Survey of Accounting Chapter 8-10
is the issuance of additional shares of stock in proportion to each stockholder's current ownership. is normally expressed as a percentage of previously issued shares. does not affect the proportionate ownership interests held by each shareholder.
A stock dividend:
examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements.
An audit conducted in accordance with generally accepted auditing standards includes each of the following:
examination, on a test basis, of evidence supporting the amounts and disclosures in the financial statements. assessment of the accounting principles used and significant estimates made by management. planning and performance of the audit to obtain reasonable assurance that the financial statements are free of material misstatements.
An audit conducted in accordance with generally accepted auditing standards includes each of the following:
$110 - $20 - $30 = $60 = $60,000
Based on the following information (amounts in thousands), calculate income from operations: Income tax expense = $10 General and administrative expenses = $30 Loss on sale of equipment = $5 Selling expenses = $20 Gross profit = $110 Interest expense = $15
BI = $3,000 - $2,800 = $200 CGS = $3,000 - $500 = $2,500
If Ending inventory = $500, Net purchases = $2,800, and the Cost of goods available for sale = $3,000, calculate the Beginning inventory (BI) and the Cost of goods sold (CGS).
Are sales increasing relative to cost of goods sold and other operating expenses? How much profit or loss did the firm have? What were the financial results of the firm's operations for the fiscal period?
What questions are answered by the income statement? More than one answer may be correct.
market
When common stock is sold, the Cash account is debited for the ______________ value per share of common stock issued.
Introduction, scope, opinion.
Which of the following is the proper paragraph sequence for an independent Auditor's Report?
Banks Insurance companies Utility companies
Which types of firms frequently issue a significant amount of preferred stock? More than one answer may be correct.
Under most circumstances, in order to recognize revenue:
the revenue must be realized or realizable, and earned.
A situation where the company has agreed to act as a guarantor of the indebtedness of another entity A potential loss that might arise from a pending lawsuit
Identify the scenarios that describe contingencies and commitments that need to be disclosed in the annual report.
Agreement to enter into a business combination Restructuring of long-term debt Issuance of a large amount of capital stock
Sometimes events subsequent to the balance sheet date would have a material impact on the balance sheet or income statement. Which of these fall into that category and therefore should be described in the notes to the financial statements?
Managers Stockholders Potential investors
A company's income statement is prepared to provide essential information to which groups of people?
Ending inventory = $8,000 Cost of goods sold = $80,000 Gross profit = $20,000
A firm has a 20 percent gross profit ratio, Net sales = $100,000, and Cost of goods available for sale = $88,000. Based on this information, which of the following statements are correct?
Gross profit = $80,000 Ending inventory = $50,000
A firm has a 40 percent gross profit ratio, Net sales = $200,000, and Cost of goods available for sale = $170,000. Based on this information, which of the following statements are correct?
assess the firm's accounting policies.
A firm's independent auditors have the responsibility to:
$5.00 Reason: $3.00 / (1 - 40%) = $5.00
A grocery store's cost for a particular cheese variety is $3.00 per pound, and the store owners have a 40 percent desired gross profit ratio. What selling price should be established per pound for this cheese?
$125.00 Reason: $50.00 / (1 - 60%) = $125
A shoe store's cost for a particular pair of boots is $50.00, and the store owners have a 60 percent desired gross profit ratio. What selling price should be established for a pair of these boots?
does not affect the proportionate ownership interests held by each shareholder. is the issuance of additional shares of stock in proportion to each stockholder's current ownership. is normally expressed as a percentage of previously issued shares.
A stock dividend:
treated as reduction to the proprietor's capital
Any salary paid to the proprietor of a firm is Blank______.
The direct method lists each major class of cash receipts and cash disbursements transactions for each of the three activity areas. The operating activity transactions include cash received from customers and cash paid to suppliers. Each of the captions reported on the statement explains how much cash was received or paid during the year for that item.
