Accounting Principles Semester Overview

The total assets of Ayayai Co. are $890,000 and its liabilities are equal to one-fourth of its total assets. What is the amount of Ayayai's stockholder's equity?

$890,000 / 4 = $222,500 $890,000 - $222,500 = $667,500

Order of Current Assets in order of liquidity

1. Cash 2. Debt Investments 3. Accounts Receivable 4. Supplies 5. Prepaid Insurance

Match each of the following forms of business organization with a set of characteristics: sole proprietorship, partnership, and corporation.

Partnership = Shared control, tax advantages, increased skills and resources Sole Proprietorship = Simple to set up and maintains control with owner Corporation = Easier to transfer ownership and raise funds, no personal liability

In choosing between cost and fair value, the FASB uses two qualities that make accounting information useful for decision making.

Relevance and faithful representation

Working capital

The difference between the amounts of curent assets and current liabilities Working capital = Current Assets - Current Liabilities

Consistency

The quality of consistency means that a company uses the same accounting principles and methods from year to year

Indicate whether each of these items is an asset, a liability, or part of the stockholder's equity. A. Accounts receivable B. Salaries and wages payable C. Equipment D. Supplies E. Common Stock F. Notes payable

A. asset B. liability C. asset D. asset E. Stockholders' Equity F. liability

On average, it takes Andy's Candies 5 months to purchase inventory, sell it on account, and collect cash from its customers. When preparing financial statements, what cutoff should Andy's use for current assets? A. 9 months B. 6 months C. 5 months D. 1 year

D. 1 year

Timely

For accounting information to have relevance, it must be timely. That is, it must be available to decision-makers before it loses its capacity to influence decisions. The SEC requires that large public companies provide their annual reports to investors within 60 days of their year-end

Services Performed on Account

On Account -means that services will be paid at a later date -Revenue is recorded when services are performed

Camparability

When different companies use the same accounting principles, comparability results

Materiality

a company-specific aspect of relevance. An item is decision of a financial statement user

Earnings available to common stockholders

an earnings amount calculated as net income less dividends paid on another type of stock, called preferred stock

Current ratio

computed as current assets divided by current liabilities

Historical Cost Principle

dictates that companies record assets at their cost. This is true \not only at the time the asset is purchased but also over the time the asset is held.

Long-term liabilities are obligations that a company expects to pay after one year

examples are bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.

Intangible Assets are assets that do not have physical substance.

examples are patents, copyrights, and trademarks or trade names that give the company exclusive rights of use for a specified period of time

Fair Value Principle

indicates that assets and liabilities should be reported at fair value (the price that would be received if an asset was sold or the amount that would be required to be paid to settle a liability). Fair value information may be more useful than historical cost for certain types of assets and liabilities.

International Accounting Standards Board (LASB)

issues standards called International Financial Reporting Standards (IFRS) which have been adopted by many countries outside of the United States.

LIquidity ratios

measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Earnings per share

measures the net income earned on each share of common stock.

Accounting Transactions

occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event

Debt to Asets Ratio

one measure of solvency. it is calculated by dividing total liabilities (bot current and long-term) by total assets. It measures the percentage of total financing provided by creditors rather than stockholders

Full disclosure principle

requires that companies disclose sufficient details regarding circumstances and events that would make a difference to financial statement users.

Monetary Unit Assumption

requires that only those things that can be expressed in money are included in the accounting records. This means that certain important information needed by investors, creditors, and managers, such as customer satisfaction is not reported in the financial statements. This assumption relies on the monetary unit remaining relatively stable in value.

Generally Accepted Accounting Principles (GAAP)

set of accounting standards that have authoritative support

Economic Entity Assumption

states that every economic entity can be separately indentified and accounted for. In order to assess a company's performance and financial position transactions with personal transactions (especially those of its managers) or transactions of other companies.

Going Concern Assumption

states that the business will remain in operation for the foreseeable future. Of course, many businesses do fail, but in general it is reasonable to assume that the business will continue operating.

