ACC 301 Test 2

owner's equity

1. capital stock- the par or stated value of the shares issued 2. additional paid-in capital- the excess of amounts paid in over the par or stated value 3. retained earnings- the corporation's undistributed earnings 4. accumulated other comprehnsive income- the aggregate amount of the other comprehensive income items 5. treasury stock- generally, the amount of ordinary shares repurchased 6. noncontrolling interest (minority interest) - a portion of the equity of subsidiaries not wholly owned by the reporting company

supplemental disclosures

1. contingencies- material events that have an uncertain outcome 2. accounting policies- explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries, etc. 3. contractual situations- explanations of certain restrictions or covenants attached to specific assets or more likely to liabilities 4. fair values- disclosures of fair values, particularly for financial instruments

four steps to preparing the statement of cash flows

1. determine the net cash provided by ( or used in) operating activities 2. determine the net cash provided by ( or used in) investing and financing activities 3. Determine the change (increase or decrease) in cash during the period 4. reconcile the change in cash with the beginning and the ending cash balance

intermediate components

1. operating section-revenues 2. nonoperating section- gains and losses 3. income tax 4. discontinued operations 5. noncontrolling interest 6. earnings per share

True or False if a company holds a noncontrolling interest in a subsidiary company, its must present an allocation of net income or loss that is attributable to the noncontrolling interest

True

True or False material gains or losses resulting from the disposition of a component of the business are reported in Discontinued Operations

True

True or false earnings per share is net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding

True

receivables

a company should clearly identify -anticipated loss due to uncollectibles - amount and nature of any nontrade receivables - receivables used as collateral

contra items

a contra account on a balance sheet reduces either an asset, liabilities, or owners' equity account

a separation of operating and non operating activities of a company exists in

a multiple-step but not a single-step income statement

Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In 2017, however, Sawyer determines that it must revise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2017 financial statements? a) $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet b) $500,000 of expense and $500,000 as an unusual loss in the income statement c) $500,000 of expense in the income statement as an ordinary item, $500,000 of expense reported as an adjustment to the beginning balance of retained earnings (net of tax) d) $500,000 of expense reported as a change in accounting principle and accounted for under the retrospective approach

a) $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet

Which of the following statements is incorrect? a) GAAP identifies certain minimum items that should be presented on the income statement. IFRS has no minimum information requirements b) Both GAAP and IFRS follow the same presentation guidelines for discontinued operations but IFRS defines a discontinued operations more narrowly c) Under IFRS, companies must classify expenses by either nature or function d) Both GAAP and IFRS require companies to indicate the amount of net income attributable to noncontrolling interest

a) GAAP identifies certain minimum items that should be presented on the income statement. IFRS has no minimum information requirements

Companies are required to highlight certain items in the financial statements so that users can better determine the long-run earning power of the company. Which of the following is not one of those items? a) changes in accounting principle b) discontinued operations c) unusual gains and losses d) noncontrolling interest

a) changes in accounting principle

Which of the following would be reported in a separate income statement category, separately from continuing operations, on the income statement? a) discontinued operations b) unusual gains c) income tax expense d) unusual losses

a) discontinued operations

Which of the following occur from peripheral or incidental transactions? a) gain on the sale of equipment b) operating expenses c) sales revenue d) cost of goods sold

a) gain on the sale of equipment

An advantage of the nature-of-expense method under IFRS is that is a) is simple to apply b) is viewed as more relevant c) identifies the major cost drivers of the company d) all of these answer choices are correct

a) is simple to apply

Which of the following statements related to noncontrolling interest is correct? a) noncontrolling interest in net income is reported as an expense on the income statement b) consolidated net income is allocated to the parent and to the noncontrolling interest in proportion to their appropriate percentages of ownership c) noncontrolling interest is sometimes called minority interest d) noncontrolling interest is the portion of equity interest in a subsidiary not attributable to the parent company

a) noncontrolling interest in net income is reported as an expense on the income statement

In preparing the statement of cash flows, which of the following transactions would be considered an investing activity? a) sale of equipment at book value b) sale of merchandise on credit c) declaration of a cash dividend d) issuance of bonds payable at a discount

a) sale of equipment at book value

change in accounting estimates

accounted for in the period of change or the period of and the future periods if the change affects both not handled retrospectively not considered errors

comprehensive income

all changes in equity during a period except those resulting from investments by owners and distributions to owners includes: all revenues and gains, expenses and losses reported n net income and all gains and losses that bypass net income but affect stockholders' equity

when a company transfers an amount of restricted retained earnings into a different account, that account is titled

appropriated retained earnings

how can comprehensive income be displayed

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

The correct order to present current assets is a) cash, inventories, accounts receivable, prepaid items b) cash, accounts receivable, inventories, prepaid items c) cash, accounts receivable, prepaid items, inventories d) cash, inventories, prepaid items, accounts receivable

