Accounting - Chapter 2

No-par-value stock can sometimes be assigned a ___________ value per share.

Stated

Cost of goods sold:

Represents the total cost of merchandise sold to customers

Stockholders' equity is the ownership right of the stockholders in the ____________ that remain after subtracting the ____________ of the corporation.

Assets; liabilities

Estimates are frequently made in accounting for each of the following items, except: - Depreciation of buildings and equipment - Warranty costs - Cash receipts from customers - Pension expense

Cash receipts from customers

The two main components of paid-in capital are:

Common stock and additional paid-in capital

Financial statements that show a column for the current year and prior year are known as ________ financial statements.

Comparative

When in doubt, a firm's assets and profits should be reported at lower amounts rather than higher amounts, such that the financial statements will reflect the concept of ___________.

Conservatism

The __________ principle refers to the fact that transactions are recorded at their ________________ cost of the entity as measured in dollars

Cost; original

Retained earnings represents the ___________ net income of the entity that has been retained for use in the business.

Cumulative

T/F: Financial statements report qualitative economic variables

False

The ____________ ______________ concept refers to the presumption that the entity will continue to operate in the future.

Going concern

The link between last year's balance sheet and this year's balance sheet is this year's:

Income statement

Stockholders' equity is:

Increased by net income for the year

Income from operations

Is a subtotal on the income statement that is not affected by the firm's tax rate or by amount of interest expense incurred

Which of the following is not one of the 3 principal forms of business organization?

LLC

Advantages of proprietorship include all of the following except: - No formal prerequisites to begin operations - Owner has unlimited personal liability - Owner is his or her own boss - Ease of formation

Owner has unlimited personal liability

The statement of changes in owners' equity and the statement of changes in capital stock are alternative names for the more commonly reported statement of changes in __________ ___________.

Stockholders' equity

With regard to partnerships:

The income earned from partnerships is taxed at the partner level

Stockholder's equity: (Select all that apply) - Is the equity in the assets that remain after subtracting the liabilities - Is sometimes referred to as net worth - Is sometimes referred to as net income - Is sometimes referred to as net assets - Is sometimes referred to as net sales - Is measured as the fair value of the shareholders' equity interests in the corporation's assets - Is sometimes referred to as owners' equity

- Is the equity in the assets that remain after subtracting the liabilities - Is sometimes referred to as net worth - Is sometimes referred to as net assets - Is sometimes referred to as owners' equity

Which of the following are limitations of financial statements? (Select all that apply) - The fact that financial statements are not adjusted for the impact of inflation - The fact that assets must be equal to liabilities plus stockholders' equity - The use of the cost principle - The use of estimates in the accounting process - The use of the matching concept and accrual accounting to measure income - The fact that financial statements do not reflect opportunity costs

- The fact that financial statements are not adjusted for the impact of inflation - The use of the cost principle - The use of estimates in the accounting process - The fact that financial statements do not reflect opportunity costs

A corporation's annual report contains the reporting firm's financial statements and each of the following key components, except: - Management's discussion and analysis of the financial statements - The reporting firm's operating budget for the next fiscal year - The report of the external auditor's examination of the financial statements - The notes to the financial statements

- The reporting firm's operating budget for the next fiscal year

Rearrange the following accounts or captions in which they appear on the income statement: 1. Income before taxes 2. Net sales 3. Income from operations 4. Gross profit

2, 4, 3, 1

In the United States, the dollar is the ___________ of _________ for all transactions.

