Acct Chapter 2

At December 31, 2017, Shorts Company had retained earnings of $2,184,000. During 2017, the company issued stock for $98,000, and paid dividends of $34,000. Net income for 2017 was $402,000. How much was the retained earnings balance at the beginning of 2017?

$1,816,000 The beginning balance of retained earnings is the ending balance minus net income plus dividends. Working backwards, $X + $402,000 - $34,000 = $2,184,000. Therefore, beginning retained earnings = $1,816,000.

The following balances and amounts were taken from the financial statements of Ortiz, Inc. The data are presented in alphabetical order. Accounts payable $35,000 Accounts receivable 37,500 Average common shares 20,000 Average current liabilities 110,000 Average and total assets 600,000 Average total liabilities 320,000 Cash 100,000 Cash provided by operations $90,000 Net income 36,000 Salaries and wages payable 8,000 Stockholders' equity 240,000 Total current assets 300,000 Total current liabilities 120,000 How much is earnings per share?

$1.80 Earnings per share is the result of net income (less preferred dividends) being divided by the average common shares; $36,000 / 20,000 shares = $1.80.

Current liabilities are $10,000, long-term liabilities are $20,000, common stock is $50,000, and retained earnings totals $70,000. How much is total stockholders' equity?

$120,000 Common stock and retained earnings are both elements of stockholders' equity. Common stock of $50,000 plus retained earnings of $70,000 equals $120,000 in stockholders' equity.

The following balances and amounts were taken from the financial statements of Ortiz, Inc. Capital expenditures $55,000 Cash 100,000 Cash dividends paid 20,000 Cash provided by operations $90,000 Net Income 80,000 How much is free cash flow?

$15,000 Free cash flow is computed by subtracting capital expenditures and cash dividends from cash provided by operations. $90,000 - $55,000 - $20,000 = $15,000.

The following balances and amounts were taken from the financial statements of Ortiz, Inc. Accounts payable $35,000 Accounts receivable 37,500 Average common shares 20,000 Average current liabilities 110,000 Average and total assets 600,000 Average total liabilities 320,000 Cash 100,000 Cash provided by operations $90,000 Net income 36,000 Salaries and wages payable 8,000 Stockholders' equity 240,000 Total current assets 300,000 Total current liabilities 120,000 How much is working capital?

$180,000 Working capital is current assets minus current liabilities. $300,000 - $120,000 = $180,000

In 2017, Bombay Corporation had cash receipts of $21,000 and cash disbursements of $12,000. The company's ending cash balance at December 31, 2017 was $33,000. What was the beginning cash balance?

$24,000 The ending balance plus cash disbursements less cash receipts equals the beginning balance. $33,000 + $12,000 - $21,000 = $24,000.

Net income is $200,000, preferred dividends are $20,000, and average common shares outstanding are 50,000. How much is earnings per share?

$3.60 Earnings per share of $3.60 is calculated by dividing earnings available to common stockholders ($200,000 - $20,000) by the average number of common shares outstanding (50,000) = $3.60/share.

For 2017, Stoneland Corporation reported net income, $24,000; net sales, $400,000; and average shares outstanding, 6,000. There were no preferred stock dividends. How much was the 2017 earnings per share?

$4.00 Net income ($24,000) divided by average shares outstanding (6,000) = $4.00/share.

Which of the following does not properly reflect a financial ratio?

$7,200 An amount such as $7,200 is likely an account balance, which can be used to calculate a ratio. However, it is not a way to express a ratio. Ratios can be stated in the form of a percentage (such as 50%), a rate (such as 1.5 times greater than a reference), or a simple proportion (like 1:2).

Cash flows from operating activities are $200,000; cash flows from financing activities are $150,000; capital expenditures are $90,000; and dividends are $20,000. How much is free cash flow?

$90,000 Free cash flow is cash provided by operating activities adjusted for capital expenditures and dividends paid. $200,000 ‒ $90,000 ‒$20,000 = $90,000.

The following balances and amounts were taken from the financial statements of Ortiz, Inc. Accounts payable $35,000 Accounts receivable 37,500 Average common shares 20,000 Average total assets 2000,000 Average and total assets 600,000 Average total liabilities 320,000 Cash 100,000 Cash provided by operations $90,000 Net income 36,000 Salaries and wages payable 8,000 Stockholders' equity 240,000 Total current assets 300,000 Total current liabilities 120,000 How much is Ortiz's current ratio?

2.50 The current ratio is total current assets divided by total current liabilities; ($300,000 / $120,000) = 2.5 to 1.

The following balances and amounts were taken from the financial statements of Ortiz, Inc. Accounts payable $35,000 Accounts receivable 37,500 Average common shares 20,000 Average current liabilities 110,000 Total assets 600,000 Average total assets 320,000 Cash 100,000 Cash provided by operations $90,000 Net income 36,000 Salaries and wages payable 8,000 Stockholders' equity 240,000 Total current assets 300,000 Total current liabilities 120,000 How much is the debt to assets ratio?

