Bus 20

Compute year-end retained earnings when given beginning retained earnings, dividends, expenses, and revenue

revenue minus expenses→ net income; then compute year-end retained earnings→ beginning retained earnings + net income - dividends = year-end retained earnings

Define what is the par value of stock.

an arbitrary amount stated to fulfill legal requirements when founding a corporation.

With regard to a corporation's stock, par value is?

an arbitrary amount stated to fulfill legal requirements when founding a corporation.

A company fails to record a storeroom of inventory at year-end. As a result, this will cause:

an understatement of gross profit at end of the year.

Separately classify the current portion and long-term portion of a long-term liability.

(Current portion is the part that you are paying now/ have paid, whereas the long-term part is the overall amount you will pay/ still need to pay.)

How to calculate income tax rate?

(Income tax expense ) / (Income from operations - interest expense)

Which one of the following items is NOT included in cash and cash equivalents?

A bank certificate of deposit or money market certificate maturing in one year

How to calculate cost of goods sold?

COGS=Beginning inventory+Purchases-Ending Inventory

Which following statement on contingencies is true?

Contingencies that are probable and not estimable are disclosed in the notes to the statements.

Which of the following statements regarding leases is false?

If a lease is classified as an operating lease, the lease is a current liability on the balance sheet.

A ten-year lease obligation appears on the balance sheet of General Products Company. How would it most likely be classified on the balance sheet?

Long-term liability

Compute Income from Operations from revenue and expenses.

Operating Income = Revenue - Cost of Goods Sold (expenses)

In order to render opinions, The Accounting Firm may:

Review company's process documentation Perform walk thru's to validate controls are designed effectively Review and re-perform a sample of test of controls Perform additional independent tests Evaluate controls to ascertain if errors of importance could occur in the financial statements or if fraud could occur

Which of the following is NOT an investing activity?

Sale of merchandise for cash.

Which of the following is reported as a financing activity?

Sale of preferred stock.

Jose Exports Inc. reported net income of $150,000 for 2013, but its cash balance decreased $40,000. Which financial statement should Jose Exports' management refer to for an explanation of this situation?

Statement of Cash Flows

Cite who is responsible for the content in financial reports.

The CEO and CFO must certify that the information in the financial statements fairly presents the financial condition and results of operations of the company.

A banker is analyzing a petroleum company. Which is a major consideration in determining whether the company should receive a loan?

The company has large interest payments related to its outstanding loans.

Bonds are a popular source of financing because

bond interest expense is deductible for tax purposes, while dividends paid on stock are not.

List advantages of financing with bonds in place of stock.

bonds are less risky, because they are government regulated payments (you WILL get your money)... whereas the stock changes too rapidly and inconsistently (risky) you may lose money.

External auditors CAN'T provide

bookkeeping human resource info system design brokerage services for clients that they audit

Goodwill can be recorded as an asset when a(n)

business is purchased and payment is made in excess of the value of the net assets.

Which following ratio is least useful in evaluating a company's ability to pay its current debts when due?

debt-to-equity ratio

Assets classified as property, plant, and equipment are reported at?

each asset's original cost minus depreciation since acquisition.

Bor Company sold merchandise on credit at a gross profit of 23%. The effect of this transaction is that

earnings per share increased

When bonds are sold for less than the face amount, this means that the?

face rate of interest is less than the market (yield) rate of interest.

The dollar and percentage change in accounts receivable from 2013 to 2014 is an example of?

horizontal analysis

An internal control system consists of policies and procedures necessary to ensure each following objective, except:

keeping cash on hand above the minimum to support ongoing operations.

Items should be reported as part of the company's "inventory" if they are..?

merchandise to be sold to customers.

The Retained Earnings account for a large corporation is $10,000,000. This amount represents?

net incomes that have not been distributed to shareholders.

How to calculate retained earnings?

retained earnings = beginning retained earnings + net income - dividends

Describe what is retained earnings. Explain how retained earnings is computed.

retained earnings refers to the portion of net income of a corporation that is retained by the corporation rather than distributed to shareholders as dividends. + Beginning retained earnings + Net income during the period Dividends paid = Ending retained earnings

If Llama Company has paid out more in dividends than it has generated in net income, over the lifetime of the company, then:

retained earnings would be negative.

