ACG HW 2

retained earnings=

= balance sheet and statement of stockholders' equity

accounts payable=

= current liability= balance sheet

Which of the following does not affect the company's current ratio? Declaring and paying a dividend Recognizing revenue from a sale to a customer Issuing of common stock to stockholders Renting a warehouse to store the company's inventory Incurring a net loss

Current ratio = current assets divided by current liabilities Paying next month's rent one month in advance decreases cash and increase prepaid rent. Both cash and prepaid rent are current assets. Increasing one and decreasing the other does not affect total current assets or the current ratio.

Clawson Corporation has current assets of $3,150,000 and current liabilities of $2,250,000. If Clawson Corporation pays $500,000 of its accounts payable what will its new current ratio be?

Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). 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)

unearned revenue=

current liability= balance sheet

cash provided by operating activities adjusted for capital expenditures and dividends paid

free cash flow

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? Predictive value Free from error Costless Comparability Going concern

free from error

Garnet and Gold

higher current ratio= higher liquidity higher debt to asset ratio= lower solvency Higher EPS= higher profitability when comparing a company to itself and the number of shares outstanding is held constant.

Issuing new shares of common stock will

increase common stock.

The constraint of determining whether an item is large enough to likely influence the decision of an investor or creditor

materiality

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.

Long-term creditors are usually most interested in evaluating

solvency

common stock=

= balance sheet and statement of stockholders' equity

Which of the following is not an example of an intangible asset? Trademarks Copyrights Patents Goodwill Accounts receivable

Accounts recievable

3. Retained earnings is not affected by a. revenue. b. a net loss. c. an issuance of common stock. d. a dividend.

An issuance of common stock Retained earnings increased by revenues, decreases by expenses, and decreased by dividends.

Which of the following is considered property, plant, and equipment on a classified balance sheet? Patents Buildings Notes payable Accounts receivable Inventory

Buildings

Constraints in Accounting

Cost constraint and materialitiy

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

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

Which of the following would not be classified as a long-term liability? Notes payable due in 18 months Current maturities of long-term debt due in 10 months Bonds payablen due in 10 years Mortgage payable due in 5 years All of these are always considered to be long-term liabilities

Current maturities of long-term debt due in 10 months

Stone Park Corporation reports the following: • Net income, $26,000 • Revenue, $400,000 • Average number of common stock shares outstanding, 6,000 • Average number of preferred stock shares outstanding, 500 • Current assets, $300,000 • Current liabilities, $100,000 • Net cash flows from operating activities, $60,000 • Net cash flow from investing activities, $40,000 (i.e., it paid $40,000 for new equipment) • Net cash flow from financing activities, ($6,000) (i.e., it paid preferred stockholders dividends of $2,000 and it paid common stockholders' dividends of $4,000). What was its earnings per share, current ratio, working capital, and free cash flow?

EPS = (Net Income - Preferred Dividends)/Average Common Shares Outstanding EPS= (26,000-2,000)/6,000 Current ratio = Current assets/current liabilities Current ratio= 300,000/100,00 Working capital = Current assets - current liabilities Working capital = $300,000 - 100,000 Free cash flow= Cash flows from operating activities- cash paid for capital expenditures- cash paid for dividends Free cash flow = $60,000 - 40,000 - 2,000 - 4,000

Stonebrook Corporation reported net income of $32,000, net sales of $500,000, and $2,000 of preferred stock dividends. Its average common shares outstanding is 12,000. How much was its earnings per share?

Earnings per share equals net income earned on each share of common stock. 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 = ($32,000 - $2,000)/12,000 shares = $2.50/share.

Stonebrook Corporation reported net sales of $360,000, net income of $20,000, and average common shares outstanding of 10,000. There were $4,000 of preferred stock dividends. How much was its earnings per share?

Earnings per share equals net income earned on each share of common stock. 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 = ($20,000 - $4,000)/10,000 shares = $1.60/share.

The quality of information that accurately depicts what really happens

Faithful representation

The net cash inflow from operating activities is $250,000; cash received from issuing stock is $150,000; cash paid for capital expenditures is $55,000; cash paid for bonds held as an investment is $5,000; and dividends paid are $10,000. How much is free cash flow?