Concerning the direct method presentation of the statement of cash flows, which of the following statements are true?
The operating activity transactions include cash received from customers and cash paid to suppliers. Each of the captions reported on the statement explains how much cash was received or paid during the year for that item. The direct method lists each major class of cash receipts and cash disbursements transactions for each of the three activity areas.
Concerning the direct method presentation of the statement of cash flows, which of the following statements are true?
The FASB encourages companies to use the direct method. The direct method involves listing each major class of cash receipts transactions and cash disbursements transactions for each side of three activity areas. The operating activity transactions include cash paid to employees, cash payments of interest, and cash payments for taxes.
Concerning the direct method presentation of the statement of cash flows, which of the following statements are true? More than one answer may be correct.
Which statements regarding net income (loss) and retained earnings are correct?
Dividends declared during the period decrease retained earnings. Net loss for the period decreases retained earnings.
issuance of a large amount of capital stock issuance of a large amount of long-term debt. sale of a significant part of the company's assets.
Examples of subsequent events that frequently have a material impact on the balance sheet or income statement and thus should be described in the notes to the financial statements include the:
30,000 x $50 x 8% x 6/12 = $60,000
Firm A has 8 percent, $50 par value cumulative preferred stock, 30,000 shares authorized, issued, and outstanding. Dividends are paid semiannually, and no dividends are in arrears. The semiannual dividend requirement is:
40,000 x $3 x 3/12 = $30,000
Firm B has $3, $50 par value cumulative preferred stock, 50,000 shares authorized and issued, and 40,000 shares outstanding. Dividends are paid quarterly, and no dividends are in arrears. The quarterly dividend requirement is:
Its total paid-in capital is increased. Its net income is not affected. Its common stock is increased.
How does a stock dividend affect the financial statements of the company? More than one answer may be correct.
Its total stockholders' equity is not affected. Its total assets are not affected. Its retained earnings account is decreased.
How does a stock dividend affect the financial statements of the company? More than one answer may be correct.
A decrease to total stockholders' equity A decrease to cash
How does the purchase of treasury stock affect the financial statements? More than one answer may be correct.
Preferred stock has historically been viewed as having less risk than common stock. Preferred stock must be paid dividends before any dividends can be paid on common stock.
How is preferred stock different from common stock? More than one answer may be correct.
They contain important disclosures that are not contained in the financial statements themselves. They help users of the financial statements to make informed decisions and judgments.
Identify the correct statements about notes that are an integral part of the financial statements.
Expenses are measured by the cash or other asset used up to obtain the economic benefit they represent. Expenses such as depreciation result from an allocation of the cost of an asset to the periods that are expected to benefit from its use. Some expenses (administrative salaries, for example) are recognized in the period in which they are incurred.
Identify the correct statements about the matching principle.
The corporation must have enough cash to be able to pay the dividend. In most states, the dividend must not exceed the corporation's retained earnings.
Identify the requirements that must be met for a corporation to pay a cash dividend.
Management's discussion and analysis
Identify the section of an annual report where the reporting entity discloses the non-GAAP financial measures and key performance indicators used to assess the entity's financial and operating results.
Liquidating value (for preferred stock) and maturity value (for bonds) both represent a fixed claim to assets. Preferred stock and bonds payable are both usually callable and may be convertible. Dividends (for preferred stock) and interest (for bonds) both normally represent a fixed claim to income.
Identify the similarities between preferred stock and bonds payable. More than one answer may be correct.
It is sometimes called a minority interest. It signifies that a portion of the net assets controlled by the reporting entity are attributable to the ownership interests of outside parties.
Identify the true statements regarding noncontrolling interest. More than one answer may be correct.
par
If the stock dividend percentage is more than 20 to 25 percent (i.e., a large stock dividend), the___________ value of additional common shares issued is transferred from retained earnings to common stock.
