financial & managerial accounting ch.1

If revenue was $45,000, expenses were $37,500, and dividends were $10,000, the amount of net income or net loss would be:

$7,500 net income.

On February 22, Kountry Repair Service extended an offer of $200,000 for land that had been priced for sale at $250,000. On April 3, Kountry Repair accepted the seller's counteroffer of $230,000 and bought the land for this amount. On September 15, the land was assessed at a value of $185,000 for property tax purposes. On January 9 of the next year, Kountry Repair was offered $300,000 for the land by a national retail chain. At what value should the land be recorded in Kountry Repair Service's records?

$230,000. Under the historical cost principle, the land should be recorded at the cost to Kountry Repair Service.

If total assets increased $20,000 during a period and total liabilities increased $12,000 during the same period, the amount and direction (increase or decrease) of the change in stockholders' equity for that period is a(n):

$8,000 increase.

financial statements are interrelated. (a) What item of financial or operating data appears on both the income statement and the statement of stockholders' equity? (b) What item appears on both the balance sheet and the statement of stockholders' equity? (c) What item appears on both the balance sheet and the statement of cash flows?

(a) Net income or net loss (b) Common stock and retained earnings at the end of the period (c) Cash at the end of the period

A business had revenues of $640,000 and operating expenses of $715,000. What was the amount of (a) net loss or (b) net income?

(a) The business incurred a net loss of $75,000 ($640,000 - $715,000)

A business had revenues of $679,000 and operating expenses of $588,000. What was the amount of (a) net loss or (b) net income?

(b) The business realized net income of $91,000 ($679,000 - $588,000).

accrual basis

A basis of accounting under which revenues and expenses are reported on the income statement in the period in which they are earned or incurred.

matching concept

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

public accounting

Accountants and their staff who provide services on a fee basis

Describe the difference between an account receivable and an account payable

An account receivable is a claim against a customer for goods or services sold. An account payable is an amount owed to a creditor for goods or services purchased. Therefore, an account receivable in the records of the seller is an account payable in the records of the purchaser

accounting equation

Assets = Liabilities + Stockholders' Equity

There are two common causes of business and accounting fraud: - a failure of individual character, and - a culture of greed or ethical indifference within an organization.

Business and accounting fraud typically result from either a failure of individual character or a culture of greed within an organization. Managers and accountants often face pressure to meet or exceed a company's financial goals. At times, supervisors can place pressure on individuals to violate accounting standards to improve a company's reported financial results. Individuals who give in to these pressures exhibit a failure of individual character. In other situations, a company may indirectly encourage employees to violate accounting rules as part of their job. This occurs in organizations that do not value ethical decision making or fair financial reporting and exhibit a culture of ethical indifference.

Dividends

Distributions of earnings to stockholders; an account representing the distribution of a corporation's earnings to stockholders.

private accounting

Managerial accountants employed by a business

The revenues and expenses of Ousel Travel Service for the year ended November 30, 20Y8, follow: Fees earned $1,475,000 Office expense 320,000 Miscellaneous expense 28,000 Wages expense 885,000 Prepare an income statement for the year ended November 30, 20Y8

Net income = $242,000

Josh Reilly is the owner of Dispatch Delivery Service. Recently, Josh paid interest of $4,500 on a personal loan of $75,000 that he used to begin the business. Should Dispatch Delivery Service record the interest payment? Explain.

No. The business entity assumption limits the recording of economic data to transactions directly affecting the activities of the business. The payment of the interest of $4,500 is a personal transaction of Josh Reilly and should not be recorded by Dispatch Delivery Service.

historical cost principle or cost principle.

Recording an item at its initial transaction price

Name some users of accounting information.

Some users of accounting information include managers, employees, investors, creditors, customers, and the government.

financial accounting

The area of accounting that provides external users, such as investors, creditors, customers, and the government, with information

managerial accounting, or management accounting

The area of accounting that provides internal users, such as managers and employees, with information

Why are most large companies like Microsoft (MSFT), PepsiCo (PEP), Caterpillar (CAT), and AutoZone (AZ0) organized as corporations?

The corporate form allows the company to obtain large amounts of resources by issuing stock. For this reason, most companies that require large investments in property, plant, and equipment are organized as corporations.

