CHAPTER 1
Calculate the free cash flow for each company. Which firm has better cash flow health? Ira Company($300,000/$75,000) =$225,000 Paul Company($650,000/$240,000) =$410,000
Paul Free cash flow
Calculate the current ratio for each company. Current ratio Peter Company$10,000/$40,000 =5.00 Paul Company$100,000/$500,000 =2.50 Which firm has higher liquidity
Peter
chapter 1 ethics and accounting unethical behavior can result in misleading financial statements
- Sarbanes-Oxley Act of 2002 was written help deter unethical behavior
Generally Accepted Accounting Principles (GAAP)
- accounting principles with substantial authoritative support - a set of rules that is understood by the users of financial reports - a guide to action that can and does change over time - differ among different countries
chapter 1 ethics and accounting ethics deals with the values, rulers, and justifications that govern ones way of life
- many business have a written code of ethics to help guide the behavior of employees - accounting organizations such as the American institute of Certified Public Accountants have a professional code of ethics
chapter 1 statement of cashflows
- reports a company's cash inflows and outflows during a given period of time - operating, investing, financing
chapter 1 statement of stockholders equity
- reports the events causing an increase or decrease in a company's stockholders equity during a given period - capital
chapter 1 income statement
- reports the results of operations for a given period of time - reports revenues and expenses - net income results when revenues exceed expenses
Financial Accounting Standards Board (FASB)
- reports to the security and exchange commission a nongovernmental entity whose pronouncements establish US GAAP FASB has codified how GAAP is organized and communicated
The beginning and ending balances of retained earnings for the year were $50,000 and $65,000, respectively. If dividend payments during the year were $0, determine the net income or net loss for the year.
15,000 net income
1. Purchased Supplies on account. 2. Paid interest on note payable. 3. Paid cash dividend to stockholders 4. Returned some defective supplies and received a reduction in the amount owed. 5. Made payment to settle note payable. 6. Received an invoice for utilities used 7. Received payment in advance from client for work to be done next month. 8. Received additional capital contribution from stockholders.
1. a. Debit an asset; d. Credit a liability 2. k. Debit an expense; b. Credit an asset 3. g. Debit dividends; b. Credit an asset 4. c. Debit a liability; b. Credit an asset 5. c. Debit a liability; b. Credit an asset 6. k. Debit an expense; d. Credit a liability 7. a. Debit an asset; d. Credit a liability 8. a. Debit an asset; f. Credit common stock
1. The company's total liabilities 2. The sources of cash during the period 3. An opinion about whether the financial statements are fairly stated 4. The amount of dividends that are distributed to the company's stockholders 5. A discussion of potential new products to be introduced the next year 6. Information regarding accounting methods used 7. The company's total revenue for the period
1. b. Balance Sheet 2. c. Statement of Cash Flows 3. g. Auditor's Report 4. d. Statement of Stockholders' Equity 5. f. Management's Discussion and Analysis (MD&A) 6. e. Notes to the Financial Statements 7. a. Income Statement
chapter 1 three types of business activities
1. financing 2. investing 3. operating -- need pos cash flow
Currency and coin in safe.$4,100 Funds in savings account(requires $2,500 compensating balance)26,540 Funds in checking account 6,750 Traveler's checks 625 Postdated check 1,250 Not-sufficient-funds check 1,880 Money market fund 35,100 RequiredIdentify the amount of the above items that should be reported as cash and cash equivalents on Tina Company's balance sheet
70,615 Cash and cash equivalents total $4,100 + ($26,540 - $2,500) + 6,750 + $625 + $35,100 = $70,615
chapter 1 corporation
= own entity advantages: easiest to raise capital, easiest to transfer ownership, protection for the stockholders against personal liability
A. Unlimited liability B. Full control C. Business income combined with owner(s) income for income tax purposes D. Relatively more difficult to establish E. Easier to raise funds
A. sole proprietorship and partnership B. Sole proprietorship C. sole proprietorship D. Corporation E. Corporation
Monetary unit
All transactions are recorded using the dollar value, or its equivalent.
