IAC test 2

what is the difference in earned and realized?

earned- the performance obligation is met realized- just because we earned doesn't mean we'll get paid

give an example of an accrued expense

employees' salaries

what section of the balance sheet is other comprehensive income a part of?

equity

T/F all illegal acts should be disclosed in the notes to the financial statements

false

T/F an example of vertical analysis would be comparing inventory this year to inventory last year to calculate the percentage change in inventory

false

T/F assessing a company's risk is a purpose of the income statement

false

T/F comprehensive income is the total change in shareholders' equity that occurred during the period

false

T/F gains from the sale of equipment would be reported as items of other comprehensive income

false

T/F horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year

false

T/F if a company does not have any discounted operations or extraordinary items to list on its income statement, the labels should still be there with a zero balance noted

false

T/F inflation impacts the cash balance at the end of the year

false

T/F intraperiod tax allocation requires corporation's total income tax expense to be allocated as other revenue and expenses

false

T/F liquidity refers to the riskiness of a company with regard to the amount of total assets in its capital expenditure

false

T/F the balance sheet of an entity purports to show the true value of an entity

false

T/F the most common method for reporting operating activities is the direct method

false

T/F the single step format of the income statement does not separately report non operating gains in the revenues section of the income statement

false

T/F the single-step format of the income statement does not separately report non-operating gains in the revenues section of the income statement

false

T/F the ultimate responsibility for the financial statements lies with the auditors

false

T/F to compute earnings per share the denominator is net income attributable to common shareholders less any preferred stock dividends for the period

false

T/F unrealized capital would be classified as contributed capital

false

the statement of cash flows reports cash flows from the activities of:

financing, investing, operating

operating activities

focuses on changes in cash due to income statement activity and changes in operational assets (current assets and current liabilities)

investing activities

focuses on the changes in cash due to the purchase and/or sale of long-term investments, property, plant, and equipment, and materials

financing activites

focuses on the changes in cash from the incurrence of long-term debt, the issuance and/or the repurchase of a company's own bonds or stock. dividend payments are also recorded in this section

how do you calculate net income on a multi-step income statement?

income before income taxes - income tax expense

under operating activities of the statement of cash flows and using the indirect method, what would you do in order to increase/decrease current assets?

increase current assets- subtract from net income decrease current assets- add to net income

under operating activities of the statement of cash flows and using the indirect method, what would you do in order to increase/decrease current liabilities?

increase current liabilities- add to net income decrease current liabilities- subtract from net income

Gains and losses that bypass net income but affect stockholders' equity are referred to as:

other comprehensive income

what does an income statement do?

reports revenue, expenses, gains, and losses for a specified period of time

general ledger

the entire group of accounts for a company

capital stock

the par or stated value of the shares issued

what are special funds and name 2 types

they are long-term investments 1. sinking fund 2. pension fund

where should items that are unusual in nature or infrequent in occurrence be reported within the income statement? should they be reported net of tax?

they should be presented within income from continuing operations. These items should NOT be reported net of tax. The income tax expense or benefit related to such items should be included in the total income tax or benefit reported on the income statement.

what does the single step income statement emphasize?

total revenues and total expenses

T/F a change in accounting principle that is implemented using the retrospective approach includes restating financial statements of all periods presented as if the new standard has been used in those periods

true

T/F a contract can be verbal if its under $500

true

T/F a patent is not generally classified as a current asset

true

T/F a reader of a set of financial statements would expect to be able to find in the statement of changes in shareholders' equity increases from comprehensive income

true

T/F accrued salaries and wages in a balance sheet represent salaries and wages that have been earned by employees but not yet paid

true

T/F balance sheets tend to be understated because of the historical cost principle

true

T/F in general, revenue is recognized as being earned when goods are sold or services are rendered

true

T/F intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects

true

T/F loss on sale of investments is temporary earnings

true

T/F material restructuring costs are reported as an element of income from continuing operations

true

T/F obligations that are not expected to require the use of current assets or the creation of other current liabilities within one year or the normal operating cycle, if longer than a year, are called long-term liabilities

true

T/F payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes

true

T/F prepaid expenses are usually classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer

true

T/F the SEC requires comparative income statements and statements of cash flows for 3 years

true

T/F the compensation to top executives is disclosed in the proxy statement

true

T/F the criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies

true

T/F the underlying asset in a lease is tangible

true

T/F to be recognized as revenue, an item must be earned revenue and be realized or realizable

true

T/F when a company classifies a component as held for sale it must report the component on its balance sheet at the lower of its book value or its fair value minus costs to sell

true

what would happen if you changed from FIFO to the weighted average method of accounting for inventory?

you would have to go back to the balance sheet and income statement and act like the change happened 3 years ago. this will then change the equity and retained earnings

what is the first thing on a multi-step income statement?