Periodicity Assumption

states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business. Notice that the income statement, retained earnings statements, and statement of cash flows all cover periods of one year, and the balance sheet is prepared at the end of each year

Liquidity

the ability to pay obligations expected to become due within the next year or operating cycle

Securities and Exchange Commission (SEC)

the agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

Ratio analysis

expresses the relationship among selected items of financial statement data

Financial Accounting Standards Board (FASB)

the primary accounting standard-setting body in the United States

Accounting information system

the system of collecting and processing transaction data and communicating financial information to decision-makers

The total assests of Splish Company are $193,000 and its stockholders' equity is $84,000. What is the amount of its total liabilities?

$193,000 - $84,000 = $109,000

At the beginning of the year, Oriole Company had total assets of $845,000 and total liabilities of $532,000. During the year, total liabilities increased $96,000 and stockholders' equity decreased $80,000. What is the amount of total assets at the end of the year?

$532,000 + $96,000 = $628,000 $313,000 - $80,000 = $233,000 $628,000 + $233,000 = $861,000

At the beginning of the year, Oriole Company had total assets of $845,000 and total liabilities of $532,000. If total assets increased $150,000 during the year and total liabilities decreased $75,000, what is the amount of stockholder's equity at the end of the year?

$845,000 + $150,000 = $995,000 $532,000 - $75,000= $457,000 $995,000 - $457,000 = $538,000

At the beginning of the year, Oriole Company had total assets of $845,000 and total liabilities of $532,000. If total assets decreased $82,000 and stockholders' equity increased $120,000 during the year, what is the amount of total liabilities at the end of the year?

$845,000 - $82,000 = $763,000 $313,000 + $120,000 = $433,000 $763,000 - $433,000 = $330,000

The liabilities of Blossom Company are $93,700 and the stockholder's equity is $240,000. What is the amount of Blossom's total assests?

$93,700 + $240,000 = $333,700

Accounting Transactions

- Are Economic events that require recording in the financial statements. Not all events represent transactions - Occur when assets, liabilities, or stockholders' equity items change as a result of some economic event - Have a dual effect on the accounting equation -

Debt to assets ratio

- Debt financing is more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. - Thus, the higher the percentage of debt financing, the riskier the company.

If an individual asset is increased, there must be a corresponding

- Decrease in another asset, or - Increase in a specific liability, or - Increase in stockholders' equity

Long-Term investments generally include the following:

- Investments in stocks and bonds of other corporations that are held for more than one year - Long-term assets such as land or buildings that a company is not currently using in its operating activities - Long-term notes receivable

Accounting Cycle

- Is the basis of an accounting information system - Implemented primarily through a computerized accounting system called electronic data processing systems (EDP) - Contains the same concepts and principles regardless if manual or computerized

Summary of transactions

- Summarizes the transactions to show their cumulative effect on the basic accounting equation -Includes the transaction number in the first column on the left -The right-most column shows the specific effect of any transaction that effects revenues or expenses.

Tabular Analysis

- Used to demonstrate the effect that each transaction has on particular financial statements - Retained earnings is affected when the company recognizes revenue, incures expenses, or pays dividends

Analyzing Transactions

-Is the process of identifying the specific effects of economic events on the accounting equation - Must always balance - Each transaction has a dual effect

Accounting transactions

-economic events the require recording in the financial statement -occurs when assets, liabilities, or stockholders' euity items change as a result of some economic event

Property, plant, and equipment is defined as follows:

1. Assets with relatively long useful lives that are currently used in operating the business 2. This category includes land, buildings, equipment, delivery vehicles, and furniture.

Companies list current assets in order of liquidity, that is, the order in which they expect to convert them into cash

1. Cash 2. Investments (such as short-term U.S. government securities) 3. Receivables (accounts receivable, notes receivable, and interest receivable) 4. Inventories 5. Prepaid expenses (insurance and supplies)

Stockholder's equity consists of two parts: common stock and retained earnings

1. Common stock is the investments of assets into the business by the stockholders (capital stock) 2. Retained earnings is the income retained for use in the business.

