C213 Test questions
Which form must be filed quarterly by all publicly held corporations
10-Q
Number of days sales in inventory
365 days in a year/Inventory turnover
Would be added to net income on a statement of cash flows prepared using the indirect method
A decrease in accounts receivable
Expenses generally cause
A decrease in net assets
A gain on the sale of machinery in the ordinary course of business should be presented in a statement of cash flows (indirect method)
A deduction from net income
Would be deducted from net income on a statement of cash flows prepared using the indirect method
A gain from the sale of equipment
Income from Continuing Operations
A measure of a company's performance that includes all items that are expected to continue into the future
Operating leverage
A measure of risk
Accounting
A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
Liquidity
Ability a company has to pay its debts in the short run
Audit committee
According to Sarbanes-Oxley, who are auditors required to report to and be retained by
Effect that the Securities Exchange Act of 1934 had on accountants?
Accountants must audit all 10-Q reports.
If a company anticipates a 40% increase in sales volume, then it is most likely that the company will need about a 40% increase in
Accounts payable.
Activity-based costing systems assume that
Activities consume overhead costs
A loss from the sale of a building would be reported on an indirect method statement of cash flows as
An addition to net income
Would be subtracted from net income on a statement of cash flows prepared by the indirect method
An decrease in dividends payable
Revenues cause
An increase in net assets
Statement of earnings
Another name for the income statement
Found on the balance sheet
Assets Owners' equity Liabilities
The internal audit manager reports directly to the
Audit committee
The exchange of debt for equipment would
Be shown as a supplementary disclosure
Investing activities EQUATION
Beginning cash balance + Operating activities + X + Financing activities
Ending cash balance EQUATION
Beginning cash balance + Operating activities - Investing activities - Financing activities
Immediate recognition
Best describes the rationale for matching administrative and selling expenses with revenues of the current period
Leverage
Borrowing that allows a company to purchase more assets than its stockholders are able to pay for
Relevant ranges must be considered for
Both fixed and variable costs
A common method of analyzing mixed costs
Both high-low and scattergraph
For a gain or loss to be classified as extraordinary, it must be
Both unusual and infrequent
Return on Equity (ROE) 2
Calculated using numbers from both the income statement and the balance sheet
Considered to be an owners' equity account
Capital stock, All these are owners' equity accounts, Retained earnings
Cash flow adequacy
Cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations
Cash times interest earned
Cash flow ratio reflects a company's ability to make its interest payments from cash generated through operations
Cash flow-to-net income
Cash flow ratio reflects the extent to which accrual accounting adjustments and assumptions have been included in net income
Cash flow adequacy ratio
Cash from operations ÷ Cash for investing activities
Cash flow-to-net income EQUATION
Cash from operations/Net income
Cash inflow from financing activities EQUATION
Cash receipt from the issuance of stock - Cash paid for dividends
Reported as a cash flow from financing activities
Cash receipts from the issuance of long-term debt
Would be reported as a cash flow from financing activities
Cash receipts from the issuance of long-term debt
Net cash inflow from operating activities EQUATION
Cash received from customers + Dividends received on long-term investments - Cash paid for wages - Cash paid for insurance
Would be classified as an investing activity on a statement of cash flows
Cash received from the sale of a land
Operating activities EQUATION
Collections on accounts receivable - Payments for wages and salaries + Receipt of interest revenue - Payments for inventory
Sales revenue
Common-size balance sheet, using the percent of sales method, each item on the balance sheet is typically expressed as a percentage of
A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?
Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size.
Product costs of a software development company
Computer programmers' salaries, Computer lease, Supplies used by programmers...NOT SALARY OF CEO
Public Company Accounting Oversight Board is required to
Conduct inspections of accounting firms, Register all public accounting firms that provide audits for public companies, Establish standards relating to the preparation of audit reports for public companies
The Public Company Accounting Oversight Board
Conducts inspections of accounting firms
The excess of sales over variable costs is equal to
Contribution margin
When the variable cost ratio decreases, the
Contribution margin as a percentage of net sales increases
C-V-P analysis is useful to managers in
Controlling decisions Evaluating decisions Planning
Company A allocates one type of overhead cost on the basis of movement of materials. The number of movement of materials processed is an example of a(n)
Cost driver
Inventory turnover EQUATION
Cost of goods sold/Average Inventory
When using activity-based costing, the cost associated with producing each batch is an example of a
Cost pool
Direct costs
Costs that are directly traceable to a unit of business or segment being analyzed
Expenses
Costs that are incurred during the normal operations of a business to generate revenues
Payment of accounts payable
Could increase a firm's current ratio
Cost of goods sold on a common-size income statement EQUATION
Current assets/Sales revenue
When using common-size statements
Data may be selected for the same business as of different dates, or for two or more businesses as of the same date
Key component of the definition of accounting?
