Accounting Chapter 2
Measures income of operating success of a company for a given period of time
Profitability Ratios
According to the FASB, useful information should possess two fundamental qualities, relevance and faithful representation.
Qualities of Useful Information
expresses the relationship among selected items of financial statement data.
Ratio analysis
Accounting information is considered _________ if it wouldmake a difference in a business decision.
Relevant
All of the following are qualities of useful information except relevance. flexibility. faithful representation. materiality.
flexibility.
In what order are current assets listed?
By liquidity
Transactions are recorded in the periods in which the events occur.
Accrual-Basis
investments of assets into the business by the stockholders.
Common stock
___________results when different companies use the same accounting principles.
Comparability
Information that confirms or corrects prior expectations
Confirmatory Value
____________ means that a company uses the same accounting principles and methods from year to year.
Consistency
Or historical cost principle, dictates that companies record assets at their cos
Cost
In a classified balance sheet, how are assets usually classified? Current assets; long-term assets; property, plant, and equipment; and intangible assets Current assets; long-term investments; property, plant, and equipment; and common stock Current assets; long-term investments; tangible assets; and intangible assets Current assets; long-term investments; property, plant, and equipment; and intangible assets
Current assets; long-term investments; property, plant, and equipment; and intangible assets
States that every economic entity can be separately identified and accounted for.
Economic Entity
Indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
Fair Value
Information accuratly depicts what really happened.
Faithful Representation
Requires that companies disclose all circumstances and events that would make a difference to financial statement users.
Full disclosure
The business will remain in operation for the foreseeable future.
Going Concern
Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? -Periodicity assumption -Going concern assumption -Monetary unit assumption -Economic entity assumption
Going concern assumption
Which of the following is considered property, plant, and equipment on a classified balance sheet? Investment in Intel Corporation stock Land Copyright Supplies
Land
If a company has the ability to pay obligations that are expected to become due within the next year or operating cycle whichever is longer, what is the term that describes this measure? Profitability Solvency Working capital Liquidity
Liquidity
Investments in stocks and bonds of other companies that are held for more than one year.
Long Term Investments
Requires that only those things that can be expressed in money are included in the accounting records
Monetary Unit
Verifiability is an ingredient of Faithful Representation----------Relevance No Yes No No Yes Yes Yes No
No------No
States that the life of a business can be divided into artificial time periods.
Periodicity
Information that help provide accurate expectations about the future.
Predictive Value
income retained for use in the business.
Retained earnings
Which of the following ratios measures the ability of the company to survive over a long period of time? Profitability ratios Solvency ratios Liquidity ratios Current ratios
Solvency ratios
Which of the following is an example of an intangible asset? Prepaid expenses Property, plant, and equipment Trademarks Accounts receivable
Trademarks
What is the primary criterion by which accounting information can be judged? Consistency Comparability Predictive value Usefulness for decision making
Usefulness for decision making
Information is _________ if independent measures, using the same methods, obtain similar results. Verifiable Relevant Consistent Understandable
Verifiable
What is measured by current assets minus current liabilities? Working capital Profitability Solvency Cash flow
Working Capital
Which of the following is a measure of liquidity? Earnings per share Debt to assets ratio Working capital Profit margin
Working capital
The convention of consistency refers to consistent use of accounting principles -within industries. -throughout the accounting periods. -among firms. -among accounting periods.
among accounting periods.
The periodicity assumption states that the economic life of a business can be divided into perpetual time periods. equal time periods. cyclical time periods. artificial time periods.
artificial time periods.
Liabilities are generally classified on a balance sheet as -present liabilities and future liabilities. -small liabilities and large liabilities. -tangible liabilities and intangible liabilities. -current liabilities and long-term liabilities.
current liabilities and long-term liabilities.
A current asset is -an asset which is currently being used to produce a product or service. -usually found as a separate classification in the income statement. -the last asset purchased by a business. -expected to be converted to cash or used in the business within a relatively short period of time
expected to be converted to cash or used in the business within a relatively short period of time
Accounting information should be neutral in order to enhance relevance. faithful representation. consistency comparability.
faithful representation
In order for accounting information to be relevant, it must -be used by a lot of different firms. -have very little cost. -help predict future events or confirm prior expectations. -not be reported to the public.
help predict future events or confirm prior expectations.
Earnings per share is computed by dividing net income by the ending common shares outstanding. less preferred stock dividends by the ending common shares outstanding. by the average common shares outstanding. less preferred stock dividends by the average common shares outstanding.
less preferred stock dividends by the average common shares outstanding.
Measures short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
liquidity ratios
The assumption that requires only those things that can be expressed in money are included in the accounting records is the -economic entity assumption. -monetary unit assumption. -going concern assumption. -periodicity assumption.
monetary unit assumption.
Ratios that measure the income or operating success of a company for a given period of time are liquidity ratios. solvency ratios. profitability ratios. trending ratios.
profitability ratios.
expresses the mathematical relationship between one quantity and another.
ratio
measures the ability of the company to survive over a long period of time
solvency ratios
Dividends appear on -he balance sheet only. -the retained earnings statement only. -the income statement only. -both the retained earnings statement and the balance sheet.
the retained earnings statement only.
For accounting information to be relevant, it must be _______.
timely
Information has the quality of ___________________ if it is presented in a clear and concise fashion.
understandability
Information that is presented in a clear fashion, so that users of that information can interpret it is an example of. comparability. understandability. relevance. faithful representation.
understandability.
Information is __________ if we are able to prove that it is free from error.
verifiable