Accounting Test 1- CH 1, 2, 11, 13
GAAP- Adequate Disclosure Concept
-requires that the financial statements, including related notes, contain all relevant data a stakeholder needs to understand the financial condition and performance of the company. Nonessential data are excluded to avoid clutter.
the following are considered assets:
Amounts due from customers Cash on hand Equipment
Financial statements:
Income statement: reports the change in financial condition Statement of Equity: reports change in financial condition Balance sheet: reports financial condition Statement of Cash Flows: reports change in financial condition
Intangible Assets
Long-term assets such as patents, goodwill, and copyrights are reported separately as intangible assets.
IASB
Many countries outside the United States use generally accepted accounting principles adopted by the International Accounting Standards Board (IASB). The IASB issues International Financial Reporting Standards (IFRS). Significant differences currently exist between FASB and IASB accounting principles. However, the FASB and IASB are working together to reduce and eliminate these differences towards the goal of developing a single set of accounting principles. Such a set of worldwide accounting principles would help facilitate investment and business in an increasingly global economy.
Tangible Assets
Most businesses need assets such as machinery, buildings, computers, office furnishings, trucks, and automobiles. These assets have physical characteristics. Long-term tangible assets such as machinery, buildings, and land are reported separately as property, plant, and equipment. Short-term tangible assets such as cash and inventories are reported separately.
For a recent year ending January 31, Target Corporation had revenues of $72,618 million and total expenses of $74,254 million. Did Target Corporation report a net loss or a net income?
Net loss of $1,636 million ($72,618 million - $74,254 million)
Capital Market Stakeholders
Providers of major financing for the business. EX: banks, owners, stockholders
Selling Expenses
Selling expenses include those costs directly related to the selling of a product or service. For example, selling expenses include such costs as sales salaries, sales commissions, freight, and advertising costs.
Low Cost strategy examples:
Southwest, Union Pacific, Hyundai, Sam's Club, Ameritrade, Super 8
Assume that a friend of yours operates a family-owned pharmacy. A super Wal-Mart, scheduled to open in the next several months, will also offer pharmacy services. What business emphasis would your friend use to compete with the Super Walmart pharmacy?
Super Wal-Mart will compete for customers us-ing a low-cost strategy. The size and buying power of Wal-Mart Corporation provides Wal-Mart a competitive advantage over your friend in the ability to offer low prices. Thus, your friend should attempt to compete using a premium-price emphasis. For example, your friend could offer personalized service to customers such as knowing customers' names and providing a friendly atmosphere, home delivery of medi-cines, help in filing insurance forms, 24-hour call service, etc
Financial Accounting
The branch of accounting that is associated with preparing reports for users external to the business. 2 major objectives: -To report the financial condition of a business at a point in time -To report changes in the financial condition of a business over a period of time. The objectives of accounting are achieved by (1) recording the economic events affecting a business and then (2) summarizing the impact of these events on the business in financial reports, called financial statements.
GAAP- Business Entity Concept
The business entity concept limits the economic data recorded in an accounting system to data related to the activities of that company. In other words, the company is viewed as an entity separate from its owners, creditors, or other companies. For example, a company with one owner records the activities of only that company and does not record the personal activities, property, or debts of the owner. A business entity may take the form of a proprietorship, partnership, corporation, or limited liability company (LLC).
Integrated Financial Statements
The financial statements are prepared in the following order: 1. income statement 2. statement of stockholders' equity 3. balance sheet 4. statement of cash flows
Stockholders' equity/owner's equity
The rights of stockholders
Assume that you are considering investing in _____
The statement of cash flows would be a primary focus to determine whether LinkedIn is generating positive cash flows from operations. Because LinkedIn is a relatively new company using an innovative business emphasis, it has generated losses on its income statement. Thus, the income statement does not provide as much useful information as the statement of cash flows. In the long run, LinkedIn must generate positive cash flows from its operations to sur-vive and succeed.
Premium Price examples:
Virgin Atlantic, Fedex, BMW, Talbot's, Morgan Stanley, Ritz Carlton
Liability:
When a company borrows money, it incurs a liability. A liability is a legal obligation to repay the amount borrowed according to the terms of the borrowing agreement. When a company borrows from a vendor or supplier, the liability is called an account payable. In such cases, the company promises to pay according to the terms set by the vendor or supplier.
the following would appear on a balance sheet:
accounts payable cash equivalents crude oil inventory equipment income taxes payable investments long term debt marketable securities notes and loans payable prepaid taxes retained earnings accounts payable accrued interest payable cash common stock inventories long-term debt payable notes payable notes receivable prepaid expenses not yet used in operations property and equipment retained earnings
the following are considered dividends:
cash paid to stockholders
the following are considered revenue:
cash sales
Manufacturing businesses
change basic inputs into products that are sold to customers. General Motors Corporation (cars, trucks, vans) Dell Inc. (personal computers)
Financing Activities
involve obtaining funds to begin and operate a business. Companies obtain financing through the use of capital markets by: ▪ borrowing ▪ issuing shares of ownership
Business Stakeholder
is a person or entity with an interest in the economic performance and well-being of a company. For example, owners, suppliers, customers, and employees are all stakeholders in a company.
