Econ 86 Review flashcards, Econ 86 Midterm 2 quizlet
D. corporation received an order for goods in June, produced the goods in July, delivered the goods to the customer in August, and received payment from the customer in September. Which of the following is correct? A. D Corp should recognize Revenue for sale in June B. D Corp should recognize Revenue for sale in July C. D Corp should recognize Revenue for sale in August D. . D Corp should recognize Revenue for sale in September E. D Corp should recognize the Revenue in an adjusting entry at the end of the year, in December
. D Corp should recognize Revenue for sale in August
Using the information on B&C Corp, cash relieved from customers for 2021 is
200+3=203
Using the information on B&C Corp, cash paid to employees for 2021 is
40+14=54
A dog food company (Royal Canin) shipped an order of dog food to a retail pet supplies store (Petsmart). The terms of the sale were "Free on Board Shipping Point." Based on this, Royal Canon should recognize Sales Revenue and COGS... A. as soon as the dog food shipment leaves their production facility B. when the dog food shipment reaches Petsmart C. When Petsmart sells the dog food D. None
A
Comparing the Percent of Sales vs Aging methods, we noted that A. Aging is more accurate for determining net accounts receivable, while percent of sales is more accurate for determining Bad Debt Expense B. Percent of Sales is more accurate for determining Net Accounts Receivable, while aging is more accurate for determining Bad Debt Expense C. Percent of Sales is more accurate for determining both Net Accounts Receivable and Bad Debt Expense D. None
A
Comparing the Percent of Sales vs Aging methods, we noted that A. Bad Debt Expense if found directly using the Percent of Sales method, but is a plug figure sing the Aging method B. Bad Debt Expense if found as a plug figure using the Percent of Sales method, but is found directly using the aging method C. Bad Debt Expense is found directly using both methods D. None
A
Consider the following information: beginning inventory, 10 units @ $20 per unit; first purchase, 35 units @ $22 per unit; second purchase, 40 units @ $24 per unit; 50 units were sold. What is cost of goods sold using the FIFO method of inventory costing? a. $1,090 b. $1,060 c. $1,180 d. $1,200
A
Given the following ratios for four companies, which company is least likely to experience problems paying its current liabilities promptly? Quick Ratio Receivable Turnover Ratio a. 1.2 58 b. 1.2 25 c. 1.0 55 d. .5 60
A
If the balance in prepaid expenses has increased during the year, what action should be taken on the statement of cash flows when following the indirect method, and why? a. The change in the account balance should be subtracted from net income because the net increase in prepaid expenses did not impact net income but did reduce the cash balance. b. The change in the account balance should be added to net income because the net increase in prepaid expenses did not impact net income but did increase the cash balance. c. The net change in prepaid expenses should be subtracted from net income to reverse the income statement effect that had no impact on cash. d. The net change in prepaid expenses should be added to net income to reverse the income state- ment effect that had no impact on cash.
A
If the ending balance in accounts payable decreases from one period to the next, which of the follow- ing is true? a. Cash payments to suppliers exceeded current period purchases. b. Cash payments to suppliers were less than current period purchases. c. Cash receipts from customers exceeded cash payments to suppliers. d. Cash receipts from customers exceeded current period purchases.
A
The inventory turnover ratio for Natural Foods Stores is 14.6. The company reported cost of goods sold in the amount of $1,500,000 and total sales of $2,500,000. What is the average amount of inven- tory for Natural Foods? a. $102,740 b. $171,233 c. $100,000 d. $60,000
A
Using the indirect method, the effect on Cash Flow of the adjustment for the change in Accumulated Depreciation due to Depreciation Expense A. an outflow (credit) in Investing Cash Flows B. an inflow (debit) in Financing Cash Flows C. an outflow (credit) in operating Cash Flows D. None
A
When a firm writes off an Accounts Receivable as uncollectible using the Allowance method, A. Neither Net Account Receivable nor Net Income is affected B. Net Accounts Receivable decreases and Net Income is not affected C. Net Accounts Receivable is not affected and Net Income Decreases D. Both Decrease E. None
A
Which of the following is false regarding a perpetual inventory system? a. Physical counts are not needed because records are maintained on a transaction-by-transaction basis. b. The balance in the inventory account is updated with each inventory purchase and salestransaction. c. Cost of goods sold is increased as sales are recorded. d. Managers are regularly informed about low or excess stock information.
A
Which of the following is not a component of the cost of manufactured inventory? a. Administrative overhead b. Direct labor c. Raw materials d. Factory overhead
A
Which of the following ratios is required by GAAP? a. Earnings per share. b. Price/earnings ratio. c. Dividend yield ratio. d. All of the above will likely affect the investor's decision.
A
Which of the following would not appear in the investing section of the statement of cash flows? a. Purchase of inventory. b. Sale of obsolete equipment used in the factory. c. Purchase of land for a new office building. d. All of the above would appear in the investing section.
