C213 Test questions

Which form must be filed quarterly by all publicly held corporations

10-Q

Number of days sales in inventory

365 days in a year/Inventory turnover

Would be added to net income on a statement of cash flows prepared using the indirect method

A decrease in accounts receivable

Expenses generally cause

A decrease in net assets

A gain on the sale of machinery in the ordinary course of business should be presented in a statement of cash flows (indirect method)

A deduction from net income

Would be deducted from net income on a statement of cash flows prepared using the indirect method

A gain from the sale of equipment

Income from Continuing Operations

A measure of a company's performance that includes all items that are expected to continue into the future

Operating leverage

A measure of risk

Accounting

A system for providing quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

Liquidity

Ability a company has to pay its debts in the short run

Audit committee

According to Sarbanes-Oxley, who are auditors required to report to and be retained by

Effect that the Securities Exchange Act of 1934 had on accountants?

Accountants must audit all 10-Q reports.

If a company anticipates a 40% increase in sales volume, then it is most likely that the company will need about a 40% increase in

Accounts payable.

Activity-based costing systems assume that

Activities consume overhead costs

A loss from the sale of a building would be reported on an indirect method statement of cash flows as

An addition to net income

Would be subtracted from net income on a statement of cash flows prepared by the indirect method

An decrease in dividends payable

Revenues cause

An increase in net assets

Statement of earnings

Another name for the income statement

Found on the balance sheet

Assets Owners' equity Liabilities

The internal audit manager reports directly to the

Audit committee

The exchange of debt for equipment would

Be shown as a supplementary disclosure

Investing activities EQUATION

Beginning cash balance + Operating activities + X + Financing activities

Ending cash balance EQUATION

Beginning cash balance + Operating activities - Investing activities - Financing activities

Immediate recognition

Best describes the rationale for matching administrative and selling expenses with revenues of the current period

Leverage

Borrowing that allows a company to purchase more assets than its stockholders are able to pay for

Relevant ranges must be considered for

Both fixed and variable costs

A common method of analyzing mixed costs

Both high-low and scattergraph

For a gain or loss to be classified as extraordinary, it must be

Both unusual and infrequent

Return on Equity (ROE) 2

Calculated using numbers from both the income statement and the balance sheet

Considered to be an owners' equity account

Capital stock, All these are owners' equity accounts, Retained earnings

Cash flow adequacy

Cash flow ratio reflects a company's ability to finance its capital expansion through cash from operations

Cash times interest earned

Cash flow ratio reflects a company's ability to make its interest payments from cash generated through operations

Cash flow-to-net income

Cash flow ratio reflects the extent to which accrual accounting adjustments and assumptions have been included in net income

Cash flow adequacy ratio

Cash from operations ÷ Cash for investing activities

Cash flow-to-net income EQUATION

Cash from operations/Net income

Cash inflow from financing activities EQUATION

Cash receipt from the issuance of stock - Cash paid for dividends

Reported as a cash flow from financing activities

Cash receipts from the issuance of long-term debt

Would be reported as a cash flow from financing activities

Cash receipts from the issuance of long-term debt

Net cash inflow from operating activities EQUATION

Cash received from customers + Dividends received on long-term investments - Cash paid for wages - Cash paid for insurance

Would be classified as an investing activity on a statement of cash flows

Cash received from the sale of a land

Operating activities EQUATION

Collections on accounts receivable - Payments for wages and salaries + Receipt of interest revenue - Payments for inventory

Sales revenue

Common-size balance sheet, using the percent of sales method, each item on the balance sheet is typically expressed as a percentage of

A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?

Compare the mix of revenue, and expenses, and determine efficient use of resources within a company over time or between companies within a given industry without respect to relative size.