Elements of an Accounting System
is designed to produce financial statements. The financial statements include the income statement, statement of stockholders' equity, balance sheet, and statement of cash flows. The basic elements of a financial accounting system include: ▪ Rules for determining what, when, and the amount that should be recorded ▪ A framework for preparing financial statements ▪ Controls to determine whether errors may have arisen in the recording process
corporation
is organized under state or federal statutes as a separate legal entity. The ownership of a corporation is divided into shares of stock. A corporation issues the stock to individuals or other companies, who then become owners or stockholders of the corporation. A primary advantage of the corporate form is the ability to obtain large amounts of resources by issuing shares of stock. In addition, the stockholders' liability to creditors for the debts of the company is limited to their investment in the corporation.
the following are considered an expense:
rent paid for the month sales commissions paid to salespersons wages paid to employees
statement of cash flows
reports the change in financial condition due to the changes in cash during a period. The statement of cash flows is organized around the three business activities of financing, investing, and operating. Any changes in cash must be related to one or more of these activities.
Statement of Stockholders' Equity
reports the changes in financial condition due to changes in stockholders' equity for a period. Changes to stockholders' equity normally involve common stock and retained earnings.
GAAP- Accounting Period Concept
requires that accounting data be recorded and summarized in financial statements for periods of time. For example, transactions are recorded for a period of time such as a month or a year. The accounting records are then summarized and updated before preparing the financial statements.
GAAP
-necessary so that stakeholders compare companies across time. If the management of a company could prepare financial statements as they saw fit, the comparability between companies and across time would be impossible. -developed by the Financial Accounting Standards Board (FASB) -The Securities and Exchange Commission (SEC), an agency of the U.S. government, also has authority over the accounting and financial disclosures for corporations whose stock is traded and sold to the public. -
Order of financial statements
1: income statement. (A summary of the revenue and expenses for a specific period of time, such as a month or year) 2: statement of stockholders' equity (a summary of the changes in the stockholders' equity in the corporation for a specific period of time, such as a month or a year) 3: Balance Sheet (a list of the assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year) 4. Statement of cash flows (a summary of the cash receipts and cash payments for a specific period of time, such as a month or a year)
What is the objective of most businesses?
The objective of most businesses is to maximize profits. Profit is the difference between the amounts received from customers for goods or services pro-vided and the amounts paid for the in-puts used to provide those goods or services.
Merchandising businesses
sell products they purchase from other businesses to customers. Wal-Mart (general merchandise) Amazon.com (books, music, videos)
Balance Sheet
shows what is owned by a company, all the amounts that are owed by a company, and what the net worth is of a company. Is it a really rich company, or etc.
Metric Based Analysis
-2 basic types of metrics used in this text: ratios and amounts. Quantitative measures are referred to as metrics. -We apply metric analysis at the following 3 levels: 1. Financial Statement Level---At this level, various financial ratios are computed and analyzed. 2. Transaction Level---When a company enters into a transaction, it changes the company's assets, liabilities, and stockholders' equity. Since we assume companies operate to maximize their profits, we assess the effects of a transaction on one or more of a company's profitability metrics. Companies also attempt to maintain a minimum degree of liquidity so they can pay their liabilities and respond quickly to new opportunities to expand or enhance their operations. 3. Managerial Decision Level In the managerial chapters of this text, metric-basis analysis assesses the effects of decisions on a variety of operating metrics. For example, a managerial decision to increase selling prices (assuming no decrease in units sold) would decrease its break-even point, which is the level at which operations may neither profit nor experience a loss. In this case, the metric being assessed is the break-even point.
GAAP- Objectivity Concept
-concept requires that entries in the accounting records and the data reported on financial statements be based on verifiable or objective evidence. For example, invoices, bank statements, and a physical count of supplies on hand are all objective and verifiable. Thus, they can be used for entering amounts in the accounting system. In some cases, judgments, estimates, and other subjective factors may have to be used in preparing financial statements. In such situations, the most objective evidence available is used.