Free cash flow is cash provided by operating activities minus cash paid for capital expenditures and dividends paid. Free cash flow = $250,000 - 55,000 - 10,000 = $185,000.

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? Accumulated depreciation Inventory Buildings Equipment Land

Inventory

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? Land Buildings Inventory Equipment Accumulated depreciation

Inventory

Which one of the following does not affect retained earnings? Declaring and paying a dividend Recognizing revenue from a sale to a customer Issuing of common stock to stockholders Renting a warehouse to store the company's inventory Incurring a net loss

Issuing of common stock to stockholders

Which of the following is a financial ratio classification that measures short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash?

Liquidity ratios

Machinery and copyrights are categorized or classified as a. a current asset and an intangible asset, respectively.. b. a plant asset and an intangible asset, respectively. c. a long‐term investment and an intangible asset, respectively. d. property, plant, and equipment and a long‐term investment, respectively. e. a plant asset and an equity, respectively.

Machinery is a plant asset and copyrights are intangible assets

How does a company compute its free cash flow?

Net cash provided by its operating activities minus (i) expenditures on property, plant, and equipment and (ii) its dividends paid.

Assets of a relatively permanent nature that are being used in the business and are not intended for resale.

Property, Plant, and equipment, or fixed assets, or plant assets

These are selected accounts and their balances as of the end of the current year: Accounts receivable................................... $100,000 Accumulated Depreciation...................... 300,000 Cash................................................................. 150,000 Buildings...................................................... 800,000 Inventory..................................................... 200,000 Equipment................................................... 550,000 Land............................................................... 100,000 Based on this information, what is the total amount of property, plant, and equipment to be reported on a classified balance sheet?

Property, plant, and equipment includes equipment plus buildings minus accumulated depreciation plus land = 550,000 + 800,000 - 300,000 + 100,000 = 1,150,000

Vista Corporation has assets of $4,300,000, common stock of $2,450,000, and liabilities of $1,250,000. What are the company's retained earnings?

Retained earnings = Equity - Common stock Equity = Assets - Liabilities 600,000

Depreciation expense=

income statement

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

Trademarks

Evans Company purchased stocks of Stone Corporation. Evans Company expects to hold the Stone Corporation stock for more than one year. On its classified balance sheet, Evans Company should report the Stone Corporation stock as

a long-term investment

Hans Company purchased bonds of Zimmer Corporation. Hans Company expects to hold the Zimmer Corporation bonds for more than one year. On its classified balance sheet, Hans Company should report the Zimmer Corporation bonds as

a long-term investment

Faithful Representation

complete, free from error, neutral, verifiable

Use of the same accounting principles and methods from year to year within a company.

consistency

Working capital is a measure of

liquidity

On a classified balance sheet, intangible assets are

listed immediately after property, plant, and equipment.

Vista Corporation has assets of $4,300,000, common stock of $2,450,000, and liabilities of $1,250,000. What are the company's retained earnings?

$600,000 The basic accounting equation is: Assets = Liabilities + Equity This equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity. Re-arranging the accounting equation to solve for equity yields the following: Equity = Assets - Liabilities Equity = $4,300,000 - 1,250,000 Equity = $3,050,000 By definition, equity equals paid-in capital (i.e., common stock) plus retained earnings. Solving this relation for retained earnings: Retained earnings = Equity - Common stock Retained earnings = $3,050,000 - 2,450,000 Retained earnings = $600,000

Inventory $ 100,000 Notes receivable (due in two years) 6,000 Notes receivable‐(due in two months) 5,000 Accumulated depreciation‐‐Buildings 200,000 Patents 50,000 Buildings 1,000,000 Cash 12,000 Accounts receivable 40,000 Prepaid insurance 4,000 Equipment 80,000 Accumulated depreciation—Buildings 16,000 Land 150,000