b) cash, accounts receivable, inventories, prepaid items

Which of the following is an intangible asset? a) deferred income taxes b) customer lists c) restricted cash d) prepaid pension costs

b) customer lists

Income statement items found on a multiple-step income statement include all of the following except a) gross profit b) prepaid expenses c) income from operations d) income tax expense

b) prepaid expenses

Which of the following is an acceptable method of presenting the income statement? a) a classified income statement b) a current operating performance income statement c) a condensed income statement d) none of these answer choices are correct

c) a condensed income statement

Current assets

cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer presented in the balance sheet in order of liquidity

operating-cash flows statement

cash effects the transactions that enter into the determination of net income

The correct order to present current assets is

cash, accounts receivable, inventories, prepaid items order of liquidity

quality of earnings

companies have incentives to manage income to meet or beat wall street expectations, so that market price of stock increased and value of stock options increase quality of earnings is reduced if earnings management results in information that is less useful for predicting future earnings and cash flows

limitations of income statement

companies omit items that cannot be measured reliably income is affected by the accounting methods employed income measurement involved judgment

where is the information for a statement of cash flows obtained?

comparative balance sheet, the current income statement, and selected transaction data

usefulness of the balance sheet

computing rates of return evaluating the capital structure (where did you get the money for your assets) assess risk and future cash flows analyze the company's liquidity, solvency, and financial flexibility

A ______ on a balance sheet reduces either an asset, liability, or owners' equity account

contra account

accumulated depreciation

contra-asset

The income statement can be used to assess

creditworthiness

trading securities

current asset

investment in preferred stock

current asset/ investment

cash dividends payable

current liability

interest payable

current liability

unearned revenue

current liability

Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? a) multiple step form b) report form c) single step form d) account form

d) account form

A multiple-step income statement a) highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company b) separates operating transactions from nonoperating transactions c) matches cost and expenses with related revenues d) all of these answer choices are correct

d) all of these answer choices are correct

Which of the following items may increase retained earnings? a) net income b) changes in accounting principle c) prior period adjustments d) all of these answer choices are correct

d) all of these answer choices are correct

The occurrence which most likely would have no effect on 2017 net income (assuming that all amounts involved are material) is the a) settlement based on litigation in 2017 of previously unrecognized damages from a serious accident which occurred in 2015 b) worthlessness determined in 2017 of stock purchased on a speculative basis in 2014 c) sales in 2017 of an office building contributed by a stockholder in 2015 d) collection in 2017 of a receivable from a customer whose account was written off in 2016 by a charge to the allowance account

d) collection in 2017 of a receivable from a customer whose account was written off in 2016 by a charge to the allowance account

The balance sheet is useful for analyzing all of the following except a) financial flexibility b) liquidity c) solvency d) profitability

d) profitability

The statement of stockholders' equity a) all of these answer choices are correct b) need not be presented if a company is reporting comprehensive income using the two statement approach c) is dated using "As of December 31, 2017" d) reports the change in each stockholders' equity account and in total stockholders' equity during the year

d) reports the change in each stockholders' equity account and in total stockholders' equity during the year

The statement of cash flows provides answers to all of the following questions except a) what was the cash used for during the period b) what was the change in the cash balance during the period c) where did the cash come from during the period d) what is the impact of inflation on the cash balance at the end of the year

d) what is the impact of inflation on the cash balance at the end of the year

losses

decreases in equity (net assets) from peripheral or incidental transactions

The first step in preparing the statement of cash flows is to

determine the cash provided by or used in operations

inventories

disclose - basis of valuation - cost flow assumption

restrictions on retained earnings

disclosed in notes to the financial statements as appropriated retained earnings

usefulness of income statement

evaluate past performance predicting future performance help assess the risk or uncertainty of achieving future cash flows

True or False Losses as a result of a strike are reported net of tax as a subdivision of noncontrolling interest section

false

True or False The single-step income statement differentiates between operating and nonoperating activities

false

True or False discontinued operations occur when a company eliminates the results of operations of the business. The elimination of the component need not represent a strategic shift, having a major effect on the company's operations and financial results

false

Borrowing money from creditors and repaying the amounts borrowed are

financing activities

intermediate components of an income statement- multiple step income statement

format referred to as multiple-step income statement separates operating transaction from nonoperating transactions matches costs and expenses with related revenues highlights certain components of income that analysts use assessing financial performance

cash

generally any monies available on demand cash equivalents- short-term highly liquid investments that mature within three months or less restrictions (set it aside for some specific purpose, you can't liquidate everything in your business) or commitments must be disclosed

other assets

if you have something you're using up but doesn't fit in any of these accounts goes here- catchall

retained earnings statement

increase- net income; change in accounting principle; prior period adjustments decrease- net loss; dividends; change in accounting principles; prior period adjustments

adjunct account

increases either an asset, liabilities, or owners' equity account

gains

increases in equity (net assets) from peripheral or incidental transactions

revenues

inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations sales, fee, interest, dividend, rent

intangible assets

lack physical substance and are not financial instruments limited life intangibles amortized indefinite-life intangibles tested for impairment

the current cash debt coverage ratio is often used to assess

liquidity

investing- cash flows statement

making and collecting loans and acquiring and disposing of investments, and property, plant, and equipment