A
Using the information on B&C Corp, the third ratio of DuPont Decomposition for ROE for 2021 rounded to two decimal places is
ATA/ATE 177+160/2=168.5 64+54/2=59 168.5/59=2.86
The two accounts that sum up to the capital contributions by shareholders are
Additional Paid in Capital plus Common Stock at Par
Which of the following Groups of accounts contain only permanent accounts? A. Accounts payable, Retained Earnings, Sales Revenue B. Additional Paid in Capital, Accounts Payable, Goodwill C. Rent Revenue, Notes Payable, Taxes Payable D. Supplies Expense, Cost of Goods Sold, Interest Expense E. None
Additional Paid in Capital, Accounts Payable, Goodwill
Operating Activities generally include all of the following except A. Buying Equipment B. Paying employees C. Buying inventory D. selling inventory E. All of them
All of them
A brand new, growing firm might slow what type of cash flow pattern from operating, investing, and financing activities? A. operating outflows, investing inflows, financing outflows B. operating outflows, investing outflows, financing inflows C. operating inflows, investing inflows, financing outflows D. operating inflows , investing outflows, financing inflows E. none
B
A company has been successful in reducing the amount of sales returns and allowances. At the same time, a credit card company reduced the credit card discount from 3 percent to 2 percent. What effect will these changes have on the company's net sales, all other things equal? a. Net sales will not change. b. Net sales will increase. c. Net sales will decrease. d. Either (b) or (c).
B
A decrease in selling and administrative expenses would impact what ratio? a. Fixed asset turnover ratio. b. Times interest earned ratio. c. Debt-to-equity ratio. d. Current ratio.
B
Consider the following: Issued common stock for $18,000, sold office equipment for $1,200, paid cash dividends of $4,000, purchased investments for $2,000, and paid accounts payable of $4,000. What was the net cash inflow (outflow) from financing activities? a. $20,000 b. $14,000 c. ($20,000) d. ($14,000)
B
Revenue recognition for bundled goods and services is related to A. discounts given for large bundles of goods or services sold by manufacturers to large retail stores such as Costco B. recognition of revunue over time in cases where the sales contract specifies different performance obligations that occur at different points in time C. goods that are typically sold as a bundle packaged together, such as a bag of candy containing both Twix and Hersheys chocolate squares, such as one might purchases for trick-or-treat distribution D. None
B
Sales discounts with terms 2/10, n/30 mean: a. 10 percent discount for payment within 30 days. b. 2 percent discount for payment within 10 days or the full amount (less returns) due within 30 days. c. Two-tenths of a percent discount for payment within 30 days. d. None of the above.
B
The "LIFO Reserve" is A. usually an amount that would be subtracted from LIFO inventory to find the FIFO inventory B. usually an amount that would be added to the LIFO inventory to find the FIFO inventory C. the difference in Tax Expense due to using LIFO instead of FIFO D. None
B
The LIFO Conformity Rule states that A. firms must use the same inventory method for both. Tax reporting to the IRS and Financial reporting shareholders B. if a firm uses LIFO for tax reporting, they must also use it for financial reporting C. firms using IFRS must conform to the rule that they are not allowed to use LIFO D. none
B
The purpose of the Times interest earned ratio is to A. assess the ability of the firm to pay its short-term obligations B. assess the ability of the firm to pay its long-term debt related obligations C. assess the ability of the firm to pay both its long-term debt related and its short-term obligations D. assess the profitability of the firm using earnings before interest and taxes E. None
B
When doing Financial Statement Analysis, a good approach is to? A. first compute rations based on the firms financial statement, and then develops narrative to explain the ratios and predict the future schuss of the firm B. first develop an understanding of the firm's strategies, and then use the ratios and other analysis to assess whether the firm is successfully implementing the strategies C. first estimate the value of the firm's stock using a method such as discounted future cash flows, and then use the firm's strategies and financial ratios to justify whether investors should buy, holder sell the stock D. None
B
When using the allowance method, as bad debt expense is recorded, a. Total assets remain the same and stockholders' equity remains the same. b. Total assets decrease and stockholders' equity decreases. c. Total assets increase and stockholders' equity decreases. d. Total liabilities increase and stockholders' equity decreases.
B
Which of the following items would not appear in the financing section of the statement of cash flows? a. The repurchase of the company's own stock. b. The receipt of dividends. c. The repayment of debt. d. The payment of dividends.
B
Briefly explain the main criticism of the first two standards setting bodies (before the FASB) according to the article by Prof Zeff
Before FASB, the SEC delegates the CAP and APB to set GAAP. These bodies were criticized by they were part-time and not fully independent. Unlike FASB, they were not well funded and were not removed from the corporate center and government center. Their due process was very influenced by public opinion.
A company has quick assets of $300,000 and current liabilities of $150,000. The company purchased $50,000 in inventory on credit. After the purchase, the quick ratio would be a. 2.0 b. 2.3 c. 1.5 d. 1.75
C
A company has total assets of $500,000 and noncurrent assets of $400,000. Current liabilities are $40,000. What is the current ratio? a. 12.5 b. 10.0 c. 2.5 d. Cannot be determined without additional information.
C
An increasing inventory turnover ratio a. Indicates a longer time span between the ordering and receiving of inventory. b. Indicates a shorter time span between the ordering and receiving of inventory. c. Indicates a shorter time span between the purchase and sale of inventory. d. Indicates a longer time span between the purchase and sale of inventory.