Dymalitics, Inc., compares the relative profitability to investors between different firms with the

return on stockholders' equity.

Depreciation is a process by which?

the cost of plant and equipment is allocated to expense over the time periods of usage.

With respect to the statement of cash flows,

the repurchase of stock (treasury stock) is a financing activity.

State the responsibilities of external auditors under Sarbanes-Oxley.pg.293-5 The Accounting Firm (External Auditor) must render two opinions:

-Management's Assessment Process -Effectiveness of the company's internal controls over financial reporting

Identify weak internal control practices

-segregation of duties→ i.e., no good to have one employee count the cash at the end of the day and another to record it if the two act in concert to steal from company. -independent verification → " "(same as prev., i.e.) -proper authorizations→ meaningless if management continually overrides or fails to support it.

How to calculate interest revenue?

Amount x Interest Rate x (how many days/360)

When cash from operations by the indirect method, what is the impact from a decrease in inventories?

An increase in the cash flow from operating activities.

Ending inventory is equal to the cost of items on hand plus..?

Merchandise in transit sold to customers FOB destination

Which internal control procedure is violated when a cashier also records the daily receipts in the journal?

Segregation of duties

List the characteristics of a current liability.

Current liability is something that can be paid/ performed in one year.

Why is depreciation added to net income in the Operating Activities category of the statement of cash flows when the indirect method is used?

Depreciation was deducted in arriving at net income, however, it did not require the use of cash.

Which following ratio is a used to analyze merchandise corporations, but not by service corporations?

Gross Profit ratio

How to calculate gross profit?

Gross profit = sales revenue - COGS

Which inventory costing method has the lowest income tax expense during a period of decreasing prices?

FIFO

Explain financial leverage.

Financial leverage is the degree to which a company uses fixed-income securities such as debt and preferred equity. The more debt, the higher the level of financial leverage which results in higher interest payments and that affects earnings per share.

Identify the income measure of a merchandising firm that does not appear on the income statement of a service firm.

Gross Profit (or Gross Margin)- is used to analyze merchandise corporations, but not by service corporations (this is because a service firm does not have inventory)

Compute the gain or loss when selling a plant asset.

If the cash received is greater than the asset's book value, the difference is recorded as a gain. If the cash received is less than the asset's book value, the difference is recorded as a loss.

How to calculate income of operations?

Income from operations = gross profit - operating exp

Which following statement is true when using the indirect method of preparing the operating activities section of the statement of cash flows?

Inventory increases are subtracted from net income

For a statement of cash flow, classify transactions as operating, investing, or financing activity.

Operating Activities= purchasing inventory, advertising, taxes, depreciation of equipment, wages given, etc. Investing Activities= acquisition/sale of long-term or non-current assets such as property, plant, and equipment. Also patents. Financing Activities= issuance/retirement of long-term liability, capital stocks, or dividends.

Distinguish between an operating lease and a capital lease.

Operating lease = the lessee acquires the right to use an asset for a limited period of time. The lessee is not required to record the right to use the property as an asset or to record the obligation for payments as a liability Capital lease = the lessee has acquired sufficient rights of ownership and control of the property to be considered its owner. The lease is called a capital lease because it is capitalized on the balance sheet by the lessee

Which consideration is most important for an investor evaluating whether to purchase a stock?

Will the company earn a fair return on the amount invested?

Cite six internal control procedures

Proper authorizations Segregation of duties Independent verification Safeguarding of assets and records Independent review and appraisal Design and use of business documents

Which of the following generally indicates a positive change

The number of days' sales in inventory decreases

To determine whether a lottery winner should receive a single lump sum now or receive an equal amount over a period of years, you would use which type of time value of money calculation?

The present value of an annuity.

Explain why depreciation is added to net income for computing indirect Cash from Operations.

The reason depreciation is added to net income for computing indirect cash from operations is because it does not require the use of cash.