ACCT 201 Chp. 2
current ratio
a measure of liquidity computed as current assets divided by current liabilities
debt to assets ratio
a measure of solvency calculated as total liabilities divided by total assets. it measures the percentage of total financing provided by creditors
earnings per share (EPS)
a measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the average number of common shares outstanding during the year
generally accepted accounting principles (GAAP)
a set of accounting standards that have substantial authoritative support, that guide accounting professionals
Match item with accounting standards: Ability to easily evaluate one company's results relative to another's
comparability
Match item with accounting standards: a company's use of the same accounting principles and methods from year to year
consistency
cost constraint
constraint that weighs the cost that companies will incur to provide the info against the benefit that financial statement users will gain from having the info available
Classify item based upon major balance sheet classification: Inventory
current asset
Classify item based upon major balance sheet classification: Accounts receivable
current asset
Classify item based upon major balance sheet classification: Prepaid advertising
current asset
(classification on a balance sheet?) Accounts receivable
current assets
(classification on a balance sheet?) Cash
current assets
(classification on a balance sheet?) Inventory
current assets
(classification on a balance sheet?) Supplies
current assets
working capital formula =
current assets - current liabilities
current ratio formula =
current assets /current liabilities
(classification on a balance sheet?) Accounts payable
current liabilities
(classification on a balance sheet?) Income taxes payable
current liabilities
Classify item based upon major balance sheet classification: Income taxes payable
current liabilities
Classify item based upon major balance sheet classification: Unearned sales revenue
current liabilities
Classify item based upon major balance sheet classification: Salaries and wages payable
current liabilities
5. The recurring steps performed each accounting period, starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance, is referred to as the: a. Accounting Period. b. Operating Cycle. c. Accounting Cycle. d. Closing Cycle.
5.c
6. A classified balance sheet: a. Measures a company's ability to pay its bills on time. b. Organizes assets and liabilities into important subgroups. c. Presents revenues, expenses, and net income. d. Reports operating, investing, and financing activities.
6.b
7. If a company failed to make an adjusting entry at the end of its accounting period to record depreciation for this period, the omission will cause: a. An understatement of expenses b. An overstatement of revenues. c. An understatement of assets. d. An overstatement of liabilities.
7.a
8. The current ratio: a. Is used to measure a company's profitability. b. Is used to measure the relation between assets and long-term debt. c. Measures the effect of operating income on profit. d. Is used to help evaluate a company's ability to pay its short-term obligations.
8.d
9. The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned: a. Is referred to as depreciation expense. b. Is referred to as accumulated depreciation. c. Is shown on the income statement in the final period. d. Is only recorded when an asset is disposed of.
9.b
Increase retained earnings, decrease retained earnings, increase common stock, or decrease common stock? Paid a cash dividend
Decrease retained earnings
Increase retained earnings, decrease retained earnings, increase common stock, or decrease common stock? Reported net loss of $20,000
Decrease retained earnings
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. (True / False)
False
classified balance sheet
a balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections
statement of stockholders' equity
a financial statement that presents the causes of changes to stockholders' equity during the period, including those that caused retained earnings to change
Identify the accounting assumption or principle that is described below. (b) Indicates that personal and business record-keeping should be separately maintained.
economic entity assumption
Match item with accounting standards: tracing accounting events to particular companies
economic entity assumption
Match item with accounting standards: the desire to minimize errors and bias in financial statements
faithful representation
Identify the accounting assumption or principle that is described below. (f) Dictates that companies should disclose all circumstances and events that make a difference to financial statement users.
full disclosure principle
Match item with accounting standards: the reporting of all info that would make a difference to financial statement users
full disclosure principle
Identify the accounting assumption or principle that is described below. (a) Is the rationale for why plant assets are not reported at liquidation value. (Note: Do not use the historical cost principle.)
going concern assumption
Match item with accounting standards: belief that a company will continue to operate for the foreseeable future
going concern assumption
Identify the accounting assumption or principle that is described below. (c) Assumes that the dollar is the "measuring stick" used to report on financial performance.
monetary unit assumption
Match item with accounting standards: reporting only those things that can be measured in dollars
monetary unit assumption
Free Cash Flow =
net cash provided by operating activities - capital expenditures -cash dividends
free cash flow
net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid
earnings per share formula =
net income - preferred dividends / average common shares outstanding
long-term liabilities (long-term debt)
obligations that a company expects to pay after one year
current liabilities
obligations that a company expects to pay within the next year or operating cycle, whichever is longer
Identify the accounting assumption or principle that is described below. (d) Separates financial information into time periods for reporting purposes.
periodicity assumption
Match item with accounting standards: the practice of preparing financial statements at regular intervals
periodicity assumption
Classify item based upon major balance sheet classification: Equipment
property, plant equipment
(classification on a balance sheet?) Accumulated depreciation
property, plant, and equipment
(classification on a balance sheet?) Buildings
property, plant, and equipment
(classification on a balance sheet?) Land
property, plant, and equipment
Classify item based upon major balance sheet classification: Accumulated depreciation—equipment
property, plant, equipment
Match item with accounting standards: quality of info that indicates the info makes a difference in a decision
relevance
Classify item based upon major balance sheet classification: Common stock
stockholder's equity
Classify item based upon major balance sheet classification: Retained earnings
stockholder's equity
solvency
the ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity
Liquidity
the ability of a company to pay obligations that are expected to become due within the next year or operating cycle
Securities & Exchange Commission (SEC)
the agency of the US gov't that oversees US financial markets and accounting standard-setting bodies
going concern assumption
the assumption that the company will continue in operation for the foreseeable future
operating cycle
the average time required to purchase inventory, sell it on account, and then collect cash from customers-that is, go from cash to cash
working capital
the difference b/w the amounts of current assets and current liabilities
Public Company Accounting Oversight Board (PCAOB)
the group charged with determining auditing standards and reviewing the performance of auditing firms
Financial Accounting Standards Board (FASB)
the primary accounting standard-setting body in the United States
relevance
the quality of info that indicates the info makes a difference in a decision
verifiable
the quality of info that occurs when independent observers, using the same methods, obtain similar results
Debt to assets ratio =
total liabilities/total assets
consistency
use of the same accounting principles and methods from year to year within a company
materiality
whether an item is large enough to likely influence the decision of an investor or creditor
10. Which of the following assets is not depreciated? a. Store Fixtures b. Computers c. Land d. Buildings
10.c
2. The accounting principle that requires revenue to be reported when earned is the: a. Matching Principle. b. Revenue Recognition Principle c. Time Period Principle d. Going-Concern Principle.