C
Consider the following information: beginning inventory, 10 units @ $20 per unit; first purchase, 35 units @ $22 per unit; second purchase, 40 units @ $24 per unit; 50 units were sold. What is cost of goods sold using the LIFO method of inventory costing? a. $1,090 b. $1,060 c. $1,180 d. $1,200
C
Consider the following information: ending inventory, $24,000; sales, $250,000; beginning inventory, $30,000; selling and administrative expenses, $70,000; and purchases, $90,000. What is cost of goods sold? a. $86,000 b. $94,000 c. $96,000 d. $84,000
C
Consider the following: Net income = $10,000, depreciation expense = $2,000, accounts receivable increased by $800, inventory decreased by $100, and accounts payable increased by $500. Based on this information alone, what is cash flow from operating activities? a. $12,000 b. $11,600 c. $11,800 d. $13,400
C
Gross sales total $300,000, one-half of which were credit sales. Sales returns and allowances of $15,000 apply to the credit sales, sales discounts of 2 percent were taken on all of the net credit sales, and credit card sales of $100,000 were subject to a credit card discount of 3 percent. What is the dol- lar amount of net sales? a. $227,000 b. $229,800 c. $279,300 d. $240,000
C
In discussing the effect of financial leverage on Net Income, we noted that A. ROE will always be higher than ROA, but leverage creates risk because Dividends are optional and Interest Payments is not optional B. If ROA exceed the interest rate on borrowing, Net Income will tend to be lower, while if the interest rate exceeds ROA, Net income will be higher C. If ROA exceeds the interest rate on borrowing, Net Income will tend to be higher; while if the interest rate exceeds ROA, Net Income will tend to be lower D. None
C
The LIFO method for Inventory A. is allowed both by U.S. GAAP and IFRS B. is not allowed by either U.S. GAAP or IFRS C. is allowed by U.S. GAAP but not by IFRS D. None
C
The primary difference between a cash flow statement prepared using the indirect method and the one prepared using the direct method is? A. the financing section is different B. the investing section is different C. the operating section is different D. all three sections of the cash flow statement are different E. none
C
The purpose of using the Allowance Method for Bad Debts is to A. ensure that the firm has enough cash reserved to pay its bad debts B. allow the firm to manage income by varying the percentages used over time C. match revenues and related expenses D. none
C
The total change in cash as shown near the bottom of the statement of cash flows for the year should agree with which of the following? a. The difference in retained earnings when reviewing the comparative balance sheet. b. Net income or net loss as found on the income statement. c. The difference in cash when reviewing the comparative balance sheet. d. None of the above.
C
The two components of the return on asset ratio are a. Gross profit margin and return on equity. b. Net profit margin and earnings per share. c. Net profit margin and total asset turnover. d. Return on equity and earnings per share.
C
U.S. GAAP classifies all of the following as financing activities on the statement of cash flows except A. cash inflows from selling bonds B. cash inflows from selling stock C. cash outflows to lenders for interest payments D. cash outflows to pay dividends E. None of the other answers is correct since all of the above are classified as financing activities
C
Upon review of the most recent bank statement, you discover that you recently received an "nonsuf- ficient funds check" from a customer. Which of the following describes the actions to be taken when preparing your bank reconciliation? Balance per Books Balance per Bank Statement a. No change Decrease b. Decrease Increase c. Decrease No change d. Increase Decrease
C
Which inventory method provides a better matching of current costs with sales revenue on the income statement and outdated values for inventory on the balance sheet? a. FIFO b. Average cost c. LIFO d. Specific identification
C
Which of the following is not a component of net sales? a. Sales returns and allowances b. Sales discounts c. Cost of goods sold d. Credit card discounts
C
Which of the following ratios is used to analyze liquidity? a. Earnings per share. b. Debt-to-equity ratio. c. Current ratio. d. Both (a) and (c).
C
Which of the following regarding the lower of cost or net realizable value (NRV) rule for inventory are true? (1) The lower of cost or NRV rule is an example of the historical cost principle. (2) When the net realizable value of inventory drops below the cost shown in the financial records, net income is reduced. (3) When the net realizable value of inventory drops below the cost shown in the financial records, total assets are reduced. a. (1) b. (2) c. (2) and (3) d. All three
C
Which of the following would not change the receivable turnover ratio for a retail company? a. Increases in the retail prices of inventory. b. A change in credit policy. c. Increases in the cost incurred to purchase inventory. d. None of the above.
C
Why is depreciation expense added back to net income in the operating section of the indirect cash flow statement? A. Depreciation expense represents cash outflows for a firm B. Depreciation expense represents cash inflows for a firm C. Depreciation expense represents a noncash expense that must be added to net income to cancel its effect within the net income calculation D. Depreciation expense represents a cash expense that must be added to net income to cancel its effect within the net income calculation E. None
C
You have determined that Company X estimates bad debt expense with an aging of accounts receiv- able schedule. Company X's estimate of uncollectible receivables resulting from the aging analysis equals $250. The beginning balance in Allowance for Doubtful Accounts was $220. Write-offs of bad debts during the period were $180. What amount would be recorded as bad debt expense for the cur- rent period? a. $180 b. $250 c. $210 d. $220
C
A creditor is least likely to use what ratio when analyzing a company that has borrowed funds on a long-term basis? a. Cash coverage ratio. b. Debt-to-equity ratio. c. Times interest earned ratio. d. Dividend yield ratio.
