ACCT3110 Test 1 - Chapter 4

Contributed capital

is recognized when the corporation raises capital by issuing shares directly to shareholders.

Current replacement cost

is the amount a company would have to pay currently to acquire an asset it now holds, either through purchase or production. The most common use of this is through application of lower of cost or market valuation of inventories

Operating Cycle

is the average length of time taken by a company to spend cash to purchase or produce inventory, sell the inventory, and collect the receivables, converting them back into cash.

accumulated other comprehensive income (loss)

is the cumulative amount of other comprehensive income (or loss) items.

Return on Assets

measures how profitably a company uses its assets and is computed as follows: NI + [Interest Expense x (1-Tax Rate)]/Avg total assets

rate of return on investment

measures how profitably a company uses its resources

debt-to-equity ratio

measures the number of dollars of debt financing per dollar of financing from total common shareholders' equity and is computed as follows: TL / Total common shareholders' equity

debt-to-assets ratio

measures the percentage of total assets financed by creditors and is computed as follows: TL / TA

Return on Common Equity

measures the profitability of the company relative to the amount of equity capital invested by the common shareholders. NI / Avg total common Shareholders' Equity

comprehensive income statement

primarily unrealized gains and losses—are measured in terms of changes in the values of certain types of assets and liabilities.

Operating Capability

the ability of a company to produce goods and services for customers

Addition Paid in Capital

the amount paid to the corporation by shareholders in excess of the par value of the stock issued.

contingent obligations

obligations that arise conditional on something else occurring, such as a performance-based bonus

Fair Value

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The owners of a company have a claim on

the residual interest in the assets of a company after deducting its liabilities

The purpose of a company's balance sheet is to report

the resources of a firm and the claims on the firm as of a specific date

What is the purpose of the balance sheet?

to report the resources of a company (assets) and the claims on the company (liabilities and shareholders' equity) as of a specific date, usually the last day of the fiscal quarter or the fiscal year

financial leverage

A key element of risk. It is the total amount of liabilities used to finance the company's assets.

Intracompany comparisons

A method of evaluating a company's current financial performance and condition by comparing them with the company's past.

intercompany comparisons

A method of evaluation a company's performance by comparing it with that of key competitors, with the industry averages, or with the results in related industries.

Deficit

A negative retained earnings balance resulting from a corporation's accumulated prior net losses or dividends in excess of its earnings.

Related party transactions

A non-arm's length transaction between a firm and a party closely related to the firm, such as a manager or major shareholder. For example, subsidiaries, trusts for the benefit of employees, its management and board of directors, and its principal owners or immediate families.

gain contingencies

A potential increase in a company's assets or a potential decrease in its liabilities, dependent upon the occurrence of some future event.

When is a company required to disclose in its annual report a description of all its significant accounting policies?

Always

Subsequent event

An event that occurs between a company's balance sheet date and the date when it issues its annual report.

Leasehold Improvements

Assets recognized as part of property, plant and equipment. These assets represent investments in additions and improvements to assets that are leased and not owned by the firm.

Intangible assets with indefinite useful lives

Assets such as goodwill, trademarks, or acquired brand names that are not amortized but are reviewed for impairment annually. Aren't amortized

Intangible assets with finite useful lives

Assets such as patents, franchises, licenses, and computer software costs that are amortized over their useful lives and reported on the balance sheet at their adjusted historical cost. They are amortized over their useful lives and reported on the balance sheet at their adjusted historical cost (historical cost minus accumulated amortization).

quick assets

Assets that can be converted into cash, usually within 90 days (typically including cash and equivalents, short-term investment securities and receivables).

The major sections of a company's balance sheet are

Assets, liabilities, and shareholders' equity.

A company's five major financial statements are the:

Balance sheet, Income statement, Comprehensive income statement, Statement of cash flows, Statement of Shareholders' equity

current cash equivalent values.

By discounting the expected future cash flows to a present value, the monetary assets and liabilities are reported in terms of

Which of the following is a characteristic of an asset?

The company must be able to obtain the future benefit and control others' access to it.

Control

The company must be able to obtain the future benefit and control others' access to it. This means that the company can deny or restrict the ability of others to use the asset.

Par value

The designated dollar amount per share that is established in the articles of incorporation and is printed on each stock certificate.

Goodwill

The excess of the purchase price over the fair value of the acquired company's identifiable net assets. Goodwill usually arises when the acquired company has valuable intangible resources such as popular and profitable products, a good reputation with customers and employees, a skilled work force, access to key channels of distribution for supplies or products, or other arrangements. Not amortized

current ratio

The most commonly used ratio to evaluate liquidity; indicates the number of dollars in current assets for each dollar in current liabilities; is computed as: Current Ratio = Current Assets ÷ Current Liabilities

Probable Future Economic Benefit.