60% The debt to asset ratio is total liabilities divided by total assets; $360,000 (total assets of $600,000 less stockholders' equity of $240,000) / $600,000 = 60%.

A company purchased a tract of land on which it expects to build a production plant on in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?

A long-term investment

What are generally accepted accounting principles?

A set of accounting rules and practices that have authoritative support.

In what order are current assets listed?

By liquidity

Which of the following is the correct order for listing current assets on the balance sheet?

Cash, short-term investments, accounts receivable, inventories, prepaid expenses

Which of the following are constraints that allow a company to modify generally accepted accounting principles without jeopardizing the usefulness of the financial statements?

Cost constraint

Which of these measures is an evaluation of a company's ability to pay current liabilities?

Current Ratio

In a classified balance sheet, how are assets usually classified?

Current assets; long-term investments; property, plant, and equipment; and intangible assets

Which one of the following is *not* an alternate means of expressing a ratio?

Dollar amount

Which is an indicator of profitability?

Earnings per share

T or F: Consistency means that a company uses the same accounting principles and methods as the other companies in the same industry.

False Consistency means that a company uses the same accounting principles and methods from year-to-year.

T or F: Current assets are economic resources that are expected to be converted to cash or used up by the business within one year or the normal operating cycle, whichever is shorter.

False Current assets are expected to be converted to cash or consumed within the next year or the normal operating cycle, whichever is longer.

T or F: Going concern is the qualitative characteristic of accounting information that allows a statement reader to compare a company's performance from one year to the next.

False The going concern assumption states that the business will remain in operation for the foreseeable future.

T or F: The monetary unit assumption assures that all important information needed by investors, creditors, and managers is contained in the financial statements.

False The monetary unit assumption requires that only those things that can be expressed in monetary terms are included in the accounting records. Some important information needed by investors, creditors, and managers is not reported in the financial statements.

What is the primary accounting standard-setting body in the United States?

Financial Accounting Standards Board

What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U. S.?

Generally accepted accounting principles (GAAP)

What organization issues International Financial Reporting Standards?

International Accounting Standards Board

Which one of the following does not affect retained earnings?

Issuance of common stock

Which of the following is considered property, plant, and equipment on a classified balance sheet?

Land

If a company has the ability to pay obligations that are expected to become due within the next year or operating cycle whichever is longer, what is the term that describes this measure?

Liquidity

Which of the following is not classified as a current asset?

Patents

For what purpose might a company use free cash flow?

Pay additional dividends Acquire property, plant, and equipment Pay off debts

Which of the following ratios measures the ability of the company to survive over a long period of time?

Solvency ratios

Which statement is used by most corporations instead of the retained earnings statement?

Statement of stockholders' equity

Which of the following is an example of an intangible asset?

Trademarks

T or F: The current ratio is a liquidity ratio that is computed as current assets divided by current liabilities.

True

T or F: The historical cost principle requires that if a company buys a building for $2,000,000 in 2015 that increases in value to $2,900,000 in 2017, the company will have to report the building at $2,000,000 in the balance sheet for 2017.

True The historical cost principle requires that an asset continue to be reported at original cost over the life of the asset.

What is the primary criterion by which accounting information can be judged?

Usefulness for decision making

Which of the following is not a fundamental quality of useful accounting information?

Verifiability

Which of the following is not a characteristic of relevance?

Verifiability Verifiability refers to the process or capability of being able to prove or verify that the data is free from error. This is one of the enhancing qualities of useful information.

What is measured by current assets minus current liabilities?

Working capital

The correct order of presentation in a classified balance sheet for the following current assets is

cash, accounts receivable, inventories, prepaid insurance.

The following ratios are available for Leer Inc. and Stable Inc. Leer Inc.: Current Ratio: 2:1 Debt to Assets Ration: 75% Earnings per share: $3.50 Stable Inc.: Current Ratio: 1.5:1 Debt to Assets Ratio: 40% Earnings per share: $2.75 Compared to Stable Inc., Leer Inc. has

higher liquidity and lower solvency, but profitability cannot be compared based on information provided. The current ratio measures liquidity and higher means the company is more liquid. The debt to assets ratio measures solvency and higher is not always better. We don't know how many outstanding shares each company has so we cannot compare profitability.

Issuing new shares of common stock will

increase common stock.

Earnings per share is computed by dividing net income

less preferred stock dividends by the average common shares outstanding.

An item is ________ if it is likely to influence the decision of an investor or creditor.

material

A company can change to a new method of accounting if management can justify that the new method results in terms of

more meaningful financial information.

Verifiability is

one of the enhancing qualities that makes information useful; however,it is not one of the fundamental qualtities. (faithful representation and relevance)