D
Comparing LIFO to FIFA, and assuming prices are rising over time... A. LIFO yields higher net income and is more accurate for measuring Net income B. FIFO yields higher net income and is more accurate for measuring Net Income C. LIFO yields lower net income and is more accurate for measuring Ending Inventory D. FIFO yields higher net income and is more accurate for measuring Ending Inventory E. none
D
Consider the following: Issued common stock for $18,000, sold office equipment for $1,200, paid cash dividends of $4,000, purchased investments for $2,000, and purchased new equipment for $4,000. What was the net cash inflow (outflow) from investing activities? a. $20,200 b. ($2,800) c. ($10,800) d. ($4,800)
D
In what order do the three sections of the statement of cash flows usually appear when reading from top to bottom? a. Financing, Investing, Operating b. Investing, Operating, Financing c. Operating, Financing, Investing d. Operating, Investing, Financing
D
The components of the year-end to year-end changes in Retained Earnings affect the indirect cash flows statement as follows: A. Net income is the starting point for operating cash flow, gains are financing cash flow, and Dividends are Investing cash flow B. Net income is the starting point for Financing cash flow, gains are Investing cash flow, and Dividends are Financing cash flow C. Net income is the starting point for Operating cash flow, gains are Operating cash flow, and Dividends are Financing cash flow D. Net income is the starting point for Operating cash flow, gains are Investing cash flow, and Dividends are Financing cash flow E. None
D
The inventory costing method selected by a company will affect a. The balance sheet. b. The income statement. c. The statement of retained earnings. d. All of the above.
D
Total cash inflow in the operating section of the statement of cash flows should include which of the following? a. Cash received from customers at the point of sale. b. Cash collections from customer accounts receivable. c. Cash received in advance of revenue recognition (unearned revenue). d. All of the above.
D
When a company using the allowance method writes off a specific customer's $100,000 account receivable from the accounting system, which of the following statements is/are true? 1. Total stockholders' equity remains the same. 2. Total assets remain the same. 3. Total expenses remain the same. a. 2 b. 1 and 3 c. 1 and 2 d. 1, 2, and 3
D
Which of the following best describes the proper presentation of accounts receivable in the financial statements? a. Gross accounts receivable plus the allowance for doubtful accounts in the asset section of the bal- ance sheet. b. Gross accounts receivable in the asset section of the balance sheet and the allowance for doubtful accounts in the expense section of the income statement. c. Gross accounts receivable less bad debt expense in the asset section of the balance sheet. d. Gross accounts receivable less the allowance for doubtful accounts in the asset section of the bal- ance sheet.
D
Which of the following is not a step toward effective internal control over cash? a. Require signatures from a manager and one financial officer on all checks. b. Require that cash be deposited daily at the bank. c. Require that the person responsible for removing the cash from the register have no access to the accounting records. d. All of the above are steps toward effective internal control.
D
Which of the following is not added to net income when computing cash flows from operations under the indirect method? a. The net increase in accounts payable. b. The net decrease in accounts receivable. c. Depreciation expense reported on the income statement. d. All of the above are added to net income.
D
Briefly explain "Due Process" in Accounting
Due Process is the process in which the FASB creates GAAP. It has 4 steps where there is Agenda, Exposure Draft, Comment Period, Revise and Repeat, and then they vote
Which of the following is true? A. Cash and Accounts Payable are assets; Notes Payable and Mortgages are liabilities; and Common at Par is a Shareholder's Equity B. Accumulated Depreciation and Patents are Assets; Interest Payable is a Liability; and Cost of Goods Sold is a Shareholder's Equity Account C. Inventories and Prepaid Insurance are Assets; Accounts Payable and Taxes Payable are Liabilities; and Additional Paid in Capital is a Shareholder's Equity Account D. None
Inventories and Prepaid Insurance are Assets; Accounts Payable and Taxes Payable are Liabilities; and Additional Paid in Capital is a Shareholder's Equity Account
Using the information on B&C Corp, Inventory Turnover for 2021 round to two decimal places is
Inventory Turnover= COGS/Average Inventory 80/48+80/2= 1.68
In our discussion of the ROE DuPont Decomposition, wee saw that one way to characterize Leverage is that it can create a benefit for shareholders by "using other people's money to make money for yourself" briefly explain how this works
Leverage refers to the use of borrowed funds (i.e., debt) to finance investments in a company. By using borrowed money instead of only equity, a company can potentially increase its return on investment (ROI) and earnings per share (EPS). The benefit for shareholders of using leverage is that it allows the company to amplify the returns earned on equity investments. This is because the interest paid on the borrowed funds is tax-deductible, which lowers the company's tax bill and increases its after-tax profits. Therefore, if the company can earn a return on the borrowed funds that is higher than the cost of the interest, the excess return will be earned by the shareholders. For example, let's say a company has $100 in equity and borrows an additional $100 at an interest rate of 5% to invest in a project that generates a 10% return. Without leverage, the company would earn $10 on its $100 equity investment. However, with leverage, the company earns an additional $5 in interest expense, but it also earns an additional $10 in profit from the project. After paying the interest expense, the company has a net profit of $15, which is a 15% return on the $100 equity investment. In summary, by using borrowed funds to finance investments, a company can potentially increase its return on equity, which benefits the shareholders. However, the use of leverage also increases the risk of financial distress if the investments do not generate the expected returns or if interest rates rise.