Summary of transactions Demonstrates three points

1. Each transaction is analyzed in terms of its effect on assets, liabilities, and stockholders' equity 2. The two sides of the equation must always be equal 3. The cause of each change in revenues or expenses must be indicated

Different ratios

1. Intracompany comparisons covering two years for the same company. 2. Industry-average comparisons based on average ratios for particular industries 3. Intercompany comparisons based on comparisons with a competitor in the same industry.

Accounting Information System is affected by

1. Nature of the company's business 2. Types of transactions 3. Size of the company 4. Volume of data 5. Information demands of management and others Relies on the accounting cycle

Consider the following business activities that occur at a Colorado ski area. Classify each of the items by type of business activity: operating, investing, or financing. 1. Cash receipts from customers paying for daily ski passes. 2. Payments made to purchase additional snow-making machines 3. Payments made to repair the snow-grooming machines 4. Receipt of funds from the bank to finance the purchase of additional snow-making equipment 5. Issue of shares to raise funds for a planned expansion 6. Repayment of a portion of the bank loan (see item 4) 7. Payment of salaries to the ski-lift operators. 8. Payment of dividend to shareholders

1. Operating 2. Investing 3. Operating 4. Financing 5. Financing 6. Financing 7. Operating 8. Financing

Financial Accounting Standards Board (FASB)

1. two fundamental qualities of relevance and faithful representation 2. Describes a number of enhancing qualities of useful info including comparability, consistency, verifiability, timeliness, and understandability.

Elizabeth Coal Ltd has total assets of $8,000,000, common stock of $4,200,000, and liabilities of $1,200,000. What is the amount for retained earnings? A. $2,600,000 B. $3,800,000 C. $5,400,000 C. $6,800,000

A. $2,600,000 The formula for Stockholders Equity (SE) is SE = Common Stock + Retained Earnings; however SE can also be found using this formula, Stockholder Equity = Assets - Liabilities. Therefore, Elizabeth Coal Ltd would calculate Retained Earning (RE) using a combination of both SE formulas, RE=Assets - Liabilities - Common Stock. Using this formula, Elizabeth Coal Ltd's Retained Earnings are $8,000,000 - $1,200,000 - $1,400,000 = $2,600,000

Sol-Tex has net income of $1,300,000 and 400,000 shares outstanding. It has preferred dividends of $300,000. What are the earnings per share? A. $2.50 B. $4.33 C. $0.25 D. $1.86

A. $2.50 The formula for Earnings per Share is: Earnings per Share [EPS] = (Net Income - Preferred Dividends) / (Weighted Average Common Shares Outstanding). Using this formula, Sol-Tex earnings per share is ($1,300,000 - $300,000)/($400,000); ($1,000,000)/($400,000) = $2.5.

Eskimo Pie Corporation markets a broad range of frozen treats, including its famous Eskimo Pie ice cream bars. The following items were taken from a recent income statement and balance sheet. In each case, identify whether the item would appear on the balance sheet or income statment.

A. Income tax expense = Income statement B. Inventory = Balance Sheet C. Accounts Payable = Balance sheet D. Retained earnings = Balance sheet E. Equipment = Balance Sheet F. Sales revenue = Income statement G. Cost of goods sold = Income statement H. Common stock = Balance sheet I. Accounts receivable = Balance sheet J. Interest expense = Income statement

Indicate which statement you would examine to find each of the following items: income statement, balance sheet, retained earnings statement, or statement of cash flows.

A. Revenue during the period = Income statment B. Supplies on hand at the end of the year = Balance sheet C. Cash received from issuing new bonds during the period = Statement of Cash Flows D. Total debts outstanding at the end of the period = Balance Sheet

According to the ________ principle, a company can purchase an asset for $1,000 and, despite an increase in value over time, can continue to report the asset for $1,000. A. historical cost B. fair value C. cost constraint D. materiality

A. historical cost The historical cost principle dictates that a company needs to record assets at their original cost. This remains true not only at the time of purchase but also over the time the asset is held. Therefore, a company can purchase an asset for $1,000, and, despite an increase in value over time, a company can continue to report the asset for $1,000.

Expenses are debited to increase their balance because A. they decrease Retained Earnings. B. they decrease Common Stock. C. they decrease liabilities. D. they are assets.