2.b
3. Adjusting entries a. Affect only income statement accounts. b. Affect only balance sheet accounts. c. Affect both income statement and balance sheet accounts. d. Affect only cash flow statement accounts.
3.c
4. Revenues, expenses, and owner's withdrawal accounts, which are closed at the end of each accounting period, are referred to as: a. Real Accounts b. Temporary Accounts c. Closing Accounts d. Permanent Accounts
4.b
long-term investments
1. investments in stocks and bonds of other corporations that companies hold for more than one year 2. long-term assets, such as land and buildings, not currently being used in the company's operations 3. long-term notes receivable
1. The time period principle assumes that an organization's activities can be divided into specific time periods including: a. Months b. Quarters c. Years d. All of the above.
1.d
7 parts of a classified balance sheet:
1. current assets 2. long-term investments 3. property, plant, equipment 4. intangible assets 5. current liabilities 6. long-term liabilities 7. stockholders' equity
Increase retained earnings, decrease retained earnings, increase common stock, or decrease common stock? Issued new shares of common stock
Increase common stock
Increase retained earnings, decrease retained earnings, increase common stock, or decrease common stock? Reported net income of $75,000
Increase retained earnings
liquidity ratios
measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
ratio analysis
a technique that expresses the relationship among selected items of financial statement data
comparability
ability to compare the accounting info of different companies because they use the same accounting principles
full disclosure principle
accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statements users
International Financial Reporting Standards (IFRS)
accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States
historical cost principle
an accounting principle that states that companies should record assets at their cost
International Accounting Standards Board (IASB)
an accounting standard-setting body that issues standards adopted by many countries outside of the United States
economic entity assumption
an assumption that every economic entity can be separately identified and accounted for
monetary unit assumption
an assumption that requires that only those things that can be expressed in money are included in the accounting records
periodicity assumption
an assumption 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
ratio
an expression of the mathematical relationship b/w one quantity and another
fair value principle
assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
current assets
assets that companies expect to convert to cash or use up within one year or operating cycle, whichever is longer
intangible assets
assets that do not have physical substance
property, plant, & equipment
assets w/ relatively long useful lives that are currently used in operating the business
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.? a) Generally accepted accounting standards b) Generally accepted accounting principles c) General accounting principles d) Generally accepted auditing principles
b) Generally accepted accounting principles
For what purpose might a company use free cash flow? a) Pay off debts b) All of the answer choices are correct c) Pay additional dividends d) Acquire property, plant, and equipment
b) all of the answer choices are correct
A company can change to a new method of accounting if management can justify that the new method results in terms of: a) less likelihood of clerical errors. b) more meaningful financial info. c) a lower net income for tax purposes. d) a higher net income.
b) more meaningful financial info
Which of the following ratios measures the ability of the company to survive over a long period of time? a) Current ratios b) Solvency ratios c) Profitability ratios d) Liquidity ratios
b) solvency ratios
The following ratios are available for Leer Inc. and Stable Inc. Current Ratio Debt to Assets Ratio Earnings per Share Leer Inc. 2:1 75% $3.50 Stable Inc. 1.5:1 40% $2.75 Compared to Stable Inc., Leer Inc. has: a) higher liquidity, lower solvency, and higher profitability. b) higher liquidity, higher solvency, but profitability cannot be compared based on information provided. c) higher liquidity and lower solvency, but profitability cannot be compared based on info provided. d) lower liquidity, higher solvency, and higher profitability.
c) higher liquidity and lower solvency, but profitability cannot be compared based on info provided
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) An intangible asset b) Land expense c) A long-term investment d) Property, plant, and equipment
c) long term investment
Identify the accounting assumption or principle that is described below. (e) Measurement basis used when a reliable estimate of fair value is not available.
historical cost principle
Match item with accounting standards: a belief that items should be reported on the balance sheet at the price that was paid to acquire the item
historical cost principle
understandability
info presented in a clear and concise fashion so that users can interpret it and comprehend its meaning
timely
info that is available to decision makers before it loses its capacity to influence decisions
faithful representation
info that is complete, neutral, and free from error
Classify item based upon major balance sheet classification: Trademarks
intangible asset
(classification on a balance sheet?) Goodwill
intangible assets
(classification on a balance sheet?) Patent
intangible assets
Classify item based upon major balance sheet classification: Patents
intangible assets
(classification on a balance sheet?) Investment in long-term bonds
long-term investments
Classify item based upon major balance sheet classification: Land (held for future use)
long-term investments
Classify item based upon major balance sheet classification: Bonds payable
long-term liabilities
Match item with accounting standards: the judgment concerning whether an item is large enough to matter to decision-makers
materiality
solvency ratios
measures of the ability of the company to survive over a long period of time
profitability ratios
measures of the operating success of a company for a given period of time