GAAP- Matching Concept/Principle
-reports the revenues earned by a company for a period with the expenses incurred in generating the revenues. That is, expenses are matched against the revenues they generated. Revenues are normally recorded at the time a product is sold or a service is rendered, which is referred to as the revenue recognition principle. At the point of sale, the sale price has been agreed upon, the buyer acquires ownership of the product or acquires the service, and the seller has a legal claim against the buyer for payment. The expenses incurred in generating revenue should be reported in the same period as the related revenue. This is called the expense recognition principle. By matching revenues and expenses, net income or loss for the period can properly be determined and reported. -states that expenses should show up on the income statement in the same accounting period as the related revenues. Further, it results in a liability to appear on the balance sheet for the end of the accounting period.
The payment of a dividend A.decreases owner's equity. B.increases expenses. C.increases revenues. D.decreases expenses. E.none of the above
A
Ponzi Scheme
A Ponzi scheme is a scam or fraudulent operation where to attract investors an individual or entity promises high returns with little or no risk. To meet their claims, the perpetrators pay early investors with monies obtained from attracting new investors. To succeed, a Ponzi scheme requires a constant stream of money from new investors. Eventually, Ponzi schemes become so large that they collapse. Most recent one: Bernard Madoff. -As a result of accounting and business frauds, the United States Congress passed laws to monitor the behavior of accounting and business. For example, the SarbanesOxley Act of 2002 (SOX) was enacted. SOX established a new oversight body for the accounting profession called the Public Company Accounting Oversight Board (PCAOB). In addition, SOX established standards for independence, corporate responsibility, and disclosure.
Prepaid Expenses and Accounts Receivable
A company may also prepay for items such as insurance or rent. Such items, which are assets until they are consumed, are reported as prepaid expenses. In addition, rights to payments from customers who purchase merchandise or services on credit are reported as accounts receivable.
What is the difference between a manufacturing business and a service business? Is a restaurant a manufacturing business, a service business, or both?
A manufacturing business changes ba-sic inputs into products that are sold to customers. A service business provides services rather than products to cus-tomers. A restaurant, such as McDo-nald's, has characteristics of both a manufacturing and a service business in that McDonald's takes raw inputs, such as cheese, fish, and beef, and processes them into products for con-sumption by its customers. At the same time, McDonald's provides services of waiting on its customer
What is the difference between a manufacturing business and a merchandising business? Give an example of each type of business.
A manufacturing business changes ba-sic inputs into products that are sold to customers. In contrast, a merchandising business purchases products in a form that can be sold to customers without any additional changes. Examples of manu-facturing businesses include Alcoa, Boe-ing, Caterpillar, and Dow Chemical. Examples of merchandising businesses include Best Buy, Macy's, Target, and Wal-Mart.
Note Payable
A note payable requires payment of the amount borrowed plus interest. Notes payable are similar to bonds except that they may be issued on either a short-term or a long-term basis.
Definition of Accounting
Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business to help make informed decisions.
identify those that would appear on the balance sheet.
Accounts receivable Common Stock Cash Salaries Payable
Common Stock
Although corporations may issue a variety of different types of stock, the basic type of stock issued to owners is called common stock. 2 Investors who purchase the stock are referred to as stockholders.
the following are considered liabilitiy/liabilities:
Amounts owed suppliers note payable owed to the bank
Assets
Assets are the resources owned by a corporation (company). Creditors have first claim on the company's assets. Only after the creditors' claims are satisfied do the stockholders have a right to the corporate assets.
A company wants to know the cost of inventory sold at the end of the current period. Which financial statement should the company refer to? A.Balance Sheet B.Income Statement C.Statement of Cash Flows D.Statement of Retained Earnings
B
Bonds
Bonds are sold to investors and require repayment normally with interest. The amount of the bonds, called the face value, usually requires repayment several years in the future. Thus, bonds are a form of long-term financing. The interest on the bonds, however, is normally paid semiannually. Bond obligations are reported as bonds payable, and any interest that is due is reported as interest payable.
Product or service market stakeholders
Buyers of products or services and vendors to the business. Ex: customers and suppliers
At some point, direct labor costs will appear on a company's A. balance sheet B. income statement C. both of the above D. none of the above
C
How many of the following would be classified as an asset? •Cash •Dividends •Retained earnings •Equipment A.0 B.1 C.2 D.3 E.4
C
Smokey Joe's makes bottled BBQ sauce; the cost of rent on packaging equipment would be considered a A.Direct material cost B.Direct labor cost C.Overhead cost D.Period cost
C
Which of the following would not be considered a fixed cost? A.Rent on Factory B.Salary of Company President C.Utilities for Administrative Office D.Salary of Production Manager E.All of the above would be considered a fixed cost
C
Government Stakeholders
Collect taxes and fees from the business and its employees. Ex: federal, state, and city governments
The Marshall Company recently returned some equipment that was previously purchased for a refund; the transaction used to record the return would include A.(Cash) and +Revenue B.(Cash) and (Equipment Expense) C.(Cash) and +Inventory D.+Cash and (Equipment) E.(Cash) and +Equipment
D
The value of something that is _____ is the basic definition of an expense. A.sold B.owned C.owed D.invested E.consumed
D
In an accounting framework, the transaction used to record the purchase of inventory would include A.(Cash) and (Cost of Goods Sold) B.Cash and Revenue C.(Cash) and Equipment D.(Cash) and (Inventory) E.None of the above
E
The value of something that is _____ is the basic definition of an expense. A.sold B.owned C.owed D.invested E.consumed
E
The three business activities are financing, investing, and operating. Using Southwest Airlines, give an example of each type of activity.