Decision-oriented, Financial, Useful...NOT Qualitative
As activity level increases within the relevant range, per-unit fixed costs usually will
Decrease
Fixed costs per unit
Decrease as activity levels increase
Within the relevant range, the fixed cost per unit
Decreases as activity level increases
When other factors remain constant, a decrease in fixed costs
Decreases the number of units needed to earn profits
Current assets usually are listed on a balance sheet in
Decreasing order of liquidity
Purpose of financial statement analysis
Diagnosis and Prognosis
Total Manufacturing Costs EQUATION
Direct labor + Direct materials + Manufacturing Overhead
An example of direct matching of an expense with revenues would be
Direct labor costs incurred to produce inventory sold during a period.
General types of financial statement notes
Disclosure of important information that is not recognized in the financial statements Summary of significant accounting policies Additional information about the summary totals found in the financial statements
First step a business professional should take when confronted with a situation that may involve an ethical conflict
Discuss the problem with the immediate supervisor.
Dividends
Distributions by a corporation to its stockholders
A company's asset mix is determined by
Dividing each asset item on the balance sheet by total assets
Historically, a plant-wide manufacturing overhead rate would usually be assigned on the basis of
Either direct labor hours or number of products produced
An example of a stepped fixed cost is
Factory supervisors' salaries
Overstates assets
Failure to record the used portion of supplies on hand during the month has the following effect on the financial statements prepared at the end of the month
Balance sheet
Financial statements that reports a company's resources, obligations, and owner's equity
Income statement
Financial statements that reports the excess of a company's revenues over its expenses
Statement of cash flows
Financial statements that reports the mount of cash collected and paid out by a company
The repayment of the principal on a loan used to finance the purchase of equipment should be classified as a(n)
Financing activity
The relevant range refers to the activity range over which
Fixed and variable cost relationships remain the same
Formula for the high-low method of analyzing mixed costs
Fixed costs = total costs − (activity level × variable cost rate)
Operating leverage deals primarily with the relationship between
Fixed costs and variable costs
What is the detailed report that companies file annually with the Securities and Exchange Commission
Form 10-K
Return on Equity (ROE) 1
Fundamental measure of overall company performance
The initials GAAP stand for
Generally Accepted Accounting Principles, Developed by accounting rule makers
Inventory
Generally is NOT considered to be a liability
A wholesale bakery would normally recognize revenue when
Goods are delivered to the customer
The proper order on an income statement for the various measures of income is
Gross profit, operating income, income from continuing operations, net income, comprehensive income
As compared to a company with a low operating leverage, a company with a high operating leverage will:
Have larger losses below the break-even point
To maximize its profits, a company should pay the highest sales commissions on those products with the
Highest contribution margin
Reliable
Historical cost has long been used in accounting because it is
First three steps in implementing an ABC system are
Identify the key cost activities. Analyze each overhead cost in terms of these activities in order to compute the cost pools. Specify numerical cost drivers that can be used to assign the overhead costs to production.
