ACG Ch.2

The primary objective of financial reporting is to provide financial information that is useful. According to the FASB, useful information should possess certain fundamental qualities. One such quality is faithful representation. Which of the following is a characteristic of faithful representation?

free from error

Accounting information is relevant to business decisions because it

has predictive value

The following ratios are available for Alpha Inc. and Omega Inc. Current ratio - Alpha Inc. - 1.8 Current ratio - Omega Inc. 2.1 Earnings per share - Alpha Inc - $1.5/share Earnings per share - Omega Inc - $1/share Compared to Alpha Inc., Omega Inc. has

higher liquidity

The assumption the life of a business can be divided into artificial time periods for financial reporting purposes is known as the

periodicity assumption

A company has assets of $2,750,000, common stock of $435,000, and retained earnings of $380,000. It has liabilities of

$1,935,000 Assets = Liabilities + Equity Equity = common stock + retained earnings Equity = 435,000 + 380,000 = 815,000 Liabilities = Assets - Equity Liabilities = Assets - Equity = 2,750,000 - 815,000 Liabilities = 1,935,000

Which of the following is not an example of an intangible asset?

Accounts receivable Most assets have physical substance (e.g., cash, inventory, equipment).

In what order are the following accounts and their balances listed on a classified balance sheet?

Cash, accounts receivable, inventories, equipment

Faithful representation means that information accurately depicts what really happened. Which of the following is a quality associated with faithful representation?

Complete

Declaring and paying a cash dividend will

decrease retained earnings

Which of the following a measure of profitability?

earnings per share

The principle that indicates that assets should be reported at the price received to sell an asset is the

fair value principle

Which of the following is an indicator of profitability?

Earnings per share

Working capital is a measure of

liquidity

A corporation reported net income of $28,000; net sales $400,000; beginning common shares outstanding of 12,000 and ending common shares outstanding of 20,000. There were no preferred dividends. What is its earnings per share (rounded to two decimal places)?

$1.75 Earnings per share = (Net income less dividends to preferred shareholders)/Average number of outstanding shares of common stock Earnings per share = ($28,000 - 0)/[(12,000 share + 20,000 share)/2] Earnings per share = $28,000/16,000 share = $1.75 per share

A company has liabilities of $2,400,000, common stock of $620,000, and retained earnings of $380,000. It has assets of

$3,400,000 Assets = Liabilities + Equity Equity = paid-in capital (i.e., common stock) + retained earnings Equity = 620,000 + 380,000 = 1,000,000 Assets = Liabilities + Equity = 2,400,000 + 1,000,000 Assets = 3,400,000

A company has current assets of $1,600,000 and total assets of $10,000,000. It has current liabilities of $750,000 and total liabilities of $7,500,000. If it pays $250,000 of its accounts payable what will its current ratio be? (rounded)

2.7 Current ratio = current assets divided by current liabilities. Current ratio = (1,600,000 - 250,000)/(750,000 - 250,000) Current ratio = 2.7 (i.e., 2.7 to 1)

A company purchased a plot of land on which it expects to build a factory in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?

A long-term investment

Which of the following is typically not a current liability?

Bonds Payable (due in 10 years) Current liabilities are obligations that the company is to pay within the next year or operating cycle, whichever is longer. Current maturities of long-term debt due in 10 months so they are classified as a current liability.

Which of the following is considered property, plant, and equipment on a classified balance sheet?

Buildings

Which account and its balance is not reported on the balance sheet or income statement?

Dividends. The balance sheet reports asset, liability, and equity accounts. The income statement reports revenues and expenses. Neither the balance sheet nor the income statement report dividends.

What group is considered to be the primary accounting standard-setting body in the United States?

Financial Accounting Standards Board

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet?

Inventory

Which of the following would increase a company's current ratio?

Negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years.

Which of the following is not classified as a current asset?

Patents patents have a long life span of up to 20 years

Which of the following does not affect the company's current ratio?

Paying the next month's rent one month in advance

Which of the following is a financial ratio classification that measures the income or operating success of a company for a given period of time?

Profitability ratios

total dollar amount of property, plant, and equipment

Property, plant, and equipment includes: equipment + buildings + land - accumulated depreciation

Which of the following statements is true? #1. The Securities Exchange Commission is the organization that makes all of the accounting standards or rules in the United States. #2. Generally Accepted Accounting Principles are rules and practices that are recognized as a general guide for financial reporting purposes.

Statement #1 is false but statement #2 is true

Which financial statement is used by most corporations to compute year-end retained earnings?

Statement of stockholders' equity

Which of the following is an example of an intangible asset?

Trademarks Trademarks are intangible assets. The trademark makes it easier for customers to recognize a specific company's products.

What is the primary criterion by which accounting information is judged?