Calculate the debt-to-total assets ratio.Round answers to the nearest whole percentage, when appropriate. Which firm has the higher level of solvency?
Benny Debt-to-total assets Benny Company$400,000/$500,000 =80.0% Walter Company$900,000/$1,100,000 =90.0%
The following financial information is taken from the annual reports of the Billy Company and the Ball Company: Billy Net income$10,000 Net sales 40,000 Net income $100,000 Net sales500,000 Calculate the return on sales ratio for each company.Round to the nearest whole percentage, when appropriate.
Billy 25% Ball 20% Which firm is more profitable? Billy Billy Company$10,000/$40,000 =25.0% Ball Company$100,000/$500,000 =20.0%
Calculate Kolby's gross profit percentage and return on sales ratio. Kolby is planning to add a new product and expects net sales to be $45,000 and cost of goods to be $38,000. No other income or expenses are expected to change. How will this affect Kolby's gross profit percentage and return on sales ratio?
Gross profit on sales = ($250,000 - $150,000) = $100,000 Gross profit percentage = Gross profit on sales / Net sales = Gross profit percentage = $100,000/$250,000 = 40.0 percent Net income = ($250,000 - $150,000 - $50,000 - $10,000 + $15,000 - $10,000) = $45,000 Return on sales ratio = Net income / Net sales = Return on sales ratio = $45,000/$250,000 = 18.0 percent Impact of New Product: Gross profit on sales = $100,000 + ($45,000 - $38,000) = $107,000 Net sales = $250,000 + $45,000 = $295,000 Gross profit percentage if new product is made = $107,000/$295,000 = 36.3 percent. Net income = $45,000 + ($45,000 - $38,000) = $52,000 Return on sales if new product is made = $52,000/$295,000 = 17.6 percent.
chapter 1 business activities -- financing
a company needs to acquire money in order to support its operations 1. debt financing - borrowing money from creditors 2. equity financing - selling stock to investors
A. Accounts receivable B. Cash received from the sale of land C. Net income D. Cash invested in the business by Flores E. Notes payable F. Supplies expense G. Land H. Supplies
a. BS b. SCF c. IS, SSE d. SCF e. BS f. IS g. BS h. BS
a. Shriver's initial application for a building permit was denied by the city as not conforming to environmental standards. Shriver disagreed with the decision and spent $8,000 in attorney's fees to convince the city to reverse its position and issue the permit. b. Due to unanticipated sandy soil conditions, and on the advice of construction engineers, Shriver spent $58,000 to extend the footings for the addition to a greater depth than originally planned. c. Shriver spent $3,000 to send each of the addition's subcontractors a side of beef as a thank-you gift for completing the project on schedule. d. Shriver invited the mayor to a ribbon-cutting ceremony to open the plant addition. It spent $40 to purchase the ribbon and scissors. e. Shriver spent $4,100 to have the company logo sandblasted into the concrete above the entrance to the addition.
a. Capital expenditure. The $8,000 is a necessary cost incurred to construct the addition. b. Capital expenditure. The $58,000 is a necessary cost incurred to construct the addition. c. Revenue expenditure. Although a nice gesture, the $3,000 is not a necessary cost incurred to construct the addition. d. Revenue expenditure. The $40 is neither a material amount nor a necessary cost incurred to construct the addition. e. Capital expenditure. The $4,100 is a necessary cost incurred to construct the addition with the company logo above the entrance.