Capital expenditures Identifiable assets Depreciation and amortization expense Operating profit Sales to unaffiliated customers
In geographic and "lines of business" segment disclosures, what five data items must be shown for each segment?
these expenses do not affect cash, but were subtracted in the determination of net income.
In the statement of cash flows, depreciation and amortization expense is added back to net income because:
average assets earnings as a percentage of sales dividends per share
Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include:
property, plant, and equipment (net) book value per share of common stock long-term debt
Most corporate annual reports present a summary of financial data for at least five years; items frequently included in the summary include:
a cost is incurred in the revenue generating process.
Most entities satisfy the accounting criteria for recognizing an expense when:
(100,000 x 3/12) + (130,000 x 6/12) + (150,000 x 3/12) = 127,500
On January 1, the beginning of its fiscal year, Wiggins Inc. had 100,000 shares of common stock outstanding. On April 1, 30,000 additional shares were issued for cash. On October 1, 20,000 additional shares were issued. Calculate the weighted average number of shares outstanding for the year.
Common stock Additional paid-in capital Preferred stock
Paid-in capital includes which of these? More than one answer may be correct.
has a limited claim on the company's assets in the event of liquidation. has several debt-like features. does not generally have voting rights.
Preferred stock is different from common stock in that preferred stock:
tax benefits associated with export sales. special treatment given to certain items for tax purposes. non-U.S. income taxed in other countries. state income taxes.
Reasons for the difference between the statutory income tax rate and the company's effective tax rate may include the effects of:
major customers. geographic territories. lines of business.
Segment disclosures for publicly traded companies are generally required for:
the reader must be aware of which of the alternative generally accepted accounting practices have been used.
Significant accounting policies are described in the notes to the financial statements because:
whether net cash flows provided by operations are sufficient to pay adequate dividends to the company's shareholders. whether the relative totals of operating, investing, and financing cash flows were similar to those observed in the prior year. whether the company has generated positive net cash flows from operations.
Some of the key interpretations to be made from the statement of cash flows include the determination of:
earnings per share of common stock. employee benefit (pension and postretirement) plans. basis of consolidation. depreciation methods.
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning:
goodwill and acquisition-related intangibles. income taxes. stock option and stock purchase plans. inventory valuation methods.
Some of the significant policies that are frequently described in the notes to the financial statements of publicly traded companies include details concerning:
Sales returns and allowances are subtracted. Sales discounts are subtracted.
Starting with gross sales and arriving at net sales, which of the following statements are true?
tax services.
The Sarbanes-Oxley Act (SOX) of 2002 does not specifically prohibit an independent auditor from performing the following non-audit function(s) for an audit client:
all costs incurred in the process of earning revenues during a period are recorded as expenses in that period.
The concept of matching revenue and expense refers to the fact that:
A credit to Common Stock account for the par value per share A debit to Cash account for the market value (price) per share A credit to Additional Paid-in Capital account for the excess of the market value (price) over the par value per share
The entry to record the issuance of common stock for a price greater than the par value per share includes which of the following? More than one answer may be correct.
Dr. Cost of Goods Sold Cr. Inventory
The entry to record the recognition of cost of goods sold is:
Dr. Cash (or Accounts Receivable) Cr. Sales (or Service Revenue)
The entry typically recorded when revenues are earned is:
a decrease to current assets. a decrease to net income. an increase to expenses.
The financial statement effects of recognizing cost of goods sold include:
a decrease to current assets. an increase to expenses. a decrease to net income.
The financial statement effects of recognizing cost of goods sold include:
Reason: Net cash flow provided by operations = (Net income + Depreciation expense - Gain on sale of machinery + Decrease in accounts receivable - Increase in inventories - Decrease in accounts payable = ($560,000 + $340,000 - $1,200 + $14,000 - $9,000 - $3,500) = $900,300
The following accounting data is obtained from the financial statements of Excellent Company: Net income $560,000 Depreciation expense 340,000 Cash dividends paid 409,000 Gain on sale of machinery 1,200 Decrease in accounts receivable 14,000 Increase in inventories 9,000 Decrease in accounts payable 3,500 Proceeds from sale of land 40,000. Using the indirect method of cash flow presentation, calculate the net cash flow provided (used) by operations for Excellent Company for the period.