Revenue
In a common-size income statement, each item on the statement is expressed as a % of
Greater than 1
In general, most companies have significant noncash expenses that reduce net income and also cause the cash flow-to-net income ratio to be
Operating Income is equal to
Income from Continuing Operations plus Income Tax Expense and Interest Expense plus/minus other miscellaneous revenues, expenses, gains, and losses
Expense and revenue accounts appear on the
Income statement
As activity level increases within the relevant range, total variable costs usually will
Increase
If the fixed costs relative to a specific product increase while the variable costs and sales price remain constant, the break-even point will:
Increase
When a company pays a warehouse by paying cash, the effect on the accounting equation will be to
Increase Buildings and decrease Cash
When a company buys a warehouse by using a mortgage with a local bank, the effect on the accounting equation for the company will be to
Increase Buildings and increase Mortgage Payable
When a company borrows money from a bank to be repaid in over time, the effect on the accounting equation for the company will be to
Increase Cash and increase Bank Loan Payable
When an investor pays cash into a business to become a part owner, the effect on the accounting equation for the business will be to
Increase Cash and increase Paid-in Capital
When a company rents a warehouse by paying for the first six month's rent in advance, the effect on the accounting equation on the day of payment would be to
Increase Prepaid Rent and decrease Cash
One method that a multi-product firm can employ to promote a high-contribution margin product is
Increase advertising for the product
When other factors remain constant, an increase in variable costs
Increases the number of units needed to earn profits
Manufacturing Overhead EQUATION
Indirect labor + Indirect materials + Factory utilities + Insurance on manufacturing equipment
Considered a current asset
Inventory, Accounts Receivable, Cash....NOT equipment
External users of financial statements use financial statement analysis for
Investing decisions
Emphasis in financial accounting is on which of the following external user groups
Investors and creditors
Financial statement analysis
Involves relationships and trends
Maintaining low fixed costs and high variable costs rather than high fixed costs and low variable costs
Is a more conservative cost structure
Depreciation expense
Is an application of the principle of systematic and rational allocation
Financial Accounting Standards Board (FASB)
It consists of seven full-time members, It has no legal power to enforce the standards it sets, It seeks consistency for its proposed standards, The current standard-setting board for accounting in the private sector...NOT a government agency
True about the double-entry system of bookkeeping
It was developed in the 1300s−1400s in Italy.
The behavior of a cost is usually defined in terms of how that cost varies with respect to
Level of activity
Within the relevant range, variable costs are considered to be:
Linear
Products that usually consume the highest amount of overhead costs per unit
Low-volume unique products
Unit level: Activities that take place each time a unit of product is produced
Machine maintenance Machine depreciation Electricity and other energy costs
Example of a cost driver
Machine setups
The accuracy of the information contained in the financial statements is the responsibility of the
Management
Glue used in the manufacture of chairs would most likely be classified as
Manufacturing overhead
Activity-based costing deals with the allocation of
Manufacturing overhead costs
Costs that are NOT classified as direct materials or direct labor but are essential to the production of goods and services are
Manufacturing overhead costs
Current Ratio
Measure of the liquid position of a corporation
Asset turnover
Measures a firm's efficiency at using its assets
Direct method
Method by which cash flows are presented on a statement of cash flows as operating cash receipts and payments
When using the scattergraph method to analyze mixed costs, the regression line should be visually fit to
Minimize the average distance between all the data points and the regression line
Costs that contain both fixed and variable components are
Mixed costs
Total contribution margin will increase in a two-product firm if total units sold remain the same and
More products with the highest contribution margin are sold
Differential costs
Most important costs to consider when making a decision involving future action, Future costs that change as a result of a decision
Common-sized financial statements
Most useful in analyzing companies of different sizes
Usually activity-based costing would be significantly more accurate than traditional product costing in a
Multiple-product firm where products are quite different
When revenue and expense items are arranged to highlight important profit relationships, the resulting income statement format is called a
Multiple-step income statement
Return on Sales equation
Net Income/Sales Revenue
Net cash flow from operating activities EQUATION
Net income + Amortization expense + Accounts receivable decrease + Inventory decrease + Interest payable increase
Net cash flow from operating activities EQUATION
Net income + Depreciation expense + Accounts receivable decrease - Inventory increase + Accounts payable increase
Net cash provided by operations EQUATION
Net income + Depreciation expense + Patent amortization expense + Loss on sale of machinery - Gain on sale of securities
Times interest earned ratio
Net income + Tax expense + Interest expense/Interest expense
Earnings per share is equal to
Net income divided by total number of shares of stock outstanding
Return on equity equation
Net income/Common stock + Add paid-in captial +Retained earnings
When assigning cost drivers to facility support activities, an appropriate cost driver would be
No cost driver should be assigned