Briefly Explain the rationale for making adjusting entries at the end of the accounting cycle
Making adjusting entries helps internal and external parties better understand the true Economic activity of the company. Adjustments present a more precise current depiction of a corporations financial statements
The Securities Act of 1933 and 1934 did all of the following except A. Required prospectus for IPOS B. Created the SEC C. mandated that firms must provide a Management Discussion and Analysis section of the annual report D. Required annual reports to the SEC E. None
Mandated that firms must provide a Management Discussion and Analysis section of the annual report
Component Percentage financial statements are prepared as follows A. Divide all Balance Sheet items by Sales, and divide all Income Statement items by total assets B. Divide all Balance Sheet items and all Income Statement items by Sales C. Divide all Balance Sheet items and all Income Statement items by Total Assets D. None
None
In making adjusting entires, "deferred" means A. the economic activity happens after the corresponding cash flow B. removing fur from a poodle C. the financial statements will not be compiled until a later date D. none
None
Which of the following events will necessarily cause cash to decrease? A. Dividends declared by the board of Directors, but not yet paid B. Delivery of goods to customer C. The firm has a net loss (negative income) reported for the period D. None
None
The requirement that auditors must express and opinion the internal controls of the firm was created by A. the Securities Act of 1930 B. the Accounting Standards Codification Project C. the Private Securities Litigation Reform Act
None of These
which of the following is correct? A. The Securities Act of 1933 created the SEC B. Regulations Fair Disclosure requires firms to disclose all material information C. The Public company Accounting Oversight Board is a division of the SEC which oversees the FASB
None of them are correct
Under U.S. GAAP, a general rule for intangible assets is that they can be recognized as an asset by a firm
Only if the asset is purchased from an external entity
According to the Conceptual Framework, the Qualitative Characteristic of "Relevance" include
Predictive Value, confirmatory (feedback) value, and materiality
Financial Accounting
Provides useful information
Using the information on B&C Corp, Return on Assets for 2021 rounded to two decimal places in percentage form is
ROA = Net Income / Average Total Assets 15+8(1-0.4)/(160+177)/2= 11.75%
For which event would the associated journal entry, necessarily include a Credit to Cash? A. Dividends declared by the Board of Directors, but not yet paid B. Delivery of goods to a customer C. Recognizing utilities expense in the income statement D. None
Recognizing utilities expense in the income statement
Shareholders' Equity is sometimes called the "residual claim" Briefly explain what this means
Shareholders Equity is sometimes called the residual claim because SE is the asset that remain after a company has paid off its liabilities . SE=A-L
The standards setting group delegated by the SEC which was in operation from the late 1950's to 1973 was
The Accounting Principles Board, which wrote opinions
Briefly learning the Allowance method for bad debts, we first looked at the Direct Write-Off method, briefly explain why the allowance method is better than the Direct Write-off method
The Allowance method for bad debts is an accounting method that estimates and records an allowance for potential bad debts at the end of each accounting period, rather than waiting for an actual bad debt to occur and then writing it off as in the Direct Write-off method. The Allowance method is generally considered to be a better method than the Direct Write-off method for several reasons. Firstly, the Allowance method is more accurate as it matches the estimated bad debts with the corresponding revenue in the same accounting period, providing a more accurate picture of a company's financial performance. Secondly, the Allowance method is in accordance with the Generally Accepted Accounting Principles (GAAP), which require companies to use an estimated allowance method for bad debts to ensure that their financial statements accurately reflect their financial position and performance. Thirdly, the Allowance method allows companies to recognize potential bad debts early on and take proactive measures to collect outstanding debts, which can improve their cash flow and reduce the risk of future bad debts. Finally, the Direct Write-off method violates the matching principle, which requires that expenses should be recognized in the same period as the revenue they helped generate. As a result, the Direct Write-off method can distort a company's financial performance, making it appear better than it actually is.
Which of the following is correct? A. The Balance Sheet has "temporary" accounts, and the Income Account has "permanent" accounts. B. The Balance Sheet has "permanent" accounts, and the Income Account has "temporary" accounts. C. Both Balance Sheet and Income Account have both "temporary" and "permanent" accounts D. None
The Balance Sheet has "permanent" accounts, and the Income Account has "temporary" accounts.
Which of the following is correct for a firm with a December 31st Fiscal Year End? A. The income statement is dated at "December 31st" while the balance sheet is dated "For the year ending December 31st' B. The Balance Sheet is dated "At December 31st" while the income statement is date "For the year end December 31st" C. Both the Balance Sheet and Income Sheet are dated "At December 31st" D. Both the Balance Sheet and Income Sheet are dated "For the Year Ending December 31st" E. None
The Balance Sheet is dated "At December 31st" while the income statement is date "For the year end December 31st"
Briefly explain what the "Business Cycle" is
The Business Cycle is the cycle in which a business operates. You got the time it takes for a company to pay cash to suppliers, sells goods and services to customers, and collect cash from customers.
