Final

On April 1, Year 1, Colonial Bookstore bought an insurance policy costing $24,000 that would insure the retail building for two years against fire loss. What asset account and what amount are recorded on the balance sheet at December 31, Year 1?

$15,000 $9,000 is paid in insurance between April, 1 and December, 31. You reduce the amount of prepaid insurance by $9,000 leaving you with a prepaid balance of $15,000 for the remaining 15 months.

At December 31, Year 1, Adam Corporation has 5,000 shares of par value common stock, additional paid-in capital of $25,000, total shareholders' equity of $80,000, and retained earnings of $45,000. What is the par value per share?

$2.00 (Total shareholder equity - additional paid in capital - retained earnings)/ # of par value stock = Par value per share (80,000-45,000-25,000)/5,000 = 2

Firms do not use LIFO because it...

... matches the actual flow of goods

The recording of amortization of intangibles generally results in a...

...credit directly to the asset account that is being amortized.

The lower-of-cost-or-market basis for inventory valuation...

...recognizes losses from decreases in market value before a sale occurs

Cash Basis Accounting

A firm measures performance from selling goods and pro- viding services as it receives cash from customers and makes cash expenditures to providers of goods and services. To understand performance measurement under the cash basis of account- ing, consider the following information.

The rate at which _____ turn(s) over measures how quickly a firm collects cash.

Accounts receivable

The _____ of a long-lived asset is the cost of a series of future services.

Acquisition cost

Balance Sheet

Also called the statement of financial position, provides information, at a point in time, on the firm's productive resources and the financing used to pay for those resources.

Expense

An expense is an event where an asset is used up or a liability is incurred. Asset increase and Equity increase, liability and equity decreases

Blance Sheet Equations

Assets = Liabilities + Shareholder Equity Investing = Financing Resources = Sources of Resources Resources = Claims on Resources

Non-current Assets

Assets that will be used for several years. Examples include land, buildings, equipment, and patents.

Current Assets

Cash and assets that a firm expects to turn into cash, or sell, or consume within one year from the date of the balance sheet. Examples are accounts receivable and inventory.

Book value of equipment is equal to

Cost of equipment less the related accumulated depreciation

Liabilities

Creditors' claims. Creditors have provided funds, or goods and services, and the firm has an obligation to pay creditors for those goods and services. We describe two exam- ples of liabilities that result from a firm's having previously received benefits (inventories, labor services). Long-term, short-term or bonds

Assets

Economic resources with the potential to provide future economic benefits to a firm. The firm's investments in items to provide productive capacity are examples of assets.

The matching convention assigns _____ to the related _____.

Expenses; Revenues The matching convention pertains to the income statement.

A company bought land for $5 million dollars 10 years ago. The land is now worth $15 million. The company should increase the book value of this asset on its balance sheet to reflect its current value. True or False

False

A liability arrises when a firm signs a new labor union contract which includes a 6% pay raise for its union employees, true or false?

False

All transactions that increase net assets affect income, true or false?

False

Depreciation is the accounting term used to refer to the periodic write-off of intangible assets, true or false?

False

Financial statement ratios alone provide direct indicators of good or poor management, true or false?

False

On the statement of cash flows, cash sale of property, plant and equipment used for the last 5 years in the company's operations is treated as an operating activity, true or false?

False

On the statement of cash flows, the issuance of capital stock for cash to be used for future expansion of a production facility is treated as a/an investing activity, true or false?

False

Tangible long-lived assets typically appear under the title Property, Plant, and Equipment, among the current assets, true or false?

False

The accounts receivable turnover ratio indicates how quickly a firm collects its accounts receivable, true or false?

False

The balance sheet perfectly describes both resources and financing (claims on those resources), true or false?

False

The statement of cash flows begin with revenues; for this reason, analysts often refer to revenue growth as "top-line" growth, true or false?

False

COGS can be debited from Inventory

False, COGS is a liability and will be a credit to offset the asset of inventory

Dividends paid to shareholders are considered operating activity, true or false?

False, Dividends paid to shareholders are considered part of financing activity.

T-accounts provide a record of transaction, true or false

False, a T-account summarizes the effects of transactions on specific accounts

T-accounts show all the accounts affected by a single event or transaction, true or false

False, a T-account summarizes the effects of transactions on specific accounts

Accounts payable is listed as a current asset on the balance sheet, true or false?

False, accounts payable is is a liability owed to suppliers

Net income is listed as a current asset on the balance sheet, true or false?

False, net income is listed near the bottom of the income statement

Sales revenue (Revenue) is listed as a current asset on the balance sheet, true or false?

False, revenue normally appears at the top of the income statement. Revenue reflects either as an asset in cash or accounts receivable and is reflected as shareholder equity to offset.

A liability arrises when a firm issues a purchase order for 100,000 units of inventory from a supplier over the next two years, true or false?

False, the firm will record this as a liability periodically as they receive the previously ordered inventory.

Investing Activities

Firms acquire buildings, equipment, and other noncurrent assets to maintain or expand their productive capacity. These acquisitions, referred to as capital expenditures, use cash. A firm can obtain the cash needed for capital expenditures from selling existing assets, from operating activities, and from financing activities.

Financing Activities

Firms obtain financing to support operating and investing activities by issuing debt or common shares. The firm uses cash to pay dividends and to repay or retire existing debt financing, such as repaying long-term debt.