Product costs of a software development company

Computer programmers' salaries, Computer lease, Supplies used by programmers...NOT SALARY OF CEO

Public Company Accounting Oversight Board is required to

Conduct inspections of accounting firms, Register all public accounting firms that provide audits for public companies, Establish standards relating to the preparation of audit reports for public companies

The Public Company Accounting Oversight Board

Conducts inspections of accounting firms

The excess of sales over variable costs is equal to

Contribution margin

When the variable cost ratio decreases, the

Contribution margin as a percentage of net sales increases

C-V-P analysis is useful to managers in

Controlling decisions Evaluating decisions Planning

Company A allocates one type of overhead cost on the basis of movement of materials. The number of movement of materials processed is an example of a(n)

Cost driver

Inventory turnover EQUATION

Cost of goods sold/Average Inventory

When using activity-based costing, the cost associated with producing each batch is an example of a

Cost pool

Direct costs

Costs that are directly traceable to a unit of business or segment being analyzed

Expenses

Costs that are incurred during the normal operations of a business to generate revenues

Payment of accounts payable

Could increase a firm's current ratio

Cost of goods sold on a common-size income statement EQUATION

Current assets/Sales revenue

When using common-size statements

Data may be selected for the same business as of different dates, or for two or more businesses as of the same date

Key component of the definition of accounting?

Decision-oriented, Financial, Useful...NOT Qualitative

As activity level increases within the relevant range, per-unit fixed costs usually will

Decrease

Fixed costs per unit

Decrease as activity levels increase

Within the relevant range, the fixed cost per unit

Decreases as activity level increases

When other factors remain constant, a decrease in fixed costs

Decreases the number of units needed to earn profits

Current assets usually are listed on a balance sheet in

Decreasing order of liquidity

Purpose of financial statement analysis

Diagnosis and Prognosis

Total Manufacturing Costs EQUATION

Direct labor + Direct materials + Manufacturing Overhead

An example of direct matching of an expense with revenues would be

Direct labor costs incurred to produce inventory sold during a period.

General types of financial statement notes

Disclosure of important information that is not recognized in the financial statements Summary of significant accounting policies Additional information about the summary totals found in the financial statements

First step a business professional should take when confronted with a situation that may involve an ethical conflict

Discuss the problem with the immediate supervisor.

Dividends

Distributions by a corporation to its stockholders

A company's asset mix is determined by

Dividing each asset item on the balance sheet by total assets

Historically, a plant-wide manufacturing overhead rate would usually be assigned on the basis of

Either direct labor hours or number of products produced

An example of a stepped fixed cost is

Factory supervisors' salaries

Overstates assets

Failure to record the used portion of supplies on hand during the month has the following effect on the financial statements prepared at the end of the month

Balance sheet

Financial statements that reports a company's resources, obligations, and owner's equity

Income statement

Financial statements that reports the excess of a company's revenues over its expenses

Statement of cash flows

Financial statements that reports the mount of cash collected and paid out by a company

The repayment of the principal on a loan used to finance the purchase of equipment should be classified as a(n)

Financing activity

The relevant range refers to the activity range over which

Fixed and variable cost relationships remain the same

Formula for the high-low method of analyzing mixed costs

Fixed costs = total costs − (activity level × variable cost rate)

Operating leverage deals primarily with the relationship between

Fixed costs and variable costs

What is the detailed report that companies file annually with the Securities and Exchange Commission

Form 10-K

Return on Equity (ROE) 1

Fundamental measure of overall company performance

The initials GAAP stand for

Generally Accepted Accounting Principles, Developed by accounting rule makers

Inventory

Generally is NOT considered to be a liability

A wholesale bakery would normally recognize revenue when

Goods are delivered to the customer

The proper order on an income statement for the various measures of income is

Gross profit, operating income, income from continuing operations, net income, comprehensive income

As compared to a company with a low operating leverage, a company with a high operating leverage will:

Have larger losses below the break-even point

To maximize its profits, a company should pay the highest sales commissions on those products with the

Highest contribution margin

Reliable

Historical cost has long been used in accounting because it is

First three steps in implementing an ABC system are

Identify the key cost activities. Analyze each overhead cost in terms of these activities in order to compute the cost pools. Specify numerical cost drivers that can be used to assign the overhead costs to production.