A. they decrease Retained Earnings. The normal balance for expense accounts is a debit. Expense accounts are one component of Retained Earnings, comprised of revenue, minus expenses, and minus dividends. Since Retained Earnings' normal balance is a credit, an account that decreases Retained Earnings must be a debit.

Relevance

Accounting information has relevance if it would make a difference in a business decision.

Accounting Cycle

Accounting information systems are based on this process

Transaction: A. Costs incurred for advertising B. Cash Received for services performed C. Costs incurred for insurance D. Amounts paid to employees E. Cash distributed to stockholders F. Cash received in exchange for allowing the use of the company's building G. Costs incurred for utilities used H. Cash purchase of equipment I. Cash received from investors

Affects & Account Title: A. Expenses - Advertising Expenses B. Revenues - Service Revenues C. Expenses - Insurance Expenses D. Expenses - Salaries & Wages E. Dividends - Not Applicable F. Revenues - Rent Revenue G. Expenses - Utilities Expenses H. Does not affect Stockholders - Not Applicable I. Common Stock - Not Applicable

Accounting Equation (Expanded Accounting Equation)

Assets = Liabilities + Stockholders' Equity

Gerardi Supply started the year with total assets of $210,000 and total liabilities of $85,000. During the year the business recorded $275,000 in revenues, $120,000 in expenses, and dividends of $50,000. The net income reported by Gerardi Supply for the year was? A. $190,000. B. $155,000. C. $125,000. D. $175,000.

B. $155,000 The formula for net income is revenue minus expenses. Using this formula, Gerardi Supply's net income would be calculated as: $275,000 - $120,000 = $155,000.

If total liabilities decreased by $75,000 and stockholders' equity increased by $20,000 during a period of time, then total assets must change by what amount and direction during that same period? A. $55,000 increase B. $55,000 decrease C. $95,000 increase D. $95,000 decrease

B. $55,000 decrease A balance sheet calculates a Stockholders' equity using the equation: Stockholders' equity equals (Total assets minus liabilities) plus (net income) minus dividends. Therefore, decreased liabilities plus stockholders' equity increase equals total asset change or ($75,000) + $20,000 = ($55,000).

Val-Tek has current assets of $1,700,000 and current liabilities of $900,000. If they pay $100,000 owed to a creditor, what will their new current ratio be? A. 4:1 B. 2:1 C. 1.5:1 D. 1:1

B. 2:1 Current ratio is calculated using the equation: Assets divided by Liabilities equals Current ratio or ($1,700,000 - $100,000) ÷ ($900,000 - $100,000) = 2:1

At the beginning of the day the balance in the Cash account was $4,750. The ledger entries that day were a debit of $1,250 and a credit of $700. What would be the balance at the end of the day? A. $6700 B. $4200 C. $5300 D. $6000

C. $5300 The normal balance is a debit. Debits increase Cash and credits decrease Cash. Therefore, the new balance is $4,750 + $1,250 - $700 = $5,300.

Welsford Company has current assets of $1,700,000 and current liabilities of $1,400,000. If they issue $100,000 of new stock, what will their new current ratio be? A.1.2:1 B.2.1:1 C. 1.29:1 D. 3.0:1

C. 1.29:1 ($1,700,000 current assets + $100,000 new stock) ÷ $1,400,000 current liabilities = 1.29:1 new current ratio

Which of the following statements is true? A. Source documents are not used when recording transactions. B. Source documents are used to transfer information to the designated accounts in the ledger. C. Source documents do not provide legal evidence of transactions. D. Source documents can provide evidence that a transaction has occurred.

D. Source documents can provide evidence that a transaction has occurred. Source documents provide evidence that a transaction has occurred and are analyzed to determine the effect of the transaction on specific accounts. Some examples of source documents include sales slips, a check, a bill, or a cash register report.

What happens when a portion of an account payable is paid? A. There is no effect on total assets. B. Liabilities increase. C. Net income decreases. D. There is no effect on stockholders' equity.

D. There is no effect on stockholders' equity. Upon payment of the liability, the balance of the liability account decreases and the asset account 'Cash' decreases proportionally. Therefore, stockholders' equity remains unchanged while assets and liabilities both decrease proportionally.