Ethical guideline that the Institute of Management Accountants (IMA) requires its members to follow
Not disclose confidential information, Maintain objectivity when communicating information to decision makers, Act with both actual and apparent integrity in all situations
Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's
Notes to financial statements
An appropriate cost driver for inspection costs is
Number of inspections completed
An appropriate cost driver for engineering changes is
Number of set-ups performed
Comprehensive income EQUATION
Operating Income - Income Taxes - Interest Expense - Extraordinary Loss + Unrealized Gain not included in Net Income
Primary use of cash
Operating expenses
Typical sequencing of activities on the statement of cash flows
Operating, investing, and financing
According to Sarbanes-Oxley, which one of the following services is an accounting firm permitted to provide to its audit client
Opinions about the reliability of internal controls
Used in the evaluation of a business segment
Opportunity costs, Direct costs, Variable costs... NOT Sunk costs
International Accounting Standards Board (IASB)
Organization that develops worldwide accounting standards
Net income (or net loss)
Overall measure of the performance of a business entity's activities
Total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements
Owner's equity will be overstated
Would be reported as an operating activity on a statement of cash flows
Payment of taxes
C-V-P analysis, while useful for several purposes, is primarily useful in
Planning
Analyzing financial statements, prognosis is
Prediction of how a business will perform in the future
Managers
Primary internal users of accounting information, has the widest variety of decisions to make
Recognition
Process of formally recording an item in the accounting records so that it will be reflected in the financial statements
Direct labor is most often considered
Product cost
In non-U.S. Balance sheets, you will often see
Property, plant, and equipment will be listed first and Current assets and current liabilities will be netted together
Most likely to be a variable cost
Raw materials
Operating
Refers to those activities that are part of the day-to-day business of a company
Would be included on an income statement
Rent expense
Price-earnings ratio
Represents an indication of investor's expectations concerning a firm's growth potential
Two economic factors that enable us to trust an independent auditor despite the fact that the auditor was hired by the company being audited
Reputation of auditor and risk of lawsuits
The indirect method of preparing a statement of cash flows
Results in the same net cash flow from operating activities as the direct method, Is the method most often used in practice, Involves adjusting the net income figure for any noncash expenses
Net income/Equity
Return on equity ratio under the DuPont framework is computed as
When a company determines to get out of a specific line of business
Revenues and expenses from that line of business are excluded from the company's recurring revenues and expenses when preparing an income statement.
Contribution margin is equal to
Revenues − Variable costs
Income from continuing operations
Sales - Cost of Goods Sold - Operating Expenses - Income taxes - Interest expense
Net income EQUATION
Sales - Cost of goods sold - Operating Expenses - Income taxes - Interest expense - Extraordinary Item
Gross profit is the difference between
Sales and Cost of Goods Sold
Cash provided by operating activities
Sales receipts - Inventory payments - Interest payments - Wage payments + Dividend receipts + Interest receipts
Net increase in cash EQUATION
Sales receipts - Inventory payments - Interest payments - Wage payments + Dividend receipts + Interest receipts - Equipment purchased - Stock of Canton Company purchased + Stock issued - Repaid a note (non operating)
Key factor involved in cost-volume-profit (C-V-P) analysis
Sales revenue, Fixed and variable costs, The mix of products sold....NOT Time value of money
Asset turnover equation
Sales revenue/Common stock + Total investments + Total PPE (property, plant, equip)
Sales revenue on a common-size income statement EQUATION
Sales revenue/Sales revenue
Price-earnings ratio equation
Shares x Market price per share of common stock/Net income
The direct method of presenting a statement of cash flows
Shows the major classes of operating cash receipts and payments
Disclosure
Sometimes done in place of recognition when the effects of an event cannot be quantified with any degree of certainty
Three primary financial statements
Statement of cash flows Income statement Balance sheet
Another name for the balance sheet is the
Statement of financial position
A cost behavior pattern
Stepped costs, Mixed costs, Variable costs....NOT Relevant cost
Cash provided by financing activities EQUATION
Stock issued - Repaid a note (non-operating)
Period cost of operating a retail store
Store rent, Store manager's salary, Corporate computer cost.....NOT Cost of merchandise sold
The statement of cash flows
Summarizes all cash inflows and outflows of an entity for a given period of time
Indirect method
The approach to preparing a statement of cash flows that adjusts net income to cash flows from operations...method that begins with net income or net loss and adjusts that number for items that did not affect cash
A company's asset mix is strongly influence by
The company's industry
Financial capital maintenance
The concept that income is defined as the excess of net assets at the end of an accounting period over the net assets at the beginning of the accounting period, excluding effect of transactions with owners
Financing mix is a measure of
The degree to which a company finances assets using liabilities or owners' equity
Income statement
The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or a year
The GAAP Oval best represents
The flexibility managers have within GAAP to report one earnings number from among many possibilities.