Usefulness for decision making

Generally Accepted Accounting Principles (GAAP)

are accounting rules that are recognized as a general guide for financial reporting

Equipment is classified on the balance sheet as

property, plant, and equipment

Long-term creditors are usually most interested in evaluating

solvency

Liquidity refers to

the ability of a company to pay its short-term liabilities

The periodicity assumption states

the life of a business can be divided into artificial time periods for financial reporting purposes

The notion that the life of a business can be divided into artificial time periods for financial reporting purposes is known as

the periodicity assumption

Working Capital

used to evaluate a company's short-term debt paying ability

A company has assets of $2,400,000, common stock of $620,000, and liabilities of $380,000. What is the company's retained earnings?

$1,400,000 Assets = Liabilities + Equity Equity = Assets - Liabilities Equity = $2,400,000 - 380,000 Equity = $2,020,000 Retained earnings = Equity - Common stock Retained earnings = $2,020,000 - 620,000 Retained earnings = $1,400,000

A corporation reports the following balances and amounts Accounts payable, $35,000 Cash provided by operations, $90,000 Accounts receivable, $37,500 Net income, $36,000 Average number of common shares, 20,000 Salaries and wages payable, $8,000 Average current liabilities, $110,000 Stockholders' equity, $240,000 Average total assets, $600,000 Current assets, $300,000 Average total liabilities, $320,000 Current liabilities, $120,000 Dividends paid to preferred shareholders, $10,000 Determine its earnings per share?

$1.30 Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends. Earnings per share = ($36,000 - 10,000)/20,000 shares = $1.30/share.

Based on the following data (in dollars), what is the working capital? Accounts payable$ 65,000 Investments in bonds 90,000 Accounts receivable 50,000 Land 95,000 Accumulated depreciation 30,000 Notes payable (due in 2 years) 90,000 Buildings 115,000 Prepaid insurance 40,000 Cash 35,000 Salaries and wages payable 10,000 Common stock 120,000 Trademarks 70,000 Inventory 70,000

$120,000 Current assets = accounts receivable + cash + inventory + prepaid insurance Current assets = 50,000 + 35,000 + 70,000 + 40,000 = 195,000 Current liabilities = accounts payable + salaries and wages payable = 65,000 + 10,000 = 75,000 Working capital = current assets - current liabilities Working capital = 195,000 - 75,000 = 120,000

For the current year, a company reported a net cash inflow from operating activities of $160,000. It also reported the following: It issued $40,000 of common stock It paid $20,000 for equipment It paid a $5,000 note payable It paid $10,000 as dividends What is the company's free cash flow?

$130,000 Free cash flow = net cash from operating activities minus capital expenditures minus cash dividends paid Free cash flow = $160,000 - 20,000 - 10,000 = $130,000

A corporation had beginning retained earnings of $724,000 and ending retained earnings of $833,000. During the year, it reported the following: Issued common stock, $47,000 Declared and paid dividends, $50,000. What was its net income for the year?

$159,000 Ending retained earnings = Beginning retained earnings + Net income - Dividends Net income = Ending retained earnings - Beginning retained earnings - Dividends Net income = $833,000 - 724,000 + 50,000 = $159,000

A corporation had beginning retained earnings of $724,000 and ending retained earnings of $833,000. During the year, it reported the following: Issued common stock, $47,000 Declared and paid dividends, $50,000. What was its net income for the year?

$159,000 Net income = Ending retained earnings - Beginning retained earnings - Dividends Net income = $833,000 - 724,000 + 50,000 = $159,000

What is the total dollar amount of intangible assets reported on the classified balance for the following company. Accounts payable$ 60,000 Goodwill 160,000 Accounts receivable 80,000 Inventory 120,000 Accumulated depreciation 40,000 Land 190,000 Buildings 230,000 Prepaid insurance 30,000 Cash 90,000 Retained earnings 150,000 Common stock 650,000 The land is used as a parking lot.

$160,000 Intangibles: Goodwill = 160,000

Based on the following accounts and year-end account balances for a certain corporation, determine the amount of current assets to be reported on its classified balance sheet. Accounts payable$ 70,000 Inventory 70,000 Accounts receivable 50,000 Land 100,000 Accumulated depreciation 30,000 Prepaid insurance 40,000 Buildings 115,000 Retained earnings 90,000 Cash 35,000 Trademarks 70,000 Common stock 325,000 The land is used as a parking lot.

$195,000 Current assets include accounts receivable, cash, inventory, prepaid insurance = 50,000 + 35,000 + 70,000 + 40,000 = 195,000

At the end of the year, a company had retained earnings of $2,840,000. During the year, the company reported the following: Issued common stock, $108,000 Declared and paid dividends, $43,000 Net income, $402,000. How much was the retained earnings balance at the beginning of the same year?