Revenue

In a common-size income statement, each item on the statement is expressed as a % of

Greater than 1

In general, most companies have significant noncash expenses that reduce net income and also cause the cash flow-to-net income ratio to be

Operating Income is equal to

Income from Continuing Operations plus Income Tax Expense and Interest Expense plus/minus other miscellaneous revenues, expenses, gains, and losses

Expense and revenue accounts appear on the

Income statement

As activity level increases within the relevant range, total variable costs usually will

Increase

If the fixed costs relative to a specific product increase while the variable costs and sales price remain constant, the break-even point will:

Increase

When a company pays a warehouse by paying cash, the effect on the accounting equation will be to

Increase Buildings and decrease Cash

When a company buys a warehouse by using a mortgage with a local bank, the effect on the accounting equation for the company will be to

Increase Buildings and increase Mortgage Payable

When a company borrows money from a bank to be repaid in over time, the effect on the accounting equation for the company will be to

Increase Cash and increase Bank Loan Payable

When an investor pays cash into a business to become a part owner, the effect on the accounting equation for the business will be to

Increase Cash and increase Paid-in Capital

When a company rents a warehouse by paying for the first six month's rent in advance, the effect on the accounting equation on the day of payment would be to

Increase Prepaid Rent and decrease Cash

One method that a multi-product firm can employ to promote a high-contribution margin product is

Increase advertising for the product

When other factors remain constant, an increase in variable costs

Increases the number of units needed to earn profits

Manufacturing Overhead EQUATION

Indirect labor + Indirect materials + Factory utilities + Insurance on manufacturing equipment

Considered a current asset

Inventory, Accounts Receivable, Cash....NOT equipment

External users of financial statements use financial statement analysis for

Investing decisions

Emphasis in financial accounting is on which of the following external user groups

Investors and creditors

Financial statement analysis

Involves relationships and trends

Maintaining low fixed costs and high variable costs rather than high fixed costs and low variable costs

Is a more conservative cost structure

Depreciation expense

Is an application of the principle of systematic and rational allocation

Financial Accounting Standards Board (FASB)

It consists of seven full-time members, It has no legal power to enforce the standards it sets, It seeks consistency for its proposed standards, The current standard-setting board for accounting in the private sector...NOT a government agency

True about the double-entry system of bookkeeping

It was developed in the 1300s−1400s in Italy.

The behavior of a cost is usually defined in terms of how that cost varies with respect to

Level of activity

Within the relevant range, variable costs are considered to be:

Linear

Products that usually consume the highest amount of overhead costs per unit

Low-volume unique products

Unit level: Activities that take place each time a unit of product is produced

Machine maintenance Machine depreciation Electricity and other energy costs

Example of a cost driver

Machine setups

The accuracy of the information contained in the financial statements is the responsibility of the

Management

Glue used in the manufacture of chairs would most likely be classified as

Manufacturing overhead

Activity-based costing deals with the allocation of

Manufacturing overhead costs

Costs that are NOT classified as direct materials or direct labor but are essential to the production of goods and services are

Manufacturing overhead costs

Current Ratio

Measure of the liquid position of a corporation

Asset turnover

Measures a firm's efficiency at using its assets

Direct method

Method by which cash flows are presented on a statement of cash flows as operating cash receipts and payments

When using the scattergraph method to analyze mixed costs, the regression line should be visually fit to

Minimize the average distance between all the data points and the regression line

Costs that contain both fixed and variable components are

Mixed costs

Total contribution margin will increase in a two-product firm if total units sold remain the same and

More products with the highest contribution margin are sold

Differential costs

Most important costs to consider when making a decision involving future action, Future costs that change as a result of a decision

Common-sized financial statements

Most useful in analyzing companies of different sizes

Usually activity-based costing would be significantly more accurate than traditional product costing in a

Multiple-product firm where products are quite different

When revenue and expense items are arranged to highlight important profit relationships, the resulting income statement format is called a

Multiple-step income statement

Return on Sales equation

Net Income/Sales Revenue

Net cash flow from operating activities EQUATION

Net income + Amortization expense + Accounts receivable decrease + Inventory decrease + Interest payable increase

Net cash flow from operating activities EQUATION

Net income + Depreciation expense + Accounts receivable decrease - Inventory increase + Accounts payable increase

Net cash provided by operations EQUATION

Net income + Depreciation expense + Patent amortization expense + Loss on sale of machinery - Gain on sale of securities

Times interest earned ratio

Net income + Tax expense + Interest expense/Interest expense

Earnings per share is equal to

Net income divided by total number of shares of stock outstanding

Return on equity equation

Net income/Common stock + Add paid-in captial +Retained earnings

When assigning cost drivers to facility support activities, an appropriate cost driver would be