Fill in the blanks in the following sentence. An error is _________ while an irregularity is A. an unintentional mistake in calculation; an unintentional mistake in entering data. B. an intentional misstatement; an intentional mistake. C. a mistake with minor impact; a mistake with major impact. D. an unintentional mistake; an intentional misstatement.

D. an unintentional mistake; an intentional misstatement An error is the result of an unintentional mistake and can be small or large in scope. An irregularity is an intentional misstatement and is an example of unethical behavior.

Receipts of cash in advance from customers are not treated as revenue at the time of receipt because A. cash in advance goes straight to stockholders' equity. B. reporting the receipts would complicate the calculation of taxes. C. the customer may demand some of the money back. D. revenue cannot be recognized until the work is performed.

D. revenue cannot be recognized until the work is performed. The revenue recognition principle of accounting states that revenue cannot be recognized until goods are delivered, or services are rendered.

Public Company Accounting Oversight Board (PCAOB)

Determines U.S. auditing standards and reviews the performance of auditing firms.

Basic approach for calculating earnings per share

Divide earnings available to common stockholders by weighted-average common shares outstanding during the year.

Current Liabilities are obligations that the company is to pay within the next year or operating cycle, whichever is longer.

Examples are accounts payable, salaries and wages payable, notes payable, unearned revenue, interest payable, and income taxes payable.

Financial Reporting Standards (IFRS)

Foreign companies that wish to have their shares treaded on U.S. stock exchanges do not have to prepare reports that conform with GAAP, as long as their reports conform with IFRS.

Understandibility

Information has the quality of understandability if it is presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning.

Verifiable

Information is verifiable if independent observers, using the same methods, obtain similar results.

The following lists types of evaluation. Match each of these evaluation types with the following users of accounting information.

Investors in common stock = Trying to degtermine whether the company's net income will result Marketing managers = Trying to determine whether an advertising proposal will be cost efficient Creditors = Trying to determine whether the company can pay its obligations Chief Financial Officer = Trying to determine whether the company should employ debt or Internal Revenue Service = Trying to determine whether the company complied with tax laws

Which of the following events would lead to a decrease in a firm's retained earnings, and why? A. Payment of $10,000 in employee salaries, because salaries are considered an expense, and an increase in expenses will reduce a firm's retained earnings B. Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered a liability, and an increase in liabilities will reduce a firm's retained earnings C. Payment of $10,000 in employee salaries, because salaries are considered a liability, and an increase in liabilities will reduce a firm's retained earnings D. Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered an expense, and an increase in expenses will reduce a firm's retained earnings

B. Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered a liability, and an increase in liabilities will reduce a firm's retained earnings Retained earnings is affected when a company recognizes revenue, incurs expenses, or pays dividends; it is not affected by changes in a firm's liabilities. Here, payment of employee salaries increases the firm's expenses, while issuance of the note payable increases the firm's liabilities. The salary-related increase in expenses is what causes the decrease in the firm's retained earnings.

JT Engineering currently has two debts: a $9,000 debt due in 9 months and a $7000 debt due in 14 months. JT prepares a classified balance sheet and has an operating cycle of less than one year. How should these debts be classified? A. The $7000 should be classified as a current liability, and the $9000 should be classified as a long-term liability. B. The $9000 should be classified as a current liability, and the $7000 should be classified as a long-term liability. C. All $16000 in debt should be classified as current liabilities. D. All $16000 in debt should be classified as long-term liabilities.

B. The $9000 should be classified as a current liability, and the $7000 should be classified as a long-term liability.

All of the following are current liabilities EXCEPT ____________ payable. A. taxes B. bonds C. accounts D. salaries and wages

B. bonds

Within the past two weeks, Fanny's Flowers has completed each of the activities listed below. Of these activities, which should be recorded in the company's accounting records? A. fired one full-time employee B. purchased a new walk-in cooler C. entered into contract negotiations with a new floral wholesaler D. hired two part-time employees

B. purchased a new walk-in cooler Each activity should be analyzed to determine its effects on the accounts and the accounting equation assets = liabilities + stockholders' equity. If accounts are affected, the activity should be recorded. Assuming a cash purchase, a new walk-in cooler's purchase decreases the asset account cash and increases the asset account equipment. Hiring and/or firing employees does not affect the accounts. Likewise, contract negotiations do not affect the accounts.