Reason: Net cash flow provided by operations = (Net income + Depreciation and amortization expense + Loss on sale of machinery - Increase in accounts receivable + Decrease in inventories + Increase in accounts payable) = ($560,000 + $340,000 + $1,200 - $14,000 + $9,000 + $3,500) = $899,700
The following accounting data is obtained from the financial statements of Synergy Company for the year ended December 31, Year 1: Net income $560,000 Depreciation and amortization expense 340,000 Income tax expense 150,000 Loss on sale of machinery 1,200 Increase in accounts receivable 14,000 Decrease in inventories 9,000 Increase in accounts payable 3,500 Proceeds from sale of land 40,000. Using the indirect method of cash flow presentation, calculate the net cash flow provided by (used in) operations for Synergy Company for the year ended December 31, Year 1.
the Sarbanes-Oxley Act (SOX) of 2002.
The most powerful corporate governance legislation to date has been:
provide relevant information about the cash receipts and cash payments of an enterprise during a period
The primary purpose of the statement of cash flows is to Blank______.
retained earnings to paid-in capital.
The term capitalizing retained earnings refers to the fact that stock dividends cause a permanent transfer of some:
Beginning inventory + Net purchases = Cost of goods available for sale Cost of goods available for sale - Ending inventory = Cost of goods sold Cost of goods sold + Ending inventory = Cost of goods available for sale
Under the cost of goods sold model, which of the following representations are correct?
Cost of goods available for sale - Ending inventory = Cost of goods sold Cost of goods sold + Ending inventory = Cost of goods available for sale Beginning inventory + Net purchases = Cost of goods available for sale
Under the cost of goods sold model, which of the following representations are correct?
Statement of stockholders' equity Statement of equity
What alternative titles are sometimes used for a statement of changes in stockholders' equity?
Obsolescence Theft Errors
What are some common causes of inventory shrinkage?
A reconciliation of the statutory income tax rate with the company's effective tax rate An explanation of the deferred taxes resulting from differences between the fiscal year in which an expense or revenue is reported for book purposes and the fiscal year in which it is reported for tax purposes
What are some of the key note disclosures frequently reported regarding income taxes?
Issues concerning full and fair disclosure and the equitable treatment of stakeholders The strategies, behaviors, and actions of the company and its directors, managers, and employees A set of structures, control mechanisms, rules, and regulations that all directors, officers, and employees must follow
What does corporate governance encompass?
The Common Stock caption of stockholders' equity indicates a drop in the par value per share (if appropriate). The total market value of the company's outstanding stock usually does not change.
What happens after a stock split? More than one answer may be correct.
The number of shares authorized, issued, and outstanding increase proportionately. No accounting entry is required. Existing stockholders receive additional shares of stock in ratios such as 2:1 or 3:1 or 4:1 (as some common examples).
What happens after a stock split? More than one answer may be correct.
The range of useful lives assumed for broad categories of asset types The company's method of reporting depreciation: straight-line, units-of-production, or sum-of-the-years'-digits.
What information about depreciation is usually disclosed in notes to the financial statements?
The company's structures, control mechanisms, rules, and regulations The responsibilities of the board of directors and its various committees The company's sense of business ethics and social responsibility
What is included in corporate governance?
Whether the company's cash balance increased or decreased during the year Whether net cash flows provided by operations exceed the company's cash used for investing activities
What key interpretations are typically made from the statement of cash flows?
Whether the company's cash balance increased or decreased during the year Whether net cash flows provided by operations exceed the company's cash used for investing activities
What key interpretations are typically made from the statement of cash flows? More than one answer may be correct.