1. Current assets= inventory, notes receivable (due in 2 months), cash accounts receivable, prepaid insurance =100,000+5,000+12,000+40,000+4,000 2. Plant assets= buildings, equipment, and land reduced by accumulated depreciation =1,000,000-200,000+80,000-16,000+150,000

goodwill=

= intangible asset= balance sheet

trademarks=

= intangible asset= balance sheet

investment in stocks=

= long term investment= balance sheet

notes receivable (to be collected in 2 years)=

= long term investment= balance sheet

land (held for future use)=

= long-term investment= balance sheet

note payable (due in 10 years)=

= long-term liability = balance sheet

accumulated depreciation=

= plant asset= balance sheet

equipment=

= plant asset= balance sheet

cash=

=current asset= balance sheet and statement of cash flows

service revenue=

=income statement

Patent=

=intangible asset=balance sheet

dividends=

=statement of stockholders' equity

A company purchased a tract 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

A measure used to evaluate a company's liquidity and short-term deb-paying ability, computed by dividing current assets by current liabilities

Current ratio

Mitchell Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they issue $100,000 of new stock what will their new current ratio be? (rounded)

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 = (1,600,000 + 100,000)/750,000 Current ratio = 2.2666 (i.e., 2.2666 to 1)

Use the following data to calculate the current ratio. Accounts payable................................. $ 140,000 Accounts receivable............................. 100,000 Accumulated depreciation.................. 40,000 Buildings................................................. 210,000 Cash........................................................ 130,000 Common stock...................................... 240,000 Inventory................................................ 110,000 Land......................................................... 180,000 Long-term stock investments.............. 170,000 Notes payable (due in 2 years)............ 160,000 Prepaid insurance................................. 60,000 Salaries and wages payable................. 20,000 Trademarks.............................................. 140,000

Current ratio = current assets/current liabilities Current assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer. Current assets = Cash + Accounts receivable + inventory + prepaid insurance Current assets = 130,000 + 100,000 + 110,000 + 60,000 = 400,000 Current liabilities = liabilities to be paid in one year or operating cycle, whichever is longer. Current liabilities = Accounts payable + Salaries and wages payable Current liabilities = 140,000 + 20,000 = 160,000Current ratio = 400,000/160,000 = 2.50

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

Current ratio = current assets/current liabilities Current assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer. 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 = liabilities to be paid in one year or operating cycle, whichever is longer. Current liabilities = Accounts payable + Notes payable (short-term) Current liabilities = 64,000 + 56,000 = 120,000 Current ratio = 394,000/120,000 = 3.28

Clawson Corporation has current assets of $3,750,000 and current liabilities of $2,050,000. If Clawson Corporation pays $500,000 of its accounts payable what will the new current ratio be?

Current ratio equals current assets divided by current liabilities. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,750,000 − $500,000) ÷ ($2,050,000 − $500,000) Current ratio = 2.0967 (i.e., 2.10 to 1 or 2.10:1)

Which of the following indicates that personal and business record‐keeping should be separately maintained? a. Full disclosure principle b. Economic entity assumption c. Going concern assumption d. Monetary unit assumption e. Historical cost principle

Economic entity assumption

Which financial ratio is usually not useful when comparing the performance of one company to a different company? a. Current ratio b. Debt to assets ratio c. Earnings per share d. All of these e. None of these

EPS. DO NOT compare EPS of one company to EPS of another company. Comparisons of EPS of one company to EPS of another company are usually misleading because companies differ not only in their net income but also the number of common shares outstanding.

Which of the following is an indicator of profitability? Debt to total assets ratio Current ratio All of these Earnings per share Working capital

Earning per share

Stonebrook Corporation reported net income of $24,000, net sales of $400,000, and average common shares outstanding of 6,000. There were $8,000 of preferred stock dividends. How much was its earnings per share?

Earnings per share equals net income earned on each share of common stock. 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.

Riverview Inc. 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 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?

Earnings per share equals net income earned on each share of common stock. 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 = ($40,000 - 5,000)/15,000 shares = $2.33/share.

During the year, Lowery Corporation issued stock for $98,000, paid dividends of $34,000, and reported net income of $402,000. What was its retained earnings balance at the beginning of the same year if its ending retained earnings is $2,384,000?

Ending retained earnings = Beginning retained earnings + Net income - Dividends Beginning retained earnings = Ending retained earnings - Net income + Dividends Beginning retained earnings = $2,384,000 - 402,000 + 34,000 = $2,016,000

Wilton Corporation had beginning retained earnings of $724,000 and ending retained earnings of $833,000. During the year, it issued common stock totaling $47,000 and paid dividends of $50,000. What was its net income for the year?