The first standards setting group delegated by the SEC, in the late 1930's was:
The Committee on Accounting Procedures, which wrote Accounting Research Bulletins
For the year 2021, R Corp had Net Income of $100 and other Comprehensive Income of $50. How much was Comprehensive Income for R Corp in 2021?
The Comprehensive Income for R Corp in 2021 is the sum of its Net Income and Other Comprehensive Income. Comprehensive Income = Net Income + Other Comprehensive Income Comprehensive Income = $100 + $50 Comprehensive Income = $150 Therefore, the Comprehensive Income for R Corp in 2021 was $150.
Briefly outline the main improvement of the structure of the FASB relative to the two previous setting groups
The FASB was better because it was stricter and had better control when making the GAAP. It was placed in Connecticut which is outside of DC and New York, hence leaving it outside the influence of stocks and government. The FASB did not allow for multiple rules as they had a due process to create gaap.
The LIFO conformity rule creates a paradox of managers regarding the use of LIFO. Briefly explain the paradox
The LIFO conformity rule is a requirement that if a company uses the Last-In, First-Out (LIFO) method for tax purposes, it must also use the same method for financial reporting purposes. This rule creates a paradox for managers because LIFO can lead to lower net income and taxes in periods of rising prices, which is advantageous for tax purposes, but it can also lead to negative effects on financial statements. The paradox arises because managers have an incentive to use LIFO to reduce their tax bills in periods of rising prices. By valuing inventory using LIFO, the most recent and expensive inventory items are assumed to be sold first, which leads to a lower cost of goods sold (COGS) and higher taxable income. However, the use of LIFO also results in lower inventory values on the balance sheet, which can reduce earnings quality, affect financial ratios, and raise concerns among investors and lenders. Therefore, the paradox for managers is that they need to balance the tax benefits of LIFO against the negative effects on financial statements. In some cases, managers may choose to use LIFO for tax purposes and also provide disclosures in financial statements to explain the impact on inventory values and earnings quality. Alternatively, managers may choose to use other inventory valuation methods, such as First-In, First-Out (FIFO) or weighted average cost, to avoid the negative effects of LIFO on financial statements. However, this may result in higher taxes in periods of rising prices. In summary, the LIFO conformity rule creates a paradox for managers regarding the use of LIFO, as they need to balance the tax benefits against the negative effects on financial statements.
LIFO conformity rule creates a dilemma for managers. Briefly state the LIFO Conformity Rule and explain why it causes a dilemma
The LIFO conformity rule requires firms that use the LIFO (Last-In, First-Out) inventory accounting method for tax purposes to also use LIFO for financial reporting purposes. This means that the inventory values reported in a company's financial statements must be consistent with the LIFO inventory values used to calculate taxable income. The LIFO conformity rule creates a dilemma for managers because the use of LIFO can result in lower reported earnings during times of rising prices, as the most recent, and therefore most expensive, inventory items are assumed to be sold first. This can negatively affect a company's stock price and financial ratios, as well as limit the company's ability to distribute dividends or access financing. To address this dilemma, managers may consider switching to a different inventory accounting method, such as FIFO (First-In, First-Out), which can result in higher reported earnings during times of rising prices. However, such a switch may also result in higher taxable income, which can lead to increased tax liabilities. Thus, managers must carefully consider the trade-offs between financial reporting and tax implications when making decisions about inventory accounting methods.
Briefly explain what the "Matching" principle is
The matching principle states that when revenues are recorded (the good is delivered) then the expenses should be recored at the same time. Hence they are matching.
A store sold an item with invoice price $200 to a customer. The customer used American Express credit card, which charges a 1% credit card fee. The store sold an item with invoice price $100 to a second customer with terms of sale 3/10, net/30. The store collected cash from the second customer 15 days after the sale date. Net sales Revenue for these two sales combined is
The net sales revenue for these two sales combined can be calculated as follows: Net Sales Revenue = Total Sales - Sales Discounts - Credit Card Fees For the first sale, the customer used an American Express credit card, which charges a 1% fee. Therefore, the credit card fee for this sale is: Credit Card Fees = Invoice Price x Credit Card Fee Credit Card Fees = $200 x 1% = $2 The total sales for this transaction is the invoice price: Total Sales = Invoice Price = $200 For the second sale, the terms of sale are 3/10, net/30. This means that the customer is entitled to a 3% sales discount if they pay within 10 days, otherwise the full invoice amount is due within 30 days. Since the customer paid 15 days after the sale date, they are not entitled to the discount. Therefore, the total sales for this transaction is: Total Sales = Invoice Price = $100 The sales discount for this transaction is 0 because the customer did not pay within the discount period. Plugging in the values, we get: Net Sales Revenue = Total Sales - Sales Discounts - Credit Card Fees Net Sales Revenue = ($200 + $100) - ($0 + $0) - $2 Net Sales Revenue = $298 Therefore, the net sales revenue for these two sales combined is $298.
