ACG CH2

Retained earnings equation

retained earnings = ending balance +net income - dividends

Classified Balance Sheet

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Generally accepted accounting principles (GAAP)

A set of accounting standards that have substantial authoritative support, that guide accounting professionals.

Comparability

Ability to compare the accounting information of different companies because they use the same accounting principles.

Full disclosure principle

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

xx

Accounts payable $ 834 Accounts receivable 810 Accumulated depreciation—equipment 670 Cash 1,270 Common stock 900 Cost of goods sold 1,060 Depreciation expense 335 Dividends 325 Equipment 2,420 Income tax expense 165 Income taxes payable 135 Insurance expense 210 Interest expense 400 Inventory 967 Land 3,100 Mortgage payable 3,500 Notes payable 61 Prepaid insurance 60 Retained earnings (beginning) 1,600 Salaries and wages expense 700 Salaries and wages payable 222 Sales revenue 5,100 Stock investments (short-term) 1,200 Prepare an income statement, retained earnings statement, and a classified balance sheet.

Historical cost principle

An accounting principle that states that companies should record assets at their cost.

Monetary unit assumption

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

Periodicity assumption

An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Fair value principle

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Intangible assets

Assets that do not have physical substance. EX: Goodwill, patents, copyrights, trademarks, film library, sports franchise

Property, plant, and equipment

Assets with relatively long useful lives that are currently used in operating the business.

$1, 108,000

At December 31, 2014 Keen Company had retained earnings of $1,292,000. During 2014 they issued stock for $49,000, and paid dividends of $17,000. Net income for 2014 was $201,000. The retained earnings balance at the beginning of 2014 was

A. Current liabilities B. Current assets C. Property, plant, and equipment D. Property, plant, and equipment E. Current assets F. Current liabilities G. Intangible assets H. Current liabilities I. Current assets J. Current assets K. Property, plant, and equipment L. Long term liabilities M. Current assets N. Property, plant, and equipment O. Current assets

Classify the following as either current assets, property, plant, and equipment, current liabilities, intangible assets, or long-term liabilities. A. Accounts payable B. Accounts receivable C. Accumulated depreciation-equipment D. Buildings E. Cash F. Interest payable G. Goodwill H. Income taxes payable I. Inventory J. Stock investments (to be sold in 7 months) K. Land (in use) L. Mortgage payable M. Supplies N. Equipment O. Prepaid rent

A. Current assets B. Property, plant, and equipment C. Intangible assets D. Current liabilities E. Current liabilities F. Stockholders' equity G. Current assets H. Long term investments I. Intangible assets J. Long term liabilities K. Stockholders' equity L. Property, plant, and equipment M. Current liabilities N. Current assets

Classify the following based upon the major balance sheet classifications A. Prepaid advertising B. Equipment C. Trademarks D. Salaries and wages payable E. Income taxes payable F. Retained earnings G. Accounts receivable H. Land (held for future use) I. Patents J. Bonds payable K. Common stock L. Accumulated depreciation-equipment M. Unearned sales revenue N. Inventory

Cost constraint

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

a

Current assets are listed: (a) by order of expected conversion to cash. (b) by importance. (c) by longevity. (d) alphabetically.

a

Generally accepted accounting principles are: (a) a set of standards and rules that are recognized as a general guide for financial reporting. (b) usually established by the Internal Revenue Service. (c) the guidelines used to resolve ethical dilemmas. (d) fundamental truths that can be derived from the laws of nature.

Long term investments

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations; and (3) long-term notes receivable.

A. Going concern assumption B. Economic entity assumption C. Monetary unit assumption D. Periodicity assumption E. Historical cost principle F. Full disclosure principle

Identify the accounting assumption or principle that is described below. A. Is the rationale for why plant assets are not reported at liquidation value. (Note: Do not use the historical cost principle.) B. Indicates that personal and business record-keeping should be separately maintained. C. Assumes that the dollar is the "measuring stick" used to report on financial performance. D. Separates financial information into time periods for reporting purposes. E. Measurement basis used when a reliable estimate of fair value is not available. F. Dictates that companies should disclose all circumstances and events that make a difference to financial statement users.

d

In a classified balance sheet, assets are usually classified as: (a) current assets; long-term assets; property, plant, and equipment; and intangible assets. (b) current assets; long-term investments; property, plant, and equipment; and common stock. (c) current assets; long-term investments; tangible assets; and intangible assets. (d) current assets; long-term investments; property, plant, and equipment; and intangible assets.

Long term liabilities

Obligations that a company expects to pay after one year. EX: bonds payable, mortgage payable, long-term notes payable, lease liabilities, pension liabilities, long term debt.

Current liabilities

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Liquidity

The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.

Securities and Exchange Commission (SEC)

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

Going concern assumption

The assumption that the company will continue in operation for the foreseeable future.

Operating cycle

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

b

The characteristic of information that evaluates whether it is large enough to impact a decision. (a) Comparability. (b) Materiality. (c) Cost. (d) Consistency.

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.

Relevance

The quality of information that indicates the information makes a difference in a decision.

Consistency

Use of the same accounting principles and methods from year to year within a company.

a

What organization issues U.S. accounting standards? (a) Financial Accounting Standards Board. (b) International Accounting Standards Committee. (c) International Auditing Standards Committee. (d) None of the above.

Materiality

Whether an item is large enough to likely influence the decision of an investor or creditor.

Current Assets

assets that are expected to be converted to cash or used in the business within a short period of time, usually one year. examples are: cash, short-term investments, receivables, inventories, and prepaid expenses. On the balance sheet they are listed in the order in which the company expects to convert them into cash (order of liquidity).

economic entity assumption

every economic entity can be separately identified and accounted for.