Unit of measurement

Which of the following items are normally included as key components of a corporation's annual report? (select all that apply) - A corporate structure chart showing line and staff reporting responsibilities of all key personnel employed by the reporting firm - The reporting firm's operating budget for the next fiscal year - A 5-year (or longer) summary of key financial data - The notes to the financial statements - The report of the external auditor's examination of the financial statements

- A 5-year (or longer) summary of key financial data - The notes to the financial statements - The report of the external auditor's examination of the financial statements

Which of the following statements are true? (Select all that apply) - Liabilities are probable future economic benefits - Assets are probable future economic benefits - Stockholders' equity is the ownership right of the creditors of the entity - Liabilities are probable future sacrifices of economic benefits - Assets are probable future sacrifices of economic benefits

- Assets are probable future economic benefits - Liabilities are probable future sacrifices of economic benefits

Which of the following statements is true regarding the statement of cash flows? - Cash received from the sale of common stock is a financing source (increase) of cash - Payment of cash dividends on common stock is an investing use (decrease) of cash - Cash paid for the purchased of buildings or equipment is an investing use (decrease) of cash - The increase in accounts receivable for the year is shown as an operating source (increase) of cash - Net income from the income statement is the starting point of determining cash provided (used) by operating activities

- Cash received from the sale of common stock is a financing source (increase) of cash - Cash paid for the purchased of buildings or equipment is an investing use (decrease) of cash - Net income from the income statement is the starting point of determining cash provided (used) by operating activities

The statement of changes in stockholders' equity reports: (Select all that apply) - Dividends for the year - Net income for the year - Total assets at the end of the year - The year-end balance of retained earnings - Total revenues for the year - Cash flows from operations for the year - Total stockholders' equity at the end of the year - Common stock issued during the year

- Dividends for the year - Net income for the year - The year-end balance of retained earnings - Total stockholders' equity at the end of the year - Common stock issued during the year

Assets include: (Select all that apply) - Accounts payable - Equipment - Cost of good sold - Short-term debt - Accounts receivable - Merchandise inventory - Cash

- Equipment - Accounts receivable - Merchandise inventory - Cash

Which of the following are the main activity categories in the statement of cash flows? (select all that apply) -Profitability - Financing - Investing - Leverage - Operating

- Financing - Investing - Operating

Gross profit: (Select all that apply) - Is often referred to as income from operations - Represents the seller's maximum "cushion" available to cover all other operating expenses before it is possible to have net income - Is an income statement subtotal that results from subtracting selling, general, and administration expenses from net sales - Is sometimes referred to as gross margin

- Represents the seller's maximum "cushion" available to cover all other operating expenses before it is possible to have net income - Is sometimes referred to as gross margin

Net sales: (Select all that apply) - Is greater than gross sales because of sales returns - Includes only credit sales, not cash sales - Results from selling a product or providing a service to a customer - Represents the amount of sales of merchandise to customers less any sales returns - Is frequently called sales revenue, or just revenue - Is normally at least twice as much as gross profit

- Results from selling a product or providing a service to a customer - Represents the amount of sales of merchandise to customers less any sales returns - Is frequently called sales revenue, or just revenue

Regarding parent-subsidiary relationships: (Select all that apply) - Subsidiaries may themselves be parents of subsidiaries - Financial statements of the parent and subsidiary are called combined financial statements - When a subsidiary is not wholly owned, the minority stockholders no longer have voting rights - It is not necessary for the parent to own 100% of the stock of the subsidiary - One parent may have several subsidiaries

- Subsidiaries may themselves be parents of subsidiaries - One parent may have several subsidiaries - It is not necessary for the parent to own 100% of the stock of the subsidiary

Selling, general, and administrative expenses include: - Depreciation expense - Interest expense - Income taxes - Cost of goods sold

Depreciation expense

The ______________ concept does not mean that revenue and expense for the period are equal.

Matching

__________ means that absolute exactness is not necessary in the amounts shown in the financial statements.

Materiality

The two main components reported on the statement of changes in stockholders' equity are:

Paid-in capital and retained earnings

Shareholders receive ________ of stock as evidence of their ownership interest in a corporation.