Y Corp's inventory was overstated by $25 on 12/31/20 and overstated by $50 on 12/31/21. based on this, Y Corp's pretax income for 2021 was
The reason why the answer is C, overstated by 25, is because inventory overstatement results in a decrease in cost of goods sold (COGS), which leads to an increase in gross profit and ultimately, an increase in pretax income. In this case, the inventory was overstated by $50 on 12/31/21, so the COGS was understated by $50. This means that gross profit was overstated by $50 and pretax income was also overstated by $50. However, the inventory was only overstated by $25 on 12/31/20, which means that it only affected the 2020 financial statements and not the 2021 financial statements. Therefore, the correct answer is that Y Corp's pretax income for 2021 was overstated by $25.
A firm had $300 in Accounts Receivable on 1/1/21, they reported Credit Sales Revenue of $5000 for 2021, they wrote of $100 as uncollectible during 2021, they collected cash of $4800 from Accounts Receivable during 2021, and they use 5% of Credit Sales for finding Bad Debt Expense using the percentage of sales method. Bad Debt Expense for 2021 was
To calculate the Bad Debt Expense for 2021, we can use the percentage of sales method, which uses a percentage of credit sales as the basis for estimating the amount of bad debts. First, we need to calculate the total credit sales for 2021, which is given as $5000. Next, we need to calculate the estimated bad debts expense for 2021 using the 5% rate provided. This is calculated as: Bad Debt Expense = 5% x Credit Sales = 0.05 x $5000 = $250 Therefore, the Bad Debt Expense for 2021 is $250 (option C).
A firm had $1000 in Accounts Receivable on 12/31/21, which they broke down into: 800 not yet due 30 days, of which they expect 3% to be uncollectible; $150 up to 30 days past due, with 20% uncollectible; and $%0 over 30 days past due, with 50% uncollectible. They also reported credit sales revenue of $8000 for 2021, they wrote off $50as uncollectible during 2021, and the 12/31/20 balance un the allowance for doubtful accounts was $65. Bad Debt Expense for 2021 was
To calculate the Bad Debt Expense for 2021, we need to estimate the amount of uncollectible accounts based on the information given, and then adjust the allowance for doubtful accounts accordingly. Here are the steps to follow: Step 1: Calculate the estimated uncollectible amount for each category of accounts receivable. Not yet due 30 days: $800 x 3% = $24 Up to 30 days past due: $150 x 20% = $30 Over 30 days past due: $50 x 50% = $25 Step 2: Total the estimated uncollectible amounts: $24 + $30 + $25 = $79. Step 3: Determine the adjustment to the allowance for doubtful accounts. The current balance in the allowance for doubtful accounts is $65, and we just calculated that the estimated uncollectible accounts for 2021 are $79. This means we need to increase the allowance for doubtful accounts by $14 to cover the expected uncollectible accounts. Step 4: Calculate the Bad Debt Expense for 2021. The Bad Debt Expense for 2021 is equal to the increase in the allowance for doubtful accounts, plus any accounts written off during the year. In this case, the increase in the allowance for doubtful accounts is $14, and $50 was written off during the year, so: Bad Debt Expense = $14 + $50 = $64. Therefore, the Bad Debt Expense for 2021 was $64
Timeline of Events during January: On Jan 1 Firm Z had 200 widgets on hand, at a cost of $8 each On Jan 8 Firm Z sold 100 widgets to customers On Jan 22 Firm Z purchased 150 widgets at a cost of $12 each On Jan 28 Firm Z sold 90 widgets COGS for January using FIFO Periodic is
To calculate the COGS using FIFO periodic method, we need to assume that the oldest inventory purchases are sold first. On January 8, 100 units were sold, and the cost of those units was $8 per unit since they are the oldest inventory purchases. So, the COGS for these units would be: 100 units x $8 per unit = $800 On January 22, 90 units were sold, and the cost of those units was $8 per unit for the first 10 units sold and $12 per unit for the remaining 80 units sold, as the cost of the most recent purchase was $12 per unit. So, the COGS for these units would be: 10 units x $8 per unit = $80 80 units x $12 per unit = $960 To calculate the ending inventory value, we need to take the remaining units, which are 110, and multiply them by the cost of the most recent purchase on January 22 at $12 per unit. So, the ending inventory value would be: 110 units x $12 per unit = $1,320 The total cost of goods available for sale would be the beginning inventory value plus the inventory purchases, which is: 200 units x $8 per unit (beginning inventory) + 150 units x $12 per unit (inventory purchases) = $1,600 + $1,800 = $3,400 Now, we can calculate the COGS using the formula: COGS = Cost of goods available for sale - Ending inventory COGS = $3,400 - $1,320 COGS = $2,080 Since $560 of this cost relates to the beginning inventory, which was also on hand in December, the COGS for January using FIFO periodic method is: COGS = $2,080 - $560 COGS = $1,520 Therefore, the COGS for January using FIFO periodic method is $1,520.