Hiring New Employees Event (9) On October 9, Sierra hired four new employees to begin work on October 15. Each employee will receive a weekly salary of $500 for a five-day work week, payable every two weeks. Employees will receive their first paychecks on October 26.

Basic Analysis: An accounting transaction has not occurred. There is only an agreement that the employees will begin work on October 15.

Payment of Dividends Event (10) On October 20, Sierra paid a $500 cash dividende.

Basic Analysis: Dividends is increased $500; the asset Cash is decreased $500

Payment of Cash for Employee Salaries Event (11) Empoyees have worked two weeks, earning $4000 in salaries, which were paid on October 26.

Basic Analysis: The asset Cash is decreased $4000; the expense Salaries and Wages Expense is increased $4000.

Purchase of Insurance Policy for Cash Event (7) On October 4, Sierra paid $600 for a one-year insurance policy that will expire next year on September 30.

Basic Analysis: The asset Cash is decreased $600; the asset Prepaid Insurance is increased $600

Investment of Cash by Stockholders Event (1) On October 1, cash of $10000 is invested by investors in exchange for $10000 of common stock.

Basic Analysis: The asset Cash is increased $10000; stockholders' equity (specifically Common stock) is increased $10000

Services Performed for Cash Event (5) On October 3, Sierra received $10000 in cash from Copa Company for guide services performed for a corporate event.

Basic Analysis: The asset Cash is increased $10000; the revenue Service Revenue is increased $10000

Receipt of Cash in Advance from Customer Event (4) On October 2, Sierra received a $1200 cash advance from R. Knox, a client.

Basic Analysis: The asset Cash is increased $1200; the liability Unearned Service Revenue is increased $1200

Note Issued in Exchange for Cash Event (2) On October 1, Sierra borrowed $5000 from Castle Bank by signing a 3-month, 12%, $5000 note payable.

Basic Analysis: The asset Cash is increased $5000; the liability Notes Payable is increased $5000

Purchase of Equipment for Cash Event (3) On October 2, Sierra purchased equipment by paying $5000 cash to Superior Equipment Sales Co.

Basic Analysis: The asset Equipment is increased $5000; the asset Cash is decreased $5000

Purchase of Supplies on Account Event (8) On October 5, Sierra purchased an estimated three monthes of supplies on account from Aero Supply for $2500

Basic Analysis: The asset Supplies is increased $2500; the liability Accounts payable is increased $2500

Payment of Rent Event (6) On October 3, Sierra paid its office rent for the month of October in cash, $900

Basic Analysis: The expense is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900

Aaron is preparing the balance sheet for his company. Copyrights and goodwill are the only two assets classified as intangible assets, and each has a cost of $24,000. Copyrights also has accumulated amortization of $7,000. How should Aaron list this information on the balance sheet? A. Copyrights and goodwill should be listed with a combined total of $41,000, and accumulated amortization need not be listed at all. B. Copyrights and goodwill should be listed with a combined total of $48,000, and accumulated amortization should be listed with a negative total of $7,000. C. Copyrights and goodwill should be listed individually at $24,000 each, and accumulated amortization should be listed with a negative total of $7,000. D. Copyrights and goodwill should be listed individually at $24,000 and $17,000 respectively, and accumulated amortization need not be listed at all.

C. Copyrights and goodwill should be listed individually at $24,000 each, and accumulated amortization should be listed with a negative total of $7,000.

The FASB most always considers which concept in their own decision-making process when creating new accounting standards? A. Historical cost B. the monetary unit assumption C. cost constraint D. materiality

C. cost constraint

Indicate to which business activity, operating activity, investing activity, or financing activity each item relates.

Cash received from customers = Operating activity Cash paid to stockholders (dividends) = Financing Activity Cash received from issuing new common stock = Financing Activity Cash paid to suppliers = Operating Activity Cash paid to purchase a new office building = Investing Activity