On July 12, Reliable Repair Service extended an offer of $150,000 for land that had been priced for sale at $185,000. On September 3, Reliable Repair accepted the seller's counteroffer of $167,500. Describe how Reliable Repair Service should record the land.

The land should be recorded at its cost of $167,500 to Reliable Repair Service. This is consistent with the cost principle.

fair value

The price that would be received for an asset if it were sold today.

What is the role of accounting in business?

The role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to others to use in assessing the economic performance and condition of the business.

generally accepted accounting principles (GAAP)

a collection of accounting standards, principles, and assumptions that define how financial information will be reported

Dream-It LLC is a motivational consulting business. At the end of its accounting period, December 31, 20Y2, Dream-It has assets of $780,000 and liabilities of $150,000. Using the accounting equation, determine the following amounts: a. Stockholders' equity as of December 31, 20Y2. Answer b. Stockholders' equity as of December 31, 20Y3, assuming that assets increased by $90,000 and liabilities increased by $25,000 during 20Y3.

a. $630,000 b. increase by $65,000 tockholders' equity as of December 31, 20Y3 = $695,000

a. Compute the ratio of liabilities to stockholders' equity for each company. Round to two decimal places. b. What conclusions regarding the margin of protection to creditors can you draw for these two companies?

a. Amazon = 3.84 Best Buy = 2.09 b. Amazon's ratio is 3.84, which means the total liabilities are almost four times as great as the stockholders' equity. For Best Buy, the ratio is only 2.09, which means total liabilities are over two times as great as the stockholders' equity. Thus, the margin of protection is less for Amazon's creditors than it is for Best Buy's creditors.

a. Land with an assessed value of $750,000 for property tax purposes is acquired by a business for $900,000. Ten years later, the plot of land has an assessed value of $1,200,000 and the business receives an offer of $2,000,000 for it. Should the monetary amount assigned to the land in the business records now be increased? b. Assuming that the land acquired in (a) was sold for $2,125,000, how would the various elements of the accounting equation be affected?

a. No. The offer of $2,000,000 and the increase in the assessed value should not be recognized in the accounting records. b. Cash would increase by $2,125,000, land would decrease by $900,000, and stockholders' equity would increase by $1,225,000.

Yum! Brands is a much larger company than is Papa John's; however, both companies compete internationally in the fast food business. Papa John's is primarily in the carry-out and delivery pizza business, while Yum! Brands is in the quick-service restaurant business with its Pizza Hut, Taco Bell, and KFC brands. a. Compute the ratio of liabilities to stockholders' equity for each company. Round to one decimal place. b. What conclusions regarding the margin of protection to creditors can you draw for these two companies? c. Which company is more risky to creditors?

a. Papa John's: 8.7 Yum! Brands: 7. 9 b. The ratio of liabilities to stockholders' equity is 8.7 for Papa John's and 7.9 for Yum! Brands. These are both very high ratios and suggest that creditors have risk with their investments in these two companies. The small level of stockholders' equity provides only a narrow margin of protection to creditors. c. Papa John's ratio of liabilities to stockholders' equity of 8.7 is higher than that of Yum! Brands. This implies that the creditors of Papa John's have more risk than the creditors of Yum! Brands.

International Accounting Standards Board (IASB)

accounting standards and principles adopted by most countries outside the United States

Securities and Exchange Commission (SEC)

agency of the U.S. government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.

Accounting

an information system that provides reports to users about the economic activities and condition of a business

business

an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

Accounting principles

and assumptions provide the framework upon which accounting standards are constructed.

Ethics

are moral principles that guide the conduct of individuals.

Accounting standards

are the rules that determine the accounting for individual business transactions.

The resources owned by a business are called:

assets

monetary unit

assumption requires that financial reports be expressed in a single money unit, or currency

A listing of a business entity's assets, liabilities, and stockholders' equity as of a specific date is a(n):

balance sheet.

A profit-making business operating as a separate legal entity and in which ownership is divided into shares of stock is known as a:

corporation

General-purpose financial statements

one type of financial accounting report that is distributed to external users.

The objective of most businesses is to earn a

profit

profit

the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

ratio of liabilities to stockholders' equity

useful in analyzing the ability of a company to pay its creditors