Going concern concept
The idea that businesses must be accounted for as though they will exist at least for the foreseeable future
Articulation
The idea that certain figures on an operating statement help to explain changes in figures on comparative balance sheets
Comparability
The idea that information becomes more useful when it can be related to a benchmark or a standard
True of accounting information
The information is primarily financial in nature, The information is quantitative in nature, The information relates to specific accounting entities....NOT The information relates to future time periods.
Relevance
The notion that information will be more useful if it will impact a decision
Conservatism
The notion that when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities
Comprehensive Income
The number used to reflect an overall measure of the change in a company's wealth during the period
In the scattergraph method fixed costs are
The point where the line crosses the cost axis
Sales mix refers to
The relative proportions of different products that constitute total sales
Needed to compute break-even point
The sales mix The company's total fixed costs The per-unit contribution margin of each product sold
Financial statements shows an entity's cash receipts and payments
The statement of cash flows
Period costs
They are recognized as an expense, The most common are selling and administrative costs, They cannot be assigned to a product
Operating activities
Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows
Considered a manufacturing cost
Tires for an automobile manufacturer, Milk for an ice cream maker, Property taxes on the factory for an ice cream make
Controller
Top accountant in most large organizations
Fixed costs
Total costs are the same at all levels of activity
Debt Ratio equation
Total current liabilities + Total long-term liabilities/Common stock + Total investments + Total PPE
Variable costs
Types of costs always change in total in proportion to changes in the level of activity of a firm AND types of costs remain constant per unit within a certain relevant range
Indirect costs
Types of costs would be allocated among segments rather than directly attributable to a segment...ex. cost of milk for an ice cream manufacturer
Break even EQUATION
Unit sells for $40(#of units) - variable cost per unit is $24(#of units) - total fixed costs
If activity-based costing is used, assembly would be classified as a
Unit-level activity
Net income/Sales
Used to measure a firm's profitability
Return on Sales
Used to measure the profit earned on each dollar of sales in a firm
Mosely Company's per-unit cost is the same at all levels of activity. The company's cost structure must have all
Variable costs
The two components of a mixed cost are
Variable costs and fixed costs
No stockholders' equity
When analyzing a company's debt ratio, if the ratio has a value that is equal to one, then the company has
When does the Securities and Exchange Commission (SEC) typically require a company to submit a registration statement to the SEC for approval
When the company issues new debt or stock securities to the public
Materiality
Whether an item is big enough that proper accounting will make a difference to users of accounting information
Beginning cash balance EQUATION
X + Operating activities - Investing activities - Financing activities
Out-of-pocket cost
You want to go skiing for the day. The cost of the lift ticket
Mortgage payable
considered a long-term liability
Cash
is considered to be the most liquid
Capital Stock EQUATION
total assets - total liabilities - retained earnings
Debt Ratio
used to measure a firm's leverage
Product line Activities that take place in order to support a product line, regardless of the number of batches or individual units actually produced
• Engineering product design • Storage in special warehouses • Management by a special supervisor of all activities associated with a particular product line • Ordering, purchasing, and receiving materials unique to a particular product line
Batch level Activities that take place in order to support a batch or production run, regardless of the size of the batch
• Inspections • Machine setups • Movement of and accounting for materials
Facility support Activities necessary to have a production facility in place. However, these activities are not related to any particular line of products or services
• Property taxes • Factory insurance • Security • Landscaping • General accounting • General factory administration