The resource must be expected to contribute future economic benefits either directly or indirectly to the company

Contributed Capital

The sum of the balances in the Preferred Stock, Common Stock, and Additional Paid-in Capital accounts, minus the amount in the Treasury Stock contra account, determines the total amount

Acquisition

The transaction or event giving the company the right to or control over the benefit must have occurred.

What kinds of subsequent events are disclosed by an adjustment to the company's financial statements?

Those significant business events and transactions which provide additional evidence about conditions that existed on the balance sheet date and significantly affect the estimates the company used in its financial statements.

The primary attribute of all assets is

Service potential

Cash Equivalents

Short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates.

loss contingencies

Situations on the balance sheet date may involve uncertainty as to possible losses or gains that the company may incur if some future event occurs or fails to occur.

Preferred stock

Stock that has preferential ownership features that differ from common stock, including the first right to a specified dividend, if one is paid.

Deferred Revenue (Unearned revenues)

When customers pay in advance for the future delivery of goods or performance of services. These transactions create performance obligations from advance payments from customers for the future delivery of goods or services.

Distributions to owners

are decreases in the equity of a company caused by transferring assets, rendering services, or incurring liabilities to owners.

To be considered an asset, an economic resource must have

1. Probable Future Economic Benefit. 2. Control 3. Acquisition

an obligation of a company must have three characteristics to be recognized as a liability:

1. Transfer 2. Nonavoidable 3. Incurred

noncontrolling interests

A component of shareholders' equity that only arises when one company (known as a parent company) owns a majority of the common shares of another company (known as a subsidiary company) but does not own 100% of the shares. Noncontrolling interests represent the equity invested in the subsidiary by noncontrolling investors.

rate of change analysis

A financial statement user computes the percentage rates of change in a company's financial position and performance over time

Long - Term Financing Instruments

are formal borrowings to finance the assets and operations of the company, including long-term notes payable, capital lease obligations, mortgages payable, bonds payable, and other noncurrent financing instruments.

Investments by owners

are increases in the equity of a company resulting from transfers of something valuable to the company from other entities to obtain or increase ownership interests.

Level 2 inputs

are observable market prices for similar assets or liabilities in active markets, or other observable inputs, such as interest rates, for the asset or liability

Level 1 inputs

are quoted prices in active markets for identical assets or liabilities on the measurement date.

Level 3 inputs

are the company's estimates and assumptions used to calculate fair value for an asset or a liability

Assets

are the probable future economic benefits obtained or controlled by a company as a result of past transactions or events.

Liabilities

are the probable future sacrifices of economic benefits arising from present obligations of a company to transfer assets or provide services in the future to other entities as a result of past transactions or events.

statement of cash flows

explains changes in financial position in terms of cash inflows and outflows during the period.

Qualitative disclosures

include a description of the contingency, factors that are likely to affect the ultimate outcome, an assessment of the most likely outcome, and the terms of relevant insurance

Payables and accrued expense

include accruals for obligations for items (goods or services) that have been received but not yet paid.

Long term Accruals

include accrued expenses for obligations that may be outstanding for many years. They include obligations for pension and other postemployment benefits, estimated liabilities from long-term warranties, and deferred tax liabilities.

Monetary assets or Financial Assets

include cash and claims to cash receivable in the future.

Financial Instruments

include plain vanilla items such as stocks, bonds, and notes payable and receivable, but they may also include more exotic instruments such as contracts for loan commitments, collateralized mortgages, interest-rate swaps, and put and call options on stocks

Quantitative information disclosed

include the amount of any claims against the company, the company's best estimate of the maximum exposure to losses, and a tabulation of its recognized loss contingencies.

Accounts Receivable Turnover

indicates how efficiently the company collects its receivables and converts them back into cash and is computed as follows: total sales/Avg. AR

inventory turnover ratio

indicates the average number of times the inventory "turned over" or sold during that period and is computed as follows: COGS / avg inventory

Measurement methods that reflect current values or a combination of historical and current values include

-fair value (assets and liabilities) -present value (assets and liabilities) -current replacement cost (assets) -net realizable value (assets)

time-series analysis

Comparisons of a firm's financial position and performance over time.

Working capital

Current assets minus current liabilities.