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

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

Financial Accounting Standards Board

Suppose that Morningstar Corporation produced and sold 4,800 laptop computers during the year. It reported $320,000 cash provided by operating activities. In order to maintain production at 4,800 laptops, Morningstar paid $45,000 for equipment. Morningstar paid $10,000 in dividends and it paid a $25,000 note payable. Shortly before year-end, Morningstar received $20,000 by issuing additional shares of its stock. What is Morningstar's free cash flow?

Free cash flow equals cash provided by operations minus cash paid for capital expenditures (e.g., buildings, equipment, etc.) and cash dividends. The company has only one cash inflow or out-flow from operating activities (i.e., cash collected from customers) and it has only one capital expenditure (cash paid for new equipment). Free cash flow = $320,000 - 45,000 - 10,000 = $265,000

What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U. S.? None of these Generally accepted accounting standards Generally accepted accounting principles Generally accepted auditing principles General accounting principles

Generally accepted accounting principles

Twilight Corporation has liabilities of $3,000,000, common stock of $780,000, and retained earnings of $475,000. What are the company's assets?

The basic accounting equation is: Assets = Liabilities + EquityThis equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity. Equity equals paid-in capital (i.e., common stock) plus retained earnings. Equity = 780,000 + 475,000 = 1,255,000 Fill-in assets and equity into the accounting equation and solve for liabilities. Assets = Liabilities + Equity = 3,000,000 + 1,255,000 Assets = 4,255,000

obligations that companies are expected to pay within the next year or operating cycle whichever is longer

current liabilities

_____________ means using the same accounting principles and methods from year to year within a company.

consistency

an accounting principle that states that companies should record assets at their cost

cost principle of historical cost principle

Cash, and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, whichever is longer, are called a. current assets. b. intangible assets. c. long‐term investments. d. property, plant, and equipment. e. retained earnings.

current assets

A financial statement that resents the factors that caused stockholders' equity to change during the period, including those things that caused retained earnings to change.

statement of stockholders' equity

Riverview Inc. 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 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?

earnings per share equals net income earned on each share of common stock. 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.

an assumption that the activities of an entity can be kept separate from the activities of its owners and all other entities

economic entity assumption

A current asset is

expected to be converted to cash or used in the business within a year or operating cycle whichever is longer.

The principle that indicates that assets should be reported at the price received to sell an asset is the consistency principle. historical cost principle. full disclosure principle. fair value principle. cost-benefit principle.

fair value principle

_____________ means that information accurately depicts what really happened.

faithful representation

Accounting information should be neutral in order to enhance

faithful representation To be useful for decision-making, accounting information needs to possess certain fundamental qualities: (i) relevance and (ii) faithful representation. Information is considered to be relevant if it provides information that has predictive value, that is, it helps provide accurate expectations about he future, and has confirmatory value (i.e., it confirms or corrects prior expectations). Materiality is another aspect of relevance. An item of information is material if its size makes it likely to influence decision-making. 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. In addition to qualities of useful information, there are several enhancing qualities of useful information. These include comparability, consistency, verifiability, timeliness, and understandability.

Which of the following is an example of an intangible asset? Cash Land Goodwill Accounts receivable Prepaid expenses

goodwill

The following ratios are available for Rock Inc. and Pebble Inc. Rock Inc. Current ratio= 1.8 Pebble Inc. Current Ratio=1.6 Compared to Rock Inc., Pebble Inc. has

lower current ratio=lower liquidity

For information to be relevant, it should have _____________ and confirmatory value.

predictive

Relevance

predictive value confirmatory value timeliness

Ratios that measure the income or operating success of a company for a given period of time are

profitability ratios.

The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. According to the FASB, useful financial information should possess certain fundamental qualities. All of the following are qualities of useful financial information except faithful representation. materiality. predictive value. universality. relevance.

universality

the going concern assumption assumes that the business

will remain in operation for the foreseeable future.

What is measured by current assets minus current liabilities?

working capital