a. Cash receipts from customers for services rendered b. Sale of long‑term investments for cash c. Acquisition of plant assets for cash d. Payment of income taxes e. Bonds payable issued for cash f. Payment of cash dividends declared in previous year g. Purchase of short‑term investments (not cash equivalents) for cash
a. Cash flow from an operating activity b. Cash flow from an investing activity c. Cash flow from an investing activity d. Cash flow from an operating activity e. Cash flow from a financing activity f. Cash flow from a financing activity g. Cash flow from an investing activity
a. Purchased, for cash, a desktop computer for use in the office. b. Rendered services and billed the client. c. Paid rent for the month d. Rendered services to a client for cash. e. Received amount due from a client in Transaction (b) f. Purchased an office desk on account. g. Paid employees' salaries for the month h. Paid for desk purchased in Transaction (f) i. The company paid a dividend.
a. Increase assets (Office Equipment) Decrease assets (Cash) b. Increase assets (Accounts Receivable) Increase stockholders' equity (increase Sales Revenue) c. Decrease stockholders' equity (increase Rent Expense) Decrease assets (Cash) d. Increase assets (Cash) Increase stockholders' equity (increase Sales Revenue) e. Increase assets (Cash) Decrease assets (Accounts Receivable) f. Increase assets (Office Furniture) Increase liabilities (Accounts Payable) g. Decrease stockholders' equity (increase Salaries Expense) Decrease assets (Cash) h. Decrease liabilities (Accounts Payable) Decrease assets (Cash) i. Decrease stockholders' equity (increase Dividends) Decrease assets (Cash)
A. Payment of employee salaries B. Repayment of a loan C. Issuance of common stock D. Purchase of equipment to manufacture a company's products E. Sale of merchandise inventory F. Investment of excess cash in the shares of another company
a. O b. F c. F d. I e. O f. I
On July 1, 2015, Karen Company purchased equipment for $325,000; the estimated useful life was 10 years and the expected salvage value was $40,000. Straight-line depreciation is used. On July 1, 2019, economic factors cause the market value of the equipment to decrease to $90,000. On this date, Karen evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be $195,000. a. Is the equipment impaired at July 1, 2019?
a. impaired b. 121,00 b. The impairment loss is the equipment's book value minus its current fair value: $211,000 $90,000 = $121,000.
chapter 1 sole proprietorship
advantages: easiest to form, tax advantages, owner can control disadvantages: takes all loses, owner can get sued owner passes away so does the business
chapter 1 partnership
advantages: relatively easy to form, tax advantages, broader skill set disadvantages: disagreements, ownership %
Public Accounting Oversight Board (PCAOB)
approves auditing standards, known as generally accepted auditing standards (GAAS)
chapter 1 Balance sheet
assets, liabilities, equity
chapter 1 the accounting equation
assets= liabilities+stockholders equity
chapter 1 ending retained earnings
beginning retained earnings +net income - dividends ending retained earnings
Cash basis
cash recieved from clients supplies purchased for cash cash paid for rent utility bills paid salary paid to assistant
U.S. Securities and Exchange Commission (SEC)
federal agency whose primary focus is to regulate the interstate sale of stocks and bonds
Accrural basis accounting
fees billed to clients for services rendered supplies used during the year rent expense for year just ended salary earned by assistant utilities expense incurred
revenue recognition
has to be earned in order to be revenue
expense recognition
incurred
chapter 1 business activities-- investing
investing activities - a company needs to purchase resources in order to run its day to day operations - investing activities involve acquisition or disposition of items such as land, buildings, and equipment
chapter 1 external users
investors need to know how profitable the company is compared to its competition creditors need to know if the company has the ability to repay its loans regulators need to know if rate increases are justified
Accounting entity
keeping business transactions separate from business and persons
chapter 1 internal users
management needs to know the profitability of each division the finance department needs to know if there is enough cash to pay its short-term expenses human resources needs to know the effect of a four percent raise for all employees
full disclosure
open and transparent with the finansial
chapter 1 business activities -- operating
operating activities - the day to day activities of producing and selling a product or providing a service - the reason the company exist
cost principle
reported at cost (invoice)
chapter 1 net income
revenue - expenses
accounting period
time frame in which you have all period
going concern
we are recording transactions assuming the business is still going