Accounting 1 final exam review
True or false? Depreciation expense does not imply a reduction in value
True; it is merely an allocation of the depreciable cost of an asset over the estimated useful life; this is in keeping with the matching principle for revenue and expenses
Return on equity
Used to measure the profitability of stockholders investment Return on equity = net income/ average total stockholders equity
Vertical analysis (common size analysis)
Uses percentage to compare individual components of financial statements to a key statement figure. On the income statement, individual items would be expressed as a percentage of net sales.
Working capital
The excess of current assets over current liabilities = current assets - current liabilities
Depreciation methods are based on two estimates
The expected life of the asset and the residual or salvage value of the asset at the end of its useful life
Any ordinary repair and maintenance expenditures are expensed in the income statement when they are incurred
The expenditure maintains the asset in normal operating conditions
Current ratio
Measures a company's ability to pay short term debts = current assets/current liabilities
Stock market ratios
Analyze earnings and dividends of a company
Royal Company purchased a dump truck at the beginning of 2012 at a cost of $60,000. The truck had an estimated life of 6 years and an estimated residual value of $24,000. On January 1, 2014 the company made major repairs of $20,000 to the truck that extended the life 1 year. This, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight line depreciation method. What amount should be recorded as depreciation expense each year starting in 2014?
$12,000
Calculating of depreciation per unit (1st to find the units of production depreciation)
= Cost- salvage value/ total estimated units of production
Straight line depreciation
The simplest and most popular methods for annual reports = (acquisition cost- residual value)/estimated useful life
Return on investment
A measure of the amount of wealth generated as compared to the amount invested Return in investment = net income/ average total assets
Earnings per share
A measure of the profitability of the stockholders investment EPS= net earnings available for common stock / average number of outstanding common shares
Double declining balance
Accelerate deprecation method; assigns more deprecation expense in earlier years and less in later years
Units of production
Assigns depreciation based upon actual production. An organization should use the depreciation method that most accurately reflects its operations
Straight line method
Assigns the same amount of depreciation every year
Borden company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should the company determine which costs should be recorded as land improvements and which cost should be recorded as land? A. The costs with a limited life will increase land, and the costs with an unlimited useful life will increase land improvement B. The costs with an unlimited life will increase land, and the costs with a limited useful life will increase land improvements C. The costs to be depreciated will increase land, and the costs that will not be depreciated will increase land improvements D. Costs that are depreciable will increase land improvements, while other costs are expensed immediately because of a lack of definite life
B. The costs with an unlimited life will increase land, and the costs with a limited useful life will increase land improvements
Using different depreciation methods for book purposes versus tax purposes for the same asset is A. Not allowed since the amount can only be calculated one way or the other, not both B. The direct result of the differing goals of financial and tax accounting C. Contrary to GAAP D. Against the internal revenue code, and as such, against the law
B. The direct result of the differing goals of financial and tax accounting
Which of the following is an example of a capital expenditure? A. Cleaning the carpet in the front room B. Tune up for a company truck C. Replacing an engine in a company car D. Replacing all burned out light bulbs in the factory
C. Replacing an engine in a company car
Price to Earnings Ratio (P/E)
Compares the earnings of a company to the market price for a share of the companys stock PE = market price per share/ earnings per share
Depreciation is a process by which A the decline in market value of plant and equipment is determined and recorded B replacement funds are accumulated for plant and equipment C the difference between current market value and historical cost of plant and equipment D the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset
D the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset
(2nd) calculate of periodic units of production depreciation
Depreciation cost per unit of production x units of production in the current account period = annual or periodic depreciation expense
Net margin (or profit margin)
Describes the percent remaining of each sales dollar after subtracting all expenses, including cost of goods sold. Net (profit) margin = net income/ net sales
Any expenditure that extend the life of a fixed asset should be capitalized
For example, an organization puts a new roof on a building
If an asset is sold for a price greater than it's book value on the balance sheet, a ______ results.
Gain and is reports in the income statement under other gains
Profitability ratios
Indicate a company's ability to generate earnings
Solvency ratios
Indicate a company's ability to pay long term debts as they become due, and it's financing structure
Liquidity ratios
Indicate a company's ability to pay short term debts as they become due. They focus on current assets and current liabilities
Horizontal analysis (trend analysis)
Involves analyzing financial info over several accounting periods. In comparing a beginning account balance with the end of the period balance we can express the change in two ways: as a dollar amount, or as a percentage change from the base year
Ratio analysis
Involves studying relationships between individual items reported in a set of financial statements.
Accumulated depreciation
Is a contra asset account that reduces the primary asset account in the balance sheet
The books value of the asset
Is the capitalized cost if the asset minus the amount of accumulated depreciation.
On January 2 Hannah Company sold a machine for $1,000 that it had used for several years. The machine cost $12,000 and had accumulated depreciation of $9,000 at the time of sale. What gain or loss will be reported on the income statement for the sake of the machine?
Loss of $2,000
When companies file their tax returns, most elect to use the modified accelerated cost recovery system (MACRS)
MACRS uses the half year convention, meaning that the company taken one-half year's depreciation in the first and last years of the assets class life. This means it would take 6 years to fully depreciate a 5 year class life asset
Inventory turnover ratio
Measured how many times a company's inventory has been sold and replaced during the year = cost of goods sold/ average inventory
Asset turnover margin
Measures how many sales dollars were generated for each dollar of assets invested Asset turnover ratio = net sales/ average total assets
Accounts receivable turnover ratio
Measures how many times a company converts its receivables into cash each year = net credit sales/ average accounts receivable (To determine average accounts receivable add the beginning and ending balance together then divide by 2)
Book value per share
Measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off BV= (stockholders equity-preferred rights)/ outstanding common share
Tangible assets
Physical presence, meaning they can be seen and touched
Lump sum purchase
Several assets purchased as a group for one price
Change in accounting estimate
When an asset wears out more quickly, and organization may elect to reduce the number of years in its useful life which is accounted for in the current and future financial statements