"for the year ended"

name 3 characteristics of the multi-step income statement

1. Separates operating transactions from nonoperating transactions. 2. Matches costs and expenses with related revenues. 3. Highlights certain components of income that analysts use assessing financial performance

Companies are required to report unusual and irregular items as part of net income so users can better determine the long-run earning power of the company. These income items fall into THREE general categories:

1. Unusual gains and losses. 2. Discontinued operations. 3. Noncontrolling interest

name 5 asset classes in the order of liquidity on a balance sheet

1. current assets 2. long-term investments 3. property, plant, and equipment 4. intangible assets 5. other assets

name 2 liability classes and 3 owner's equity classes in the order of liquidity on a balance sheet

1. current liabilities 2. long term debt 1. capital stock 2. additional paid-in-capital 3. retained earnings

what are 2 ways to manipulate income?

1. income shifting 2. income statement classification

balance sheets analyze what 3 characteristics of a company?

1. liquidity 2. solvency 3. financial flexibility

name 3 limitations of a balance sheet

1. most assets and liabilities are reported at historical cost 2. use of judgments and estimates 3. many items of financial value are omitted (ex. human capital)

name 3 actions that gains or losses can result from

1. sale of investments or plant assets 2. settlement of liabilities 3. write-offs of assets

cash equivalents are securities that mature when?

3 months or less

why is a balance sheet useful?

The Balance Sheet is useful to financial statement users because it indicates the resources the entity has to generate revenues and the claims of 'ownership' against those assets.

paid-in-capital

The amount that the shareholders have invested into the company

what are the 2 primary sources of equity?

contributed capital and retained earnings

formula for the current ratio

current liablities / current assets

List the circumstances under which land would be classified under the following balance sheet classifications: 1. Current assets. 2. Investments (non-current). 3. Property, plant, and equipment. 4. Other non-current assets.

1. Current assets : Land held for short-term speculation would be a short-term investment. Land could also be held as inventory by, for example, a real estate developer. 2. Investments (non-current) : Land held for long-term speculation would be a long-term investment. 3. Property, plant, and equipment : The most common use of land would be under this category when it is actively used in operations. 4. Other non-current assets : Land in idle use or held as a future building site could be included in this category

name the 5 steps in the process of preparing the statement of cash flows

1. Determine the change (increase or decrease) in cash during the period. 2. Determine the net cash provided by (or used in) operating activities. There are Two Methods - the Direct Method and the Indirect Method. 3. Determine the net cash provided by (or used in) investing activities. 4. Determine the net cash provided by (or used in) financing activities. 5. Reconcile the change in cash with the beginning and the ending cash balances.

what is a classified balance sheet?

A classified balance sheet is a financial statement that presents the assets, liabilities, and equity in relevant sub-categories that will be useful for end users. There is no specific required format or number of sub-categories, but the most common sub-categories are current and non-current. In short, the aim of the classified balance sheet is to give investors and creditors more useful information about the company.

Companies must display the components of other comprehensive income in one of two ways:

A single continuous statement (one statement approach) or two separate, but consecutive statements of net income and other comprehensive income (two statement approach).

what makes a contract enforceable?

COALL- consideration, offer, acceptance, legal capacity, legal subject matter

non-operating income

Includes certain gains and losses and revenues and expenses related to peripheral or incidental activities of the company

operating income

Includes revenues and expenses directly related to the principal revenue-generating activities of the company

prospective approach

accounts for changes in estimates

intraperiod income tax presentation is primarily a matter of what?

allocation

give the formula for equity

assets - liabilities

why is earnings per share important to disclose?

because it provides relevant information to common stockholders

the correct order to present current assets is what?

cash, A/R, inventories, pre-paid items

4. Long lived assets used in the operations of the business refer to property, plant, equipment, and:

intangible assets

comprehensive income

is the change in equity (net assets) arising from either transactions or other occurrences with non-owners

what is straight-line depreciation

it's the same every year

give the formula for comprehensive income

net income + other comprehensive income

formula for basic earnings per share

net income - preferred dividends / weighted average number of common shares outstanding

where will other assets (deferred income tax, restricted cash, etc) show up on the balance sheet?

on the asset side on the bottom

define and give 3 examples of cash equivalents

short-term, highly liquid investments, readily convertible to cash with little risk of loss. also have a maturity date no longer than 3 months from the date of purchase. ex. money market funds, treasury bills, and commercial paper

what is another name for the income statement?

statement of changes

what is another name for the balance sheet?

statement of financial position