Timeline of Events during January: On Jan 1 Firm Z had 200 widgets on hand, at a cost of $8 each On Jan 8 Firm Z sold 100 widgets to customers On Jan 22 Firm Z purchased 150 widgets at a cost of $12 each On Jan 28 Firm Z sold 90 widgets Cogs for January using LIFO perpetual is
To calculate the COGS using LIFO perpetual method, we need to assume that the most recent inventory purchases are sold first. So, the cost of the units sold would be based on the most recent purchase on January 22 at $12 per unit. On January 8, 100 units were sold, and the cost of those units was $12 per unit since it is the most recent purchase. So, the COGS for these units would be: 100 units x $12 per unit = $1,200 On January 28, 90 units were sold, and the cost of those units was also $12 per unit. So, the COGS for these units would be: 90 units x $12 per unit = $1,080 To calculate the ending inventory value, we need to take the remaining units, which are 160, and multiply them by the most recent purchase cost of $12 per unit. So, the ending inventory value would be: 160 units x $12 per unit = $1,920 The total cost of goods available for sale would be the beginning inventory value plus the inventory purchases, which is: 200 units x $8 per unit (beginning inventory) + 150 units x $12 per unit (inventory purchases) = $1,600 + $1,800 = $3,400 Now, we can calculate the COGS using the formula: COGS = Beginning inventory + Inventory purchases - Ending inventory COGS = $1,600 + $1,800 - $1,920 COGS = $1,880
The "Separate Entity Assumption" means that
Transactions for a firm are separate from the transaction of the owners
In our discussion of the Donaldson article, we noted that using Sales as a target metric is probably not as good as using Income or Returns. Briefly explain the impact on incentives using Sales as a target and why this might be detrimental to firm performance
Using Sales as a target metric may incentivize managers to focus on increasing revenue at the expense of profitability. Managers may be tempted to engage in practices such as deep discounting or aggressive marketing campaigns to increase sales, even if these actions ultimately result in lower profits. This can lead to a situation where the firm's overall financial performance is weakened, even though sales figures may appear strong in the short term. Furthermore, focusing on sales alone can lead to a neglect of other important aspects of business performance, such as product quality, customer satisfaction, and operational efficiency. Managers may prioritize increasing sales over these other factors, resulting in long-term negative consequences for the firm. In contrast, using Income or Returns as target metrics incentivizes managers to consider the profitability of their actions and to make decisions that are beneficial for the long-term financial health of the firm. This can lead to more sustainable growth and better overall performance.
Which of the following contains only Current Liabilities? A. Wages Payable, Accounts Payable, and Unearned Revenue for goods to be provided within a year B. Accounts Payable, Dividends Payable, and Cost of Goods sold C. Accumulated Depreciation, Wages Payable, and Retained Earnings D. None
Wages Payable, Accounts Payable, and Unearned Revenue for goods to be provided within a year
A firm wrote off an Account Receivable of $100. Write the journal entry they make to record the write off
When a firm writes off an Account Receivable, it means that they have determined that the amount owed by a customer is no longer collectible and is deemed as bad debt. To record the write-off of $100, the following journal entry should be made: Debit: Allowance for Doubtful Accounts (contra-asset account) $100 Credit: Accounts Receivable $100 The debit to the allowance for doubtful accounts account reduces the amount of accounts receivable that is expected to be collected, while the credit to the accounts receivable account reduces the amount owed by the customer who is no longer expected to pay. This write-off effectively removes the amount of the bad debt from the firm's accounts.
Zigby Co received an order for goods in March, produced goods in April, delivered goods in May, and received payment in June, which of the following is correct? A. Zigby Co should recognize Revenue for sale in march B. Zigby Co should recognize Revenue for sale in April C. Zigby Co should recognize Revenue for sale in May D. Zigby Co should recognize Revenue for sale in June E. Zigby co should recognize the Revenue in an adjusting entry at the end of the year
Zigby Co should recognize Revenue for sale in May
"Materiality" means that
a piece of information is important enough by itself to matter to an investor's decision
If the firm's auditor concludes that the financials of the firm fairly present the financial condition of the firm, they would issue
an unqualified audit report
Which of the following only Current Assets? A. cash, accumulated depreciations, and inventory B. Accounts receivable, short-term marketable securities, and additional paid in capital C. cash, inventory, and goodwill D. none
cash, accumulated depreciations, and inventory
The concept of "mixed attribute measurement" refers to the fact
differential account values are measured using different methods
Financial Accounting
provides useful information
General Motors manufactured a car in 2021, and sold it in 2022. It should
recognize both sales revenue and COGS in 2022
Section 404 of the Sarbanes-Oxley Act
requires evaluation of the internal controls of the firm
If a firm has a prepaid assets account, the adjusting entry at the end of the accounting period includes
the Debit to an expense account and a Credit to the prepaid account
If the firm's auditor concludes that the financials are "qualified," this means that
the financials contain some material problem
The "going concern" assumption means that
the firm is expected to operate for the foreseeable future
The "Operating Cycle"
the process of purchasing materials, creating product, selling it to customers, and collecting cash
In Accounting "Due Process" refers to
the process used to create GAAP
In making adjusting entries, "deferred expenses" might result from all of the following except: A. cash paid by a firm in advance for the rental of a building they will use as a store B. cash advances received from customers for future goods or services to be provided C. wages earned by employees but not yet paid to them D. none of them
wages earned by employees but not yet paid to them