No cost driver should be assigned

Ethical guideline that the Institute of Management Accountants (IMA) requires its members to follow

Not disclose confidential information, Maintain objectivity when communicating information to decision makers, Act with both actual and apparent integrity in all situations

Vital information that CANNOT be captured solely by dollar amounts is reported in a firm's

Notes to financial statements

An appropriate cost driver for inspection costs is

Number of inspections completed

An appropriate cost driver for engineering changes is

Number of set-ups performed

Comprehensive income EQUATION

Operating Income - Income Taxes - Interest Expense - Extraordinary Loss + Unrealized Gain not included in Net Income

Primary use of cash

Operating expenses

Typical sequencing of activities on the statement of cash flows

Operating, investing, and financing

According to Sarbanes-Oxley, which one of the following services is an accounting firm permitted to provide to its audit client

Opinions about the reliability of internal controls

Used in the evaluation of a business segment

Opportunity costs, Direct costs, Variable costs... NOT Sunk costs

International Accounting Standards Board (IASB)

Organization that develops worldwide accounting standards

Net income (or net loss)

Overall measure of the performance of a business entity's activities

Total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements

Owner's equity will be overstated

Would be reported as an operating activity on a statement of cash flows

Payment of taxes

C-V-P analysis, while useful for several purposes, is primarily useful in

Planning

Analyzing financial statements, prognosis is

Prediction of how a business will perform in the future

Managers

Primary internal users of accounting information, has the widest variety of decisions to make

Recognition

Process of formally recording an item in the accounting records so that it will be reflected in the financial statements

Direct labor is most often considered

Product cost

In non-U.S. Balance sheets, you will often see

Property, plant, and equipment will be listed first and Current assets and current liabilities will be netted together

Most likely to be a variable cost

Raw materials

Operating

Refers to those activities that are part of the day-to-day business of a company

Would be included on an income statement

Rent expense

Price-earnings ratio

Represents an indication of investor's expectations concerning a firm's growth potential

Two economic factors that enable us to trust an independent auditor despite the fact that the auditor was hired by the company being audited

Reputation of auditor and risk of lawsuits

The indirect method of preparing a statement of cash flows

Results in the same net cash flow from operating activities as the direct method, Is the method most often used in practice, Involves adjusting the net income figure for any noncash expenses

Net income/Equity

Return on equity ratio under the DuPont framework is computed as

When a company determines to get out of a specific line of business

Revenues and expenses from that line of business are excluded from the company's recurring revenues and expenses when preparing an income statement.

Contribution margin is equal to

Revenues − Variable costs

Income from continuing operations

Sales - Cost of Goods Sold - Operating Expenses - Income taxes - Interest expense

Net income EQUATION

Sales - Cost of goods sold - Operating Expenses - Income taxes - Interest expense - Extraordinary Item

Gross profit is the difference between

Sales and Cost of Goods Sold

Cash provided by operating activities

Sales receipts - Inventory payments - Interest payments - Wage payments + Dividend receipts + Interest receipts

Net increase in cash EQUATION

Sales receipts - Inventory payments - Interest payments - Wage payments + Dividend receipts + Interest receipts - Equipment purchased - Stock of Canton Company purchased + Stock issued - Repaid a note (non operating)

Key factor involved in cost-volume-profit (C-V-P) analysis

Sales revenue, Fixed and variable costs, The mix of products sold....NOT Time value of money

Asset turnover equation

Sales revenue/Common stock + Total investments + Total PPE (property, plant, equip)

Sales revenue on a common-size income statement EQUATION

Sales revenue/Sales revenue

Price-earnings ratio equation

Shares x Market price per share of common stock/Net income

The direct method of presenting a statement of cash flows

Shows the major classes of operating cash receipts and payments

Disclosure

Sometimes done in place of recognition when the effects of an event cannot be quantified with any degree of certainty

Three primary financial statements

Statement of cash flows Income statement Balance sheet

Another name for the balance sheet is the

Statement of financial position

A cost behavior pattern

Stepped costs, Mixed costs, Variable costs....NOT Relevant cost

Cash provided by financing activities EQUATION

Stock issued - Repaid a note (non-operating)

Period cost of operating a retail store

Store rent, Store manager's salary, Corporate computer cost.....NOT Cost of merchandise sold