Shares

In the horizontal model representation of the financial statements:

The arrow pointing from net income to stockholders' equity indicates that net income affects retained earnings

Which of the following is not true regarding accounts receivable? - Accounts receivable are reported as current assets on the balance sheet - Accounts receivable represent amounts due from customers who have purchased merchandise on credit - Accounts receivable are normally due within a period of time - Accounts receivable are recorded for the company's gross profit on credit sales

- Accounts receivable are recorded for the company's gross profit on credit sales

Retained earnings: (Select all that apply) - Is the cumulative net income of the entity that has been retained for use in the business - Is increased each year by the entity's net income - Is reduced by any dividends paid to stockholders - Is referred to as an accumulated deficit if cumulative losses and dividends exceed cumulative net income - Are distributions of earnings that have been made to stockholders - Is the same thing as net income for the year

- Is the cumulative net income of the entity that has been retained for use in the business - Is increased each year by the entity's net income - Is reduced by any dividends paid to stockholders - Is referred to as an accumulated deficit if cumulative losses and dividends exceed cumulative net income

The 4 concepts/principles that relate to bookkeeping and the accounting process are:

- Matching - Accrual accounting - Accounting period - Revenue recognition

Current liabilities:

Are those liabilities that are likely to be paid with cash within one year of the balance sheet date

The balance sheet

As of the end of one period is the balance sheet at the beginning of the next period

Disadvantages of proprietorships include all of the following except: - If the business fails, owner's personal assets may be claimed by business creditors - Owner has unlimited liability - Ease of business informatino - Owner has limited ability to raise capital

Ease of business formation

Most assets are reported on the balance sheet based on their:

Original (historical) cost

Assets are ______ future economic benefits obtained or controlled by a particular entity as a result of a __________ transaction or event.

Probable; past

A partnership is essentially a group of __________ who have banded together.

Proprietors

A firm's fiscal year: (Select all that apply): - Must end at the end of a calendar month - Can be any 12-month period - Is the annual period used for reporting purposes - Cannot be for 52 weeks in some years and 53 weeks in other years - Is often the same as the calendar year

- Can be any 12-month period - Is the annual period used for reporting purposes - Is often the same as the calendar year

The par value per share of common stock: (Select all that apply) - Bears a close relationship to the market value per share of common stock - Is a relic from the past, that for all practical purposes, has lost its significance - Is often a nominal amount, such as $1 per share - Is important to understand since the issuance of no-par value stock is prohibited by federal law - Is an arbitrary value assigned when the corporation is organized

- Is a relic from the past, that for all practical purposes, has lost its significance - Is often a nominal amount, such as $1 per share - Is an arbitrary value assigned when the corporation is organized

Net assets: (Select all that apply) - Is equal to assets minus liabilities - Is another term for net worth - Is equal to stockholders' equity - Are reported on the income statement - Is equal to assets plus liabilities

- Is equal to assets minus liabilities - Is another term for net worth - Is equal to stockholders' equity

Income from operations: (Select all that apply) - Appears on the income statement after income before taxes - Is frequently called earnings from operations - Is frequently called operating income - Is a subtotal on the income statement that is not affected by the firm's tax rate or by amount of interest expense incurred - Is frequently referred to as net margin

- Is frequently called earnings from operations - Is frequently called operating income - Is a subtotal on the income statement that is not affected by the firm's tax rate or by amount of interest expense incurred

Which of the following statements are true? (Select all that apply) - Liabilities are amounts owed to other entities - Liabilities are present obligations to transfer assets or provide services to other organizations - Assets are amounts owed to other entities - Liabilities are claims against the firm by its creditors - Stockholders' equity is the amount owed to other entities

- Liabilities are amounts owed to other entities - Liabilities are present obligations to transfer assets or provide services to other organizations - Liabilities are claims against the firm by its creditors

The 3 activity categories in the statement of cash flows are:

- Operating - Investing - Financing

The income statement is sometimes called the: (select all that apply) - Statement of cash flow - Statement of earnings - Profit and loss statement - Statement of operations - Statement of financial position

- Statement of earnings - Profit and loss statement - Statement of operations

Most companies will include selected dates from their balance sheets and income statements of at least:

5 years