased $5K, (b) liabilities increased $5K and owners' equity decreased $5K,(c) assets and owners' equity both increased $5K, (d) none of the above

A - liabilities increased $5K and assets increased $5K,

Which of the following is a liability? A) accounts payable, B)Inventory, C)Investments, D) Prepaid Insurance, E)None

Accounts Payable

Current assets

An enterprise's resources that are expected to be converted into cash within a year as a result of the day-to-day operations of the firm

Creditor

An entity that provides an asset to a firm in exchange for future reimbursement, usually in the form of cash.

Fundamental equation =

Assests = Liabilities + Owners' Equity (increase in assets must be balanced by an equal and offsetting increase in liabilities and/or equity, or a decrease in other assets.

Investment

Asset

Accounting Equation

Assets = Liabilities + Owners Equity

You sell 100 shares of common stock to Mr. Berry. Which increase and which decreases in Assets = Liabilities + Owner's Equity

Assets increase & Owners equity increases

When a company becomes incorporated, its retained earnings account is ______

$0

Order for owners' equity

1. Common (Capital) stock 2. Retained earnings

Current assets are a firm;s resources that are expected to be converted into cash within a year. The basis of this rule is

Accounting convention, which dictates the categories on the balance sheet. This idea of cash conversion within a year is an accounting convention, not a GAAP principle.

You purchase supplies on account which increases and decreases in Assets = Liabilities + Owner's Equity

Assets increase & Liabilities increase

Dividends are distributions of profits to the owner's of a corporation, and therefore represent an expense to the firm T/F

F

T/F: The capital stock account combined with the retained earnings account reflect the valuation the open market places on the company

F

T/F: The statement of financial position she's how well a company has perform over a period of time.

False - (Balance sheet) - lists a company's assets, liabilities, and owner's equity.

Which account shows the dividends paid during the accounting period?

Statement of retained earnings. This shows the beginning and ending retained earnings plus net income and dividends.

T/F The retained earnings could take the form of inventory

TRUE. As a company generates earnings, these earnings can take the form of investments. Investmants can be in the form of accounts receivable, inventory, and plant and equipment.

T/F The net worth of a company is shown on the balance sheet.

TRUE. Net worth is synonymous with owners equity although equity is the preferred title.

The difference between a firm's revenues and its expenses for a period

Net Income

What is a snapshot of the financial position of a company?

The balance sheet

Liabilities

The debts of an enterprise

The financial position at the end of a period is reflected on the

Balance Sheet

long-term liabilities

Bonds (Notes) Payable

Money spend to buy equipment

Capital Expenditure

Which of the following accounts represents the original investment of the shareholders? (a) capital stock, (b) retained earnings, (c) liabilities, (d) assets, (e) none of the above

Capital Stock

The amount that owners have directly invested into the corporation.

Capital stock

Includes cash on hand, checks on hand that have not been deposited, and cash in the bank.

Cash Account on Balance Sheet

Asset Accounting Equation

Current Assets + Non-current Assets = Total Assets

Include all obligations that are expected to be paid within one year

Current Liabilities

Arial Corporation incorporated on January 1, 2012. The capital stock account at that time was $100K. Losses for 2012, 2013, and 2014 totaled $60K. The retained earnings account at the end of 2014 was (a)$40K, (b) $160K, (c) $60K, (d) -$60K

D -$60,000

A dividend is declared and paid in cash. Which increase decrease in Assets = Liabilities + Owner's Equity

Decrease assets & decreases owners equity

You make a cash settlement of an account payable. Which increase/decrease? Assets = Liabilities + Owner's Equity

Decreases assets & decreases liabilities

T/F: Capital stock represents the market's value of the company.

F

T/F: Current assets are properly listed in order of liquidity on a balance sheet as shown in the following example: Cash, Accounts Receivable, Prepaid Insurance, Inventory

F

T/F: Prepaid items have already been converted to cash and therefore are the most liquid items in the current assets portion of the balance sheet.

F

T/F An asset is only a tangible, economic resource of a firm that can be measured in monetary terms.

FALSE. An asset does not need to be tangible as long as it is measurable in monetary terms. (Think: a patent)

T/F Dividends are the largest expense a corporation incurs.

FALSE. Dividends are not an expense of the corporation. They are NOT required to pay dividends.

T/F The money spent to buy equipment is called an expense

FALSE. Money spent on this is called capital expenditure. The historical cost of the equipment is reported on the balance sheet under the category of property, plant, and equipment.

T/F A company's property holdings are usually listed as fair market value on the balance sheet

FALSE. Property, like any asset, is carried on a company's books and is listed on its balance sheet at its original price. This is known as the historical cost or acquisition cost of the asset.

T/F The statement of retained earnings shows the revenues, expenses, and net income of an enterprise over a period of time.

FALSE. The statement of retained earnings shows the retained earnings at the beginning of the period plus net income, less dividends. Finally, the ending retained earnings are shown .

T/F: Current assets almost always equal Current Liabilities

False

T/F: Retained earnings are the earnings that a company saves and reinvests; they can be used whenever the company needs cash.

False

T/F: Dividends can be paid to stockholders only following a year in which a company has generated net income.

False - a company can pay dividends any time its board of directors chooses, whether the firm has operated profitability or at a net loss for the year.

a company's property holdings are usually listed at fair market value on the balance sheet T/F

False - property, like any assets, is carried on a company's books and is listed on its balance sheet as its original price. This is known as the historical cost or acquisition cost of the asset.

Allison Corporation had net income of $18,000 for 2014. At the end of 2014, Allison paid out $10K in dividends. This payment left Allison with $8K cash in retained earnings, T/F

False: The payment left Allison with $8,000 in retained earnings, not necessarily cash. The retained earnings could take the form of inventory, accounts receivable and PP&E.