Income Statement

IFRS statement of profit and loss Provides information on profitability. The terms net income, earnings, and profit are interchangeable. The income statement reports a firm's success in generating earnings during a given report- ing period

The _____ ratio indicates how fast firms sell their inventory items, measured in terms of the rate of movement of goods into and out of the firm.

Inventory turnover

Revenues (also called sales or sales revenue)

Measure the inflows of assets from selling goods and providing services to customers. In exchange for providing goods and services, firms receive assets (either cash or promises to pay cash, Accounts Receivable).

Expenses

Measure the outflow of assets incurred in generating revenues

Under U.S. GAAP, the classification of interest expense as a(n) _____ activity and dividends paid on common or preferred shares as a(n) _____ activity appears inconsistent to some observers as both are payments to suppliers of funds.

Operating; Financing

The traditional use of the term _____ financial statements refers to projected financial statements based on some set of assumptions about the future. One set of assumptions might be that historical patterns (for example, growth rates or rates of return) will continue.

Pro forma

Operating Activities

Purchasing, production, marketing, administration, research and development. Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

Statement of Cash Flows

Reports information about cash generated from (or used by) operating, investing, and financing activities during the period. It shows where the firm obtains or generates cash and where it spends or uses cash. The statement of cash flows explains the change in cash between the beginning and the end of the period. It also displays the changes in cash from operating, investing, and financing activities.

Current Liabilities

Represent obligations a firm expects to pay within one year. Examples are accounts payable to suppliers and salaries payable to employees.

Retained Earnings

Represent the net assets (= total assets − total liabilities) a firm derives from its earnings that exceed the dividends it has distributed to shareholders. Management operates the firm's assets with the intent of generating earnings. That is, the firm expects to receive more assets than it consumes in operations. The increase in assets, after claims of creditors, is called Retained Earnings, and it belongs to the firm's owners.

Non-current Liabilities and Shareholders' equity

Sources of funds whose suppliers do not expect to receive payment within the next year. Rather, they expect payment sometime after next year.

The method of depreciation for assets whose utilization is not uniform over time is the _____ method.

Straight-Line (Use)

Shareholders' Equity

The amount of funds owners have provided either by buying shares or by reinvesting (retaining) the net assets generated by earnings. Owners have a claim on the firm's assets because they have provided funds to the firm. The owners' claim is a residual interest in the firm's assets. That is, owners have a claim on assets that are in excess of the assets required to meet creditors' claims. Shareholders' equity lists both the amount invested by shareholders for their ownership interests and the amount of retained earnings.

Statement of Shareholders' Equity

This statement displays components of shareholders' equity, including com- mon shares and retained earnings, and changes in those components

A balance sheet prepared according to U.S. GAAP lists assets from most liquid to least liquid, where liquid refers to the ease of converting the asset into cash, true or false?

True

A liability arrises when a firm receives inventory previously ordered, true or false?

True

GAAP requires that companies use accrual accounting for external reporting purposes. True or False

True

Long-lived financial assets include investments in securities, true or false?

True

Paying a dividend to stockholders does not affect a company's net income. True or False

True

Revenues are reported on the income statement in the time period in which they have been earned and they are realized or realizable. True or False

True

Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than, net income as a performance measure, true or false?

True

T-accounts summarize the effects of transactions on specific accounts, true or false

True

The amount of goodwill represents the excess of the total purchase price over the fair value of identifiable tangible and intangible net assets, true or false?

True

The capitalization of interest in the acquisition cost of assets during construction delays expense recognition from the time periods of borrowing to the time periods of using the asset, true or false?

True

The depreciable or amortizable basis of long-lived assets is the acquisition cost less salvage value, true or false?

True

The income statement is always prepared before closing entries but after adjusting entries are recorded. True or False

True

The return from investing in the shares of common stock has two components: cash dividends and the change in the market price of the common stock, true or false?

True

The same asset can have different measurements for tax purposes, for financial reporting purposes, and for internal managerial decision-making purposes, true or false?

True

The second section of the statement of cash flows shows the amount of cash flow from investing activities, true or false.

True

Theoretical and empirical research has shown that the expected return from investing in a firm relates, in part, to the expected profitability of the firm, true or false?

True

U.S. GAAP permits firms to increase the balance sheet carrying values of tangible and intangible long-lived assets when the fair values of their assets increase, true or false?

True

When a firm has securities outstanding that, if exchanged for shares of common stock, would decrease basic earnings per share by 30% or more, generally accepted accounting principles require a dual presentation: basic earnings per share and diluted earnings per share, true or false?

True

Working capital is the difference between a firm's current assets and its current liabilities, true or false?

True

The firm recognizes an expense when the consumption of the asset results from the passage of time, true or false?

True, an example would be depreciation.

The expenditures on advertising must be recognized as expense in the period of expenditure, true or false?

True, the firm would recognize this as an expense

The expenditures on research must be recognized as expense in the period of expenditure, true or false?

True, the firm would recognize this as an expense

Where are Retained Earnings reported on the balance sheet?

Under Shareholder Equity

A patent is granted by the federal government to an inventor for a period of several years. Costs that are capitalized with regard to a patent would include...

legal fees of obtaining the patent, incidental costs of obtaining the patent, and costs of successful patent infringement suits

Accountants and financial analysts criticize earnings per share as a measure of profitability because it does...

not consider the amount of assets required to generate that level of earnings.