General and administrative expenses Selling expenses Research and development expenses
What principal categories of other operating expenses are frequently reported on the income statement?
Income from operations Gross profit
What subtotals are commonly reported in multiple-step income statements?
realization
When a product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash, the ______________ criterion has been met
an increase to current assets an increase to net income
When revenues are earned, the effects on the financial statements typically include:
Method of estimating uncollectible accounts receivable.
Which of the following is not a topic that is likely to be discussed as a significant accounting policy?
Neither proprietorships nor partnerships issue stock. Owners' equity for proprietorships and partnerships is usually referred to as capital. No distinction is made between invested capital and retained earnings for a proprietorship or a partnership.
Which of the following statements are true regarding owners' equity and ownership rights held in noncorporate entities? More than one answer may be correct.
A credit to the Additional Paid-in Capital account for the difference between the market price and par value per dividend share issued A debit to the Retained Earnings account for the market price per dividend share issued
Which of these are included in the entry to record an issuance of a small stock dividend when the market price per share of stock is greater than the par value per share? More than one answer may be correct.
Inventory valuation method Basis of consolidation Depreciation method
Which of these are significant accounting policies that should be included in notes to the financial statements?
Stock option and stock purchase plans Earnings per share of common stock Goodwill and other acquisition-related intangibles
Which of these are significant accounting policies that should be included in notes to the financial statements? (Check all that apply.)
They have a claim to all assets that remain in the entity after all liabilities and preferred stock claims have been satisfied. All profits accrue to common stockholders; there is no upper limit to the value of their ownership interest. They do not have any personal liability for corporate debts and thus cannot be forced by creditors to invest additional amounts to make up for losses.
Which of these are the essential rights of common stockholders? More than one answer may be correct.
They include the use of cash to acquire land, buildings, and equipment. They relate primarily to the purchase and sale of noncurrent assets.
Which of these are true, in regard to investing activities in the statement of cash flows? More than one answer may be correct.
They are the ultimate owners of the corporation; they have a residual ownership claim to the corporation's assets. All profits accrue to common stockholders; there is no upper limit to the value of their ownership interests.
Which of these statements about common stockholders are true?
Lending of money and collection of loans Payment of cash for the purchase of land, buildings, and equipment Purchase and sale of long-term investments in debt and equity securities of other companies
Which of these would be included as investing activities in the statement of cash flows? More than one answer may be correct.
It is reported within stockholders' equity rather than on the income statement because these amounts are unrealized. It is reported as a component of Accumulated Other Comprehensive Income (Loss) within stockholders' equity. It can swing back and forth from a debit (net cumulative loss) balance to a credit (net cumulative gain) balance within stockholders' equity.
Which statements are true regarding the cumulative foreign currency translation adjustment? More than one answer may be correct.
It is a stockholders' equity category. It is sometimes referred to as capital surplus. It reflects the excess of the amount received from the sale of preferred or common stock over par value.
Which statements regarding additional paid-in capital are true? More than one answer may be correct.
Accumulated other comprehensive income (loss) Preferred stock Retained earnings
Which stockholders' equity captions are usually seen in a balance sheet?
Some expenses (cost of goods sold, for example) are recognized concurrently with the revenues to which they relate. Some expenses (depreciation, for example) are an allocation of the cost of an asset to the periods expected to benefit from its use. Expenses such as administrative salaries are recognized in the period in which they are incurred, because the benefit of the expense is used up simultaneously or soon after incurrence.
correct statements about the matching principle.
Preferred dividends are not an expense and are not deductible for tax purposes; bond interest is an expense and is deductible for tax purposes. Preferred stock has no maturity date; bond principal must be paid at maturity . Preferred dividends may be legally skipped; bond interest must be paid, or the firm faces legal action, possibly leading to bankruptcy.
identify the differences between preferred stock and bonds payable.