$2,481,000 Ending retained earnings = beginning retained earnings + net income - dividends. $2,840,000 = X + $402,000 - $43,000 Solve for X: Beginning retained earnings = $2,481,000.

A corporation reports the following balances and amounts: Accounts payable, $50,000 Cash provided by operations, $100,000 Accounts receivable, $35,000 Net income, $40,000 Average number of common shares, 15,000 Salaries and wages payable, $40,000 Average current liabilities, $225,000 Stockholders' equity, $200,000 Average total assets, $600,000 Current assets, $300,000 Average total liabilities, $320,000 Current liabilities, $250,000 Dividends paid to preferred shareholders, $5,000 Determine its earnings per share?

$2.33 Earnings per share = ($40,000 - 5,000)/15,000 shares = $2.33/share

Based on the following data (in dollars), what is the working capital? Accounts payable$ 110,000 Investments in bonds 170,000 Accounts receivable 80,000 Land 190,000 Accumulated depreciation 40,000 Notes payable (due in 18 months) 180,000 Buildings 226,000 Prepaid insurance 60,000 Cash 84,000 Salaries and wages payable 20,000 Common stock 240,000 Trademarks 140,000 Inventory 140,000

$234,000 Current assets = accounts receivable + cash + inventory + prepaid insurance Current assets = 80,000 + 84,000 + 140,000 + 60,000 = 364,000 Current liabilities = accounts payable + salaries and wages payable = 110,000 + 20,000 = 130,000 Working capital = current assets - current liabilities Working capital = 364,000 - 130,000 = 234,000

What is the total dollar amount of property, plant, and equipment reported on the classified balance for the following company? Accounts payable$ 60,000 Inventory 140,000 Accounts receivable 80,000 Land 190,000 Accumulated depreciation 40,000 Prepaid insurance 30,000 Buildings 230,000 Retained earnings 150,000 Cash 90,000 Trademarks 140,000 Common stock 650,000 The land is used as a parking lot.

$380,000 Property, plant, and equipment includes: equipment + buildings - accumulated depreciation + land = 230,000 - 40,000 + 190,000 = 380,000

A corporation reports the following balances and amounts: Accounts payable, $60,000 Cash provided by operations, $150,000 Accounts receivable, $25,000 Net income, $50,000 Average number of common shares, 12,000 Salaries and wages payable, $45,000 Average current liabilities, $220,000 Stockholders' equity, $200,000 Average total assets, $500,000 Current assets, $200,000 Average total liabilities, $320,000 Current liabilities, $150,000 Dividends paid to preferred shareholders, $2,000 Determine its earnings per share?

$4.00 Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends. Earnings per share = ($50,000 - 2,000)/12,000 shares = $4.00/share.

Based on the following accounts and year-end account balances for a certain corporation, determine the amount of current assets to be reported on its classified balance sheet. Accounts payable$160,000 Inventory 110,000 Accounts receivable 100,000 Land 180,000 Accumulated depreciation 40,000 Prepaid insurance 60,000 Buildings 210,000 Retained earnings 130,000 Cash 130,000 Trademarks 140,000 Common stock 600,000 The land is used as a parking lot.

$400,000 Current assets include accounts receivable, cash, inventory, prepaid insurance = 100,000 + 130,000 + 110,000 + 60,000 = 400,000

The net cash inflow from operating activities is $140,000; cash received from issuing stock is $75,000; cash paid for capital expenditures is $60,000; cash paid for bonds held as an investment is $20,000; and dividends paid are $20,000. How much is free cash flow?

$60,000 Free cash flow is cash provided by operating activities minus cash paid for capital expenditures and dividends paid. Free cash flow = $140,000 - 60,000 - 20,000 = $60,000.

For the current year, a company reported a net cash inflow from operating activities of $170,000. It also reported the following: It issued $40,000 of common stock It paid $60,000 for equipment It paid 40,000 as dividends It paid a $15,000 note payable What is the company's free cash flow?

$70,000 Free cash flow = net cash from operating activities minus capital expenditures minus cash dividends paid Free cash flow = $170,000 - 60,000 - 40,000 = $70,000

financial ratios

1. profitability ratios - measure the income or operating success of a company for a given period of time. 2. liquidity ratios - measure short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. 3. solvency ratios - measure the ability of the company to survive over a long period of time.

A corporation has current assets of $3,150,000, current liabilities of $2,250,000, total assets of $10,000,000 and total liabilities of $6,000,000. If it pays $500,000 of its accounts payable what will its current ratio be? (rounded)

1.51 Current ratio = ($3,150,000 − $500,000) ÷ ($2,250,000 − $500,000) Current ratio = 1.514 (i.e., 1.51 to 1 or 1.51:1)

A company has current assets of $1,800,000 and total assets of $10,000,000. It has current liabilities of $750,000 and total liabilities of $7,500,000. If it buys $250,000 of inventory on account what will its current ratio be (rounded)?