Earnings per share is computed as net income

minus preferred dividends divided by the weighted average of common shares outstanding

limitations of the balance sheet

most assets and liabilities are reported at historical cost use of judgements and estimates many of items of financial value omitted

current cash debt coverage ratio

net cash provided by operating activities/ average current liabilities

earnings per share

net income- preferred dividends/ weighted average of common shares outstanding a significant business indicator measures the dollars earned by each share of common stock must be disclosed on the income statement

long-term liabilities

obligations that a company does not reasonably expect to liquidate within the normal operating cycle, all covenants and restrictions must be disclosed

current liabilities

obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities

financing- cash flows statement

obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed

discontinued operations

occurs when two things happen: 1. a company eliminates the results of operations of a component of the business 2. the elimination fo a component that represents a strategic shift, having a major effect on the company's operations and financial results NET OF TAX

gains and losses that bypass net income but affect stockholders' euqity are referred to as

other comprehensive income

expenses

outflows or other using-up of assets or incurrences of liabilities that constitute the e ntity''s ongoing major or central operations cost of goods sold, depreciation, interest, rent, salaries and wages, taxes (income tax)

techniques of disclosure

parentehtical explanations notes cross-reference and contra items supporting schedules terminology

prepaid expenses

payment of cash, that is recorded as an asset because service or benefit will be received in the future cash payment BEFORE expense recorded

statement of cash flows

presents a detailed summary of all the cash inflows and outflows or the sources and uses of cash during the period meets the objective of financial reporting to help assess the amounts, timing, and uncertainty, of future cash flows

Balance sheet uses

reports assets, liabilities, and equity at a specific date provides information about resources, obligations to creditors, and equity in net resources helps in predicting amounts, timing, and uncertainty of future cash flows

statement of stockholder's equity

reports the changes in each stockholder's equity account and total equity for the period following items are disclosed in the statement: - contributions (issuances of shares) and distribution (dividends) to owners - reconciliation of the carrying amount of each component of stockholders' equity from the beginning to the end of the period

corrections of errors

result from: mathematical mistakes; mistakes in application of accounting principles; oversight or misuse of facts corrections treated as prior period adjustments adjustment to the beginning balance of retained earnings

changes in accounting principle

retrospective adjustment cumulative effect adjustment to beginning retained earnings approach preserves comparability across years

The major elements of the income statement are

revenues, expenses, gains, and losses

Noncurrent assets- long-term investments

securities (Bonds, common stock, or long-term notes) tangible fixed assets not currently used in operations (land held for speculation) special funds (sinking fund, pension fund, plant expansion fund, or cash surrender value of life insurance) nonconsolidated subsidiairies or affiliated companies

significant noncash activities

significant financing and investing activities that do not affect cash are reported in either a separate schedule at the bottom of the statement of cash flows or in the notes

common stock

stockholders' equity

deficit

stockholders' equity

treasury stock

stockholders' equity

property plant and equipment

tangible long-lived assets used in the regular operations of the business - physical property such as land, buildings, machinery, furniture, tools, and wasting resources (minerals) - with the exception of land, a company either depreciates or depletes these assets

intraperiod tax allocation

the allocation of tax within a period helps users understand the impact of income taxes on the various components of net income intraperiod tax allocation is used for income from continuing operations, and discontinued operations

purpose of the statement of cash flows

to provide relevant information about the cash receipts and cash payments of an enterprise during a period answers the following questions: 1. where did the cash come from? 2. what was the cash used for? 3. what was the change in the cash balance?

The single-step income statement emphasizes

total revenues and total expenses

True or False Companies frequently use judgments and estimates in valuing items on the balance sheet

true

True or False The income statement helps investors and creditors predict amounts, timing, and uncertainty of future cash flows

true

unusual and infrequent gains and losses

unusual- high degree of abnormally and a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment in which it operates infrequency of occurrence- type of transaction that is not reasonably expected to recur in the foreseeable future, taking into account the environment in which the company operates

non controlling interest

when a company owns substantial interest (generally greater than 50%) in another company, GAAP generally require that the financial statements of both companies be consolidated together into one set of financials noncontrolling interest is the portion of equity (net assets) interest in a subsidiary not attributable to the parent company

usefulness of the cash flows statement

without cash, a company will not survive cash flow from operations: - high amount- company is able to generate sufficient cash to pay its bills - low amount- company may have to borrow or issue equity securities to pay bills

__________ is the ability of a company to pay its debts as they mature

Solvency