The statement of cash flows

Summarizes all cash inflows and outflows of an entity for a given period of time

Indirect method

The approach to preparing a statement of cash flows that adjusts net income to cash flows from operations...method that begins with net income or net loss and adjusts that number for items that did not affect cash

A company's asset mix is strongly influence by

The company's industry

Financial capital maintenance

The concept that income is defined as the excess of net assets at the end of an accounting period over the net assets at the beginning of the accounting period, excluding effect of transactions with owners

Financing mix is a measure of

The degree to which a company finances assets using liabilities or owners' equity

Income statement

The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or a year

The GAAP Oval best represents

The flexibility managers have within GAAP to report one earnings number from among many possibilities.

Going concern concept

The idea that businesses must be accounted for as though they will exist at least for the foreseeable future

Articulation

The idea that certain figures on an operating statement help to explain changes in figures on comparative balance sheets

Comparability

The idea that information becomes more useful when it can be related to a benchmark or a standard

True of accounting information

The information is primarily financial in nature, The information is quantitative in nature, The information relates to specific accounting entities....NOT The information relates to future time periods.

Relevance

The notion that information will be more useful if it will impact a decision

Conservatism

The notion that when doubt exists concerning two or more reporting alternatives, users should select the alternative with the least favorable impact on reported income, assets, and liabilities

Comprehensive Income

The number used to reflect an overall measure of the change in a company's wealth during the period

In the scattergraph method fixed costs are

The point where the line crosses the cost axis

Sales mix refers to

The relative proportions of different products that constitute total sales

Needed to compute break-even point

The sales mix The company's total fixed costs The per-unit contribution margin of each product sold

Financial statements shows an entity's cash receipts and payments

The statement of cash flows

Period costs

They are recognized as an expense, The most common are selling and administrative costs, They cannot be assigned to a product

Operating activities

Those transactions and events that enter into the determination of net income are reported under which section of the statement of cash flows

Considered a manufacturing cost

Tires for an automobile manufacturer, Milk for an ice cream maker, Property taxes on the factory for an ice cream make

Controller

Top accountant in most large organizations

Fixed costs

Total costs are the same at all levels of activity

Debt Ratio equation

Total current liabilities + Total long-term liabilities/Common stock + Total investments + Total PPE

Variable costs

Types of costs always change in total in proportion to changes in the level of activity of a firm AND types of costs remain constant per unit within a certain relevant range

Indirect costs

Types of costs would be allocated among segments rather than directly attributable to a segment...ex. cost of milk for an ice cream manufacturer

Break even EQUATION

Unit sells for $40(#of units) - variable cost per unit is $24(#of units) - total fixed costs

If activity-based costing is used, assembly would be classified as a

Unit-level activity

Net income/Sales

Used to measure a firm's profitability

Return on Sales

Used to measure the profit earned on each dollar of sales in a firm

Mosely Company's per-unit cost is the same at all levels of activity. The company's cost structure must have all

Variable costs

The two components of a mixed cost are

Variable costs and fixed costs

No stockholders' equity

When analyzing a company's debt ratio, if the ratio has a value that is equal to one, then the company has

When does the Securities and Exchange Commission (SEC) typically require a company to submit a registration statement to the SEC for approval

When the company issues new debt or stock securities to the public

Materiality

Whether an item is big enough that proper accounting will make a difference to users of accounting information

Beginning cash balance EQUATION

X + Operating activities - Investing activities - Financing activities

Out-of-pocket cost

You want to go skiing for the day. The cost of the lift ticket

Mortgage payable

considered a long-term liability

Cash

is considered to be the most liquid

Capital Stock EQUATION

total assets - total liabilities - retained earnings

Debt Ratio

used to measure a firm's leverage

Product line Activities that take place in order to support a product line, regardless of the number of batches or individual units actually produced

• Engineering product design • Storage in special warehouses • Management by a special supervisor of all activities associated with a particular product line • Ordering, purchasing, and receiving materials unique to a particular product line

Batch level Activities that take place in order to support a batch or production run, regardless of the size of the batch

• Inspections • Machine setups • Movement of and accounting for materials

Facility support Activities necessary to have a production facility in place. However, these activities are not related to any particular line of products or services

• Property taxes • Factory insurance • Security • Landscaping • General accounting • General factory administration