2.05 Current ratio = current assets divided by current liabilities. Current ratio = (1,800,000 + 250,000)/(750,000+250,000 ) Current ratio = 2.05 (i.e., 2.05 to 1)

A company has current assets of $1,800,000 and total assets of $10,000,000. It has current liabilities of $750,000 and total liabilities of $7,500,000. If it pays $250,000 for inventory what will its current ratio be (rounded)?

2.40 Current ratio = current assets divided by current liabilities. Buying inventory for cash reduces cash (i.e., current assets) and it increases inventory (i.e., current assets). Current ratio = (1,800,000 - 250,000+250,000)/(750,000 ) Current ratio = 2.4 (i.e., 2.4 to 1)

A company has current assets of $1,800,000 and total assets of 410,000,000. It has current liabilities of $750,000 and total liabilities of $6,000,000. If it issues $100,000 of common stock what will its current ratio be? (rounded)

2.53 Current ratio = current assets divided by current liabilities. Issuing common stock to shareholders increases the corporation's cash (i.e., current assets) and increases its stockholders' equity. It does not affect current liabilities. Current ratio = (1,800,000 + 100,000)/750,000 Current ratio = 2.5333 (i.e., 2.5333 to 1)

A corporation reported net income of $24,000, term-41net sales of $400,000, average stockholders' equity of $1,000,000, and average common shares outstanding of 6,000. It paid $8,000 of dividends to preferred stockholders. How much was its earnings per share?

2.67 Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding. This company has no preferred dividends. Earnings per share = ($24,000 - $8,000)/6,000 shares = $2.67/share.

Based on the following data (in dollars), what is the current ratio? Accounts payable$ 64,000 Investments in bonds 160,000 Accounts receivable 114,000 Notes payable (due in 3 months) 56,000 Accumulated depreciation 160,000 Notes payable (due in 2 years) 200,000 Cash 60,000 Patents 100,000 Equipment 1,500,000 Prepaid insurance 2,000 Inventory 138,000 Short-term investments 80,000

3.28 Current ratio = current assets/current liabilities Current assets = Cash + Accounts receivable + inventory + short-term investments + prepaid insurance Current assets = 60,000 + 114,000 + 138,000 + 80,000 + 2,000 = 394,000 Current liabilities = Accounts payable + Notes payable (short-term) Current liabilities = 64,000 + 56,000 = 120,000 Current ratio = 394,000/120,000 = 3.28

Which of the following would decrease the company's current ratio?

Using excess cash to buy long-term investments

Which of the following is not a characteristic of relevance?

Verifiability Verifiability refers to the process or capability of being able to prove or verify that the data is free from error. This is one of the enhancing qualities of useful information.

What is measured by current assets minus current liabilities?

Working capital By definition, working capital is the difference between current assets and current liabilities. It is a measure of liquidity.

A company purchased bonds issued by another corporation. The company expects to hold the bonds for more than one year. On its classified balance sheet, the company should report the bonds as

a long-term investment

Classified Balance Sheet

four categories: 1. current assets (e.g., inventory) 2. long-term investments 3. property, plant, and equipment (e.g., buildings, land, equipment, and accumulated depreciation which is the total amount of depreciation that the company has expensed so far on its property, plant and equipment) 4. intangibles

Reporting net income of $95,000 will

increase both retained earnings and stockholders' equity

Relevant accounting information

is information that is capable of making a difference in a business decision

The Securities Exchange Commission (SEC)

is the agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

The Financial Accounting Standards Board (FASB)

is the primary accounting standard-setting body in the U.S. is the organization that makes many of the accounting standards or rules in the United States.

Generally Accepted Accounting Principles (GAAP)

is the set of accounting standards (i.e., rules) that have authoritative support for determining the content of financial statements, including assets, liabilities, equity, revenues, and expenses.

Which one of the following does not affect retained earnings?

issuing of common stock to stockholders

A short-term creditor is primarily interested in the __________ of the borrower

liquidity

On a classified balance sheet, intangible assets are

listed immediately after property, plant, and equipment. These four categories are reported in the following order: (i) current assets, (ii) long-term investments, (iii) property, plant, and equipment, (iv) and intangible assets.

Faithful representation

means information accurately depicts what actually happened. To provide a faithful representation, information must be complete (i.e., nothing important omitted), neutral (i.e., the information s not biased toward one position of another), and free from error.

The assumption that requires only those things that can be expressed in money are included in the accounting records is the

monetary unit assumption.

A company can change to a new method of accounting if management can justify that the new method results in

more meaningful financial information