Investments in marketable securities

Debt and equity securities that are classified as trading securities and available-for-sale securities, which are reported at fair value, as well as held-to-maturity securities that will mature within a year, which are reported at historical cost.

mixed attribute measurement model

Financial reporting uses a variety of different measurement attributes (historical costs, fair values, and others) to measure and report assets and liabilities on the balance sheet, in order to increase the relevance and representational faithfulness of the reported information.

cross-sectional analysis

Financial statement analysis involving intercompany comparisons, in which one companies' financial statements and ratios are compared to peer companies, competitors, and/or industry-averages.

common-size analysis

Financial statement users compute the percentage amounts of each item on the financial statement relative to the relevant total for that statement.

comparative financial statements

Financial statements for the current and preceding accounting periods used to compare and identify trends in the company's financial position and performance

Total Asset Turnover ratio

Indicates how efficiently a company generates sales relative to its total asset base; is computed as: Total Asset Turnover = Total Revenues ÷ Average Total Assets

Fixed asset turnover ratio

Indicates the average number of sales dollars the company generated per average dollar invested in fixed assets; is computed as: Fixed Asset Turnover = Total Revenues ÷ Average Net Fixed Assets

Treasury stock

Is the capital stock of a corporation that has been issued but reacquired by the corporation. This account has a debit balance, and the corporation deducts the amount from the total of contributed capital, retained earnings, and accumulated other comprehensive income to determine its total shareholders' equity.

There is a three-tiered hierarchy within U.S. GAAP and IFRS that distinguishes among different inputs for determining fair values

Level 1, Level 2, Level 3

Accounts Payable turnover ratio

Measures the number of times accounts payable turn over during the year; is computed as: Accounts Payable Turnover = Inventory Purchases ÷ Average Accounts Payable

Which of the following best describes the term "Recognition"?

Recognition is the process of formally recording and reporting an element in the financial statements.

Adjusted historical cost

Recognizing an expense for the portion of the asset used up each period and decrease the balance sheet value of the asset to reflect the benefits that have been consumed.

assets and liabilities

Under the mixed attribute measurement model, different types of ______ are valued using different measurement bases, including historical costs, fair values, present values, net realizable values, and others.

Operating Capability Ratios

Used to evaluate the efficiency with which the company uses its economic resources to generate revenues.

Net book Value

Value of an asset derived from subtracting the Accumulated Depreciation contra account from the asset account.

Present Value

Value of monetary assets and liabilities represent amounts of cash the company expects to receive or is obligated to pay in the future.

Fair Value Option

Values of certain types of assets and liabilities (such as trading securities and investment securities available for sale) for financial instruments (such as loans, notes receivable or payable, and bonds receivable or payable).

Adjusted Present Values

Values that reflect the passage of time.

How does the balance sheet at the end of an accounting period relate to the other four financial statements?

a. The statement of cash flows explains changes in financial position in terms of cash inflows and outflows during the period. b. The elements of the income statement-revenues, expenses, gains and losses, and net income-are measured in terms of changes in assets and liabilities. c. The statement of shareholders' equity reports owners' claims on the company and how those claims changed during the period.

In order to be considered a liability,

a. The transaction, event, or arrangement obligating the company must have occurred. b. The company must be bound by a legal, equitable, or constructive responsibility to transfer assets or provide services. c. It must involve a responsibility that will be settled by a sacrifice (such as involving the transfer of assets).

Common Stock

carries the right to vote (giving common shareholders control over the corporation) and to share in residual profits.

executory contracts

contracts in the process of being fulfilled, such as a purchase order

quick ratio

current assets that may be easily converted into cash. Quick assets / current liabilities

Derivative financial instruments

derives its value from changes in the price of the underlying resource to which it is linked. For example, a stock option gives the holder the right to buy stock at a specified price, so the value of the stock option depends on (is derived from) the market price of the underlying stock

Net realizable value

is the net amount a company would receive if it sold an asset, or the present value of cash flows it expects to realize from an asset. It is usually triggered by a decline in the expected economic benefits of an asset to a value less than historical cost. e.g. uncollectible accounts receivable, a decline in the salable value of inventory (part of the lower of cost or market rule), or the impairment of the value of tangible or intangible assets.

recognition

is the process of formally recording and reporting an element in the financial statements

Equity

is the residual interest in the assets of a company after deducting its liabilities.

stated value

per share of no-par stock that, when multiplied by the number of shares issued, generally determines the amount of the corporation's legal capital.

The statement of shareholders' equity

reports owners' claims on the company and how those claims changed during the period.

Non monetary assets or non financial assets

represent future service potential from resources used by the company to produce goods and services for customers. They do not represent claims to future cash flows. They include assets that are tangible (e.g., have a physical substance) such as inventories, land, buildings, equipment, and vehicles, as well as assets that are intangible (e.g., usually legal substance or reputation) including patents, trademarks, licenses, and goodwill.

Accumulated Other Comprehensive Income

represents cumulative unrealized gains and losses from the recognition and valuation of certain assets or liabilities.

income statement

revenues, expenses, gains and losses, and net income—are measured in terms of changes in assets and liabilities.

Balance sheet (Statement of financial position)

together with information from the income statement and the statement of cash flows, helps users assess a company's profitability, risk, liquidity, financial flexibility, and operating capability. It reports the financial position at the end of the accounting period.

market-based exit value

which is the amount for which a company could sell an asset or pay to settle or transfer a liability.