Accounting I - Chapter 2

Neutral

accounting information that is not biased toward one position or another

Generally accepted accounting principles

are accounting rules that are recognized as a general guide for financial reporting.

Confirmatory value

confirms or corrects prior decisions

In a classified balance sheet, assets are usually classified as

current assets; long-term investments; property, plant, and equipment; and intangible assets.

Liabilities are generally classified on a balance sheet as

current liabilities and long-term liabilities.

Earnings per Share =

(net income - preferred dividends) / average common shares outstanding

On a classified balance sheet, short-term investments are classified as

A current asset

Full Disclosure Principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Property, plant, and equipment

Accumulated depreciation-equipment

The convention of consistency refers to consistent use of accounting principles

Among accounting periods

Monetary Unit Assumption

Assumes that the dollar is the "measuring stick" used to report on financial performance.

Current Ratio =

Current Assets ÷ Current Liabilities

Which of the following would not be classified as a long-term liability?

Current maturities of long-term debt

Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Jackson most likely violated?

Faithful representation

Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments?

Going concern assumption

Economic Entity Assumption

Indicates that personal and business record keeping should be separately maintained.

Current assets

Inventory Prepaid insurance

Investments

Land (held for investment)

Historical Cost Principle

Measurement basis used when a reliable estimate of fair value is not available.

The assumption that requires only those things that can be expressed in money are included in the accounting records is the

Monetary unit assumption

Long-term liabilities

Mortgage payable

Going Concern Assumption

Rationale why plant assets are not reported at liquidation value. (do not use historical cost principle):

Stockholders' equity

Retained earnings

Current liabilities

Salaries and wages payable

Periodicity Assumption

Separates financial information into time periods for reporting purposes.

Information presented in a clear and concise fashion so that users can comprehend its meaning is an application of

Understandability

Classify each of the following financial statement items taken from Ming Corporation's balance sheet.

a) Accounts payable - current liabilities (b) Accounts receivable - current assets (c) Accumulated depreciation—equipment -property, plant, equipment (d) Buildings - property, plant, equipment (e) Cash - current assets (f) Interest payable - current liabilities (g) Goodwill - intangible assets (h) Income taxes payable - current laibilities (i) Inventory - current assets (j) Stock investments (to be sold in 7 months) - current assets (k) Land (in use) - property, plant, equipment (l) Mortgage payable - long term liabilities (m) Supplies - current assets (n) Equipment - property, plant, equipment (o) Prepaid rent - current assets

Verifiable

independent observers obtain similar results

Free Cash Flow =

net cash through operations - capital expenditures - cash dividends

Interest expense

not on balance sheet

Intangible assets

patents

Equipment is classified on the balance sheet as

property, plant, and equipment

Faithful representation

provide information before it loses its capacity to influence decisions

Relevant

providing information that would make a difference in a business decision

Debt to Assets Ratio =

total liabilities/total assets