The only requirements to pay the dividends.

Have enough cash and enough retained earnings balance

Matches the revenues that a company earns during a period against the expenses it incurs for the same period.

Income Statement

You receive payment from a debtor. Which increases and decreases in Assets = Liabilities + Owners' Equity

Increase and decrease assets

You get a loan at a local bank. Which increase decrease in Assets = Liabilities + Owner's Equity

Increases assets & increases liabilities

______________________ can go under the heading of "investments" in non-current assets.

Long-term securities

Owners' equity can also be shown on the balance sheet as____

Net worth, net assets, stockholders' equity

Management agrees to paint the store red

No transaction occurred

Prepaid items

Orepayments of expenses that will occur in future periods, such as insurance or rent

Can also be called proprietor's equity, net assets, partners' equity, or stockholders' equity, depending on the type of entity.

Owners Equity

Salaries Expense

Owners' equity

Purpose of Income Statement

To provide information that can be used to evaluate a company's financial performance for a period of time

T/F: Liabilities are the claims of creditors to a company's resources

True

T/F: Stockholder's equity is the same as owner's equity

True

T/F: The "net worth" of a firm is shown on the company's balance sheet.

True

T/F: One application of the conservatism principle is that inventory is valued on the balance sheet at either its original cost or market value, whichever is lower.

True - This is known as valuing inventories at the lower of cost or market (LCM). The concept of conservatism states that financial statements should provide for all probable losses and liabilities.

T/F: Depreciation can be considered an allocated cost of using an asset with a life of more than one year.

True - depreciation is a process of systematically and rationally allocating the cost of an asset over its useful life. Its a good example of the matching principle where expenses are recognized in the period they will provide benefit the firm.

Corporations today often combine the statement of retained earnings with the income statement, in which case the combined statement is called

a statement of income and retained earnings

The two most common formats for balance sheets are

account form and the report form.

Current assets are a firms resources that are expected to be converted into cash within a year. The basis of this rule is

accounting convention

Accounting conventions

accounting convention dictates the categories on the balance sheet. The idea of cash conversion within a year is an accounting convention.

The retained earnings account could take the form of

accounts receivable, inventory, and plant and equipment

Corporations use the __________ method of accounting

accrual

This principle of recognizing revenues and expenses only during the period in which they have occurred is called the ______ method of accounting.

accrual

Income statements are prepared on an...

accrual basis

Accounts Receivable

asset

Inventory

asset

Prepaid Insurance

asset

These can be tangible, like inventory or equipment, or they can represent control of future benefits, such as accounts receivable due from customers or patent rights to a profitable product.

assets

Owners' Equity is divided into two accounts

capital stock and retained earnings

Accounts Receivable

cash due from customers who have purchased goods or services from the company on credit

Method of accounting where revenue is recognized only when cash is received, regardless of when the sale was made or the service performed.

cash method of accounting

One purpose of the retained earnings is to show

claims on the companys resources.

All headings for financial statements should have

company's name, the name of the financial statement, and the date

All headings for financial statements should have the

company's name, the name of the financial statement, and the date

The distribution of corporate profits to the owners. In a sense, they are a reward to the shareholders for investing in the company

dividends

Revenues are recognized when....

earned (not received)

Assets

economic resources of a firm, and they are generally used to help produce, either directly or indirectly, future cash inflows for the firm

if a firm's revenues are greater than its expenses for a period, then the firm's net assets, or owners' equity, will ______________

increase.

Expenses are recognized when...

incurred (not paid) (expenses are subdivided in to cost of goods sold, operating expenses, interest, and taxes)

The ____________________ is a function of how the company has financed its operations and not a result of the operation itself.

interest expense

Almost all _______ are incurred to acquire assets.

liabilities

Claims by creditors on the resources (assets) of a firm

liabilities

Accounts payable

liability

Bonds Payable

liability

Account Form

lists the assets on the left-hand side of the statement and the liabilities and owners' equity on the right-hand side

Prepayment of expenses over a period longer than a year would fall into the __________________ portion of the asset accounts.

non-current

Retained earnings decreases as a result of

operating losses and distributions to stockholders in the form of dividends

Cost of Goods Sold

owner's equity

Sales

owner's equity

capital stock

owner's equity

Interest Expense

owners equity

retianed earnings

owners equity

Retained earnings increases as a result of

profitable operations of a business during a period.

the revenue, whether it is in the form of cash, receivables or other assets, must be measurable with some degree of _________

reliability

If capital stock represents the amount that owners have invested directly into the corporation, then one could consider ______________ as the owners' indirect investment

retained earnings

Income statements always begin with

revenues

The inflows and outflows of a company's resources are expressed in terms of

revenues and expenses.

If a firm decides that it temporarily has excess cash, it may invest some in ___________ until the cash is needed

short term securities

income statement

shows a firm's earnings and comprehensive income for a period

Balance Sheet

shows a firm's financial position at a point in time

the statement of retained earnings

shows the distribution to owners (stockholders) during a period; reports the increases in accumulated, undistributed income from the time of incorporation, plus current earnings, less current dividends.

dividend

sum of money - always subtract to get retained earnings

Owners Equity

the residual claim of the owners on the assets of a firm

A corporation's fiscal year does not always coincide with the calendar year. The most common reason for this disparity is

to favorable present the results of operations of seasonable enterprises

The balance sheet in many cases gives _________ years of data for comparative purposes so that the user can look for trends

two to three

Operating expenses

typically include expenses such as rent, utilities, insurance, salaries, advertising and promotion, and costs associated with running the administrative offices