Accounting 1 final exam review

True or false? Depreciation expense does not imply a reduction in value

True; it is merely an allocation of the depreciable cost of an asset over the estimated useful life; this is in keeping with the matching principle for revenue and expenses

Return on equity

Used to measure the profitability of stockholders investment Return on equity = net income/ average total stockholders equity

Vertical analysis (common size analysis)

Uses percentage to compare individual components of financial statements to a key statement figure. On the income statement, individual items would be expressed as a percentage of net sales.

Working capital

The excess of current assets over current liabilities = current assets - current liabilities

Depreciation methods are based on two estimates

The expected life of the asset and the residual or salvage value of the asset at the end of its useful life

Any ordinary repair and maintenance expenditures are expensed in the income statement when they are incurred

The expenditure maintains the asset in normal operating conditions

Current ratio

Measures a company's ability to pay short term debts = current assets/current liabilities

Stock market ratios

Analyze earnings and dividends of a company

Royal Company purchased a dump truck at the beginning of 2012 at a cost of $60,000. The truck had an estimated life of 6 years and an estimated residual value of $24,000. On January 1, 2014 the company made major repairs of $20,000 to the truck that extended the life 1 year. This, starting with 2014, the truck has a remaining life of 5 years and a new salvage value of $8,000. Royal uses the straight line depreciation method. What amount should be recorded as depreciation expense each year starting in 2014?

$12,000

Calculating of depreciation per unit (1st to find the units of production depreciation)

= Cost- salvage value/ total estimated units of production

Straight line depreciation

The simplest and most popular methods for annual reports = (acquisition cost- residual value)/estimated useful life

Return on investment

A measure of the amount of wealth generated as compared to the amount invested Return in investment = net income/ average total assets

Earnings per share

A measure of the profitability of the stockholders investment EPS= net earnings available for common stock / average number of outstanding common shares

Double declining balance

Accelerate deprecation method; assigns more deprecation expense in earlier years and less in later years

Units of production

Assigns depreciation based upon actual production. An organization should use the depreciation method that most accurately reflects its operations

Straight line method

Assigns the same amount of depreciation every year

Borden company incurred the following costs to acquire and prepare land for a new parking lot: purchase price for land, cost to clear the land, cost of paving, lighting for the parking lot, and landscaping for the parking lot. How should the company determine which costs should be recorded as land improvements and which cost should be recorded as land? A. The costs with a limited life will increase land, and the costs with an unlimited useful life will increase land improvement B. The costs with an unlimited life will increase land, and the costs with a limited useful life will increase land improvements C. The costs to be depreciated will increase land, and the costs that will not be depreciated will increase land improvements D. Costs that are depreciable will increase land improvements, while other costs are expensed immediately because of a lack of definite life

B. The costs with an unlimited life will increase land, and the costs with a limited useful life will increase land improvements

Using different depreciation methods for book purposes versus tax purposes for the same asset is A. Not allowed since the amount can only be calculated one way or the other, not both B. The direct result of the differing goals of financial and tax accounting C. Contrary to GAAP D. Against the internal revenue code, and as such, against the law

B. The direct result of the differing goals of financial and tax accounting

Which of the following is an example of a capital expenditure? A. Cleaning the carpet in the front room B. Tune up for a company truck C. Replacing an engine in a company car D. Replacing all burned out light bulbs in the factory

C. Replacing an engine in a company car

Price to Earnings Ratio (P/E)

Compares the earnings of a company to the market price for a share of the companys stock PE = market price per share/ earnings per share

Depreciation is a process by which A the decline in market value of plant and equipment is determined and recorded B replacement funds are accumulated for plant and equipment C the difference between current market value and historical cost of plant and equipment D the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset

D the cost of plant and equipment is allocated to expense over the time periods which benefit from the use of the asset

(2nd) calculate of periodic units of production depreciation

Depreciation cost per unit of production x units of production in the current account period = annual or periodic depreciation expense

Net margin (or profit margin)

Describes the percent remaining of each sales dollar after subtracting all expenses, including cost of goods sold. Net (profit) margin = net income/ net sales

Any expenditure that extend the life of a fixed asset should be capitalized

For example, an organization puts a new roof on a building

If an asset is sold for a price greater than it's book value on the balance sheet, a ______ results.

Gain and is reports in the income statement under other gains

Profitability ratios

Indicate a company's ability to generate earnings

Solvency ratios

Indicate a company's ability to pay long term debts as they become due, and it's financing structure

Liquidity ratios

Indicate a company's ability to pay short term debts as they become due. They focus on current assets and current liabilities

Horizontal analysis (trend analysis)

Involves analyzing financial info over several accounting periods. In comparing a beginning account balance with the end of the period balance we can express the change in two ways: as a dollar amount, or as a percentage change from the base year

Ratio analysis

Involves studying relationships between individual items reported in a set of financial statements.

Accumulated depreciation

Is a contra asset account that reduces the primary asset account in the balance sheet

The books value of the asset

Is the capitalized cost if the asset minus the amount of accumulated depreciation.

On January 2 Hannah Company sold a machine for $1,000 that it had used for several years. The machine cost $12,000 and had accumulated depreciation of $9,000 at the time of sale. What gain or loss will be reported on the income statement for the sake of the machine?

Loss of $2,000

When companies file their tax returns, most elect to use the modified accelerated cost recovery system (MACRS)

MACRS uses the half year convention, meaning that the company taken one-half year's depreciation in the first and last years of the assets class life. This means it would take 6 years to fully depreciate a 5 year class life asset

Inventory turnover ratio

Measured how many times a company's inventory has been sold and replaced during the year = cost of goods sold/ average inventory

Asset turnover margin

Measures how many sales dollars were generated for each dollar of assets invested Asset turnover ratio = net sales/ average total assets

Accounts receivable turnover ratio

Measures how many times a company converts its receivables into cash each year = net credit sales/ average accounts receivable (To determine average accounts receivable add the beginning and ending balance together then divide by 2)

Book value per share

Measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off BV= (stockholders equity-preferred rights)/ outstanding common share

Tangible assets

Physical presence, meaning they can be seen and touched

Lump sum purchase

Several assets purchased as a group for one price

Change in accounting estimate

When an asset wears out more quickly, and organization may elect to reduce the number of years in its useful life which is accounted for in the current and future financial statements