Examples of financing activities for Southwest Airlines could include issuing stock, borrowing from banks, and paying dividends. Examples of investing activities could include purchasing new aircraft, acquiring new terminal facilities, and upgrading its computerized reservation systems. Examples of operating activities could include transporting passengers and freight
Identify those that would appear on an income statement.
Fees earned Rent expense salaries expense supplies expense
Internal Stakeholders
Individuals employed by the business. Ex: employees and managers.
What particular item of financial or operating data appears on both the income statement and the statement of stockholders' equity? What items appear on both the balance sheet and the statement of stockholders' equity? What item appears on both the balance sheet and statement of cash flows?
Net income or net loss will appear on the income statement and the statement of stockholders' equity. TheRetained Earnings and Common Stock balances at the end of the period will appear on the statement of stockholders' equity and the balance sheet. Finally, the Cash bal-ance at the end of the period will appear on the balance sheet and the statement of cash flows.
14. Billy Jessop is the owner of Valley Delivery Service. Recently, Billy paid interest of $6,000 on a personal loan of $75,000 that he used to begin the business. Should Valley Delivery Service record the interest payment? Explain.
No. The business entity concept limits the re-cording of economic data to transactions directly affecting the activities of the business. The pay-ment of the interest of $6,000 is a personal transaction of Billy Jessop and should not be recorded by Valley Delivery Servic
Land with an assessed value of $500,000 for property tax purposes is acquired by a business for $600,000. Four years later, the plot of land has an assessed value of $750,000 and the business receives an offer of $975,000 for it. Should the monetary amount assigned to the land in the business records now be increased?
No. The offer of $975,000 and the increase in the assessed value should not be recognized in the accounting records. This is consistent with the cost concept.
A business's stakeholders can be classified into capital market, product or service market, government, and internal stakeholders. Will the interests of all the stakeholders within a classification be the same? Use bankers and stockholders of the capital market as an example in answering this question.
No. The stakeholders within a group do not al-ways share the same interests. For example, bankers are primarily concerned about the ability of the business to repay its debt, including inter-est. In contrast, stockholders are more con-cerned about the long-term profitability of the business, the business's ability to pay dividends, and the future appreciation of their stock.
Why are most large companies like Apple, Pepsi, General Electric, and Intel organized as corporations?
The corporate form allows the company to obtain large amounts of resources by issuing stock. In addition, in a corpora-tion the stockholders' liability to creditors for the debts of the company is limited to their investment in the corporation. For these reasons, most large companies that require large investments in proper-ty, plant, and equipment are organized as corporations.
GAAP- Cost Concept
The cost concept initially records assets in the accounting records at their cost or purchase price. A variation on the concept is to allow the recorded cost of an asset to be lower than its original cost, if the market value of the asset is lower than the original cost. The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired. Further, the amount recorded will not be increased for inflation or improvements in market value. (An exception is the change in market value of a short-term investment in the capital stock of a corporation whose shares of stock are actively traded on a major stock exchange.)
GAAP-Going concern concept
The going concern concept assumes that a company will continue in business indefinitely. This assumption is made because the amount of time that a company will continue in business is not known. The going concern concept justifies the use of the cost concept for recording purchases, such as land. -the assumption that an entity will remain in business for the foreseeable future
1: Assume that you are considering purchasing a personal computer from __
The income statement of Dell would provide the most useful informa-tion on whether the company's business emphasis is working and, thus, whether the company will be around to provide warranty and other support services for your personal computer.
Briefly describe the nature of the information provided by each of the following financial statements: the income statement, the statement of stockholders' equity, the balance sheet, and the statement of cash flows. In your descriptions, indicate whether each of the financial statements covers a period of time or is for a specific date.
The income statement presents a summary of the revenues and expenses of a business for a specific period of time. The statement of stock-holders' equity indicates the changes in retained 2 © 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.earnings that have occurred over a spe-cific period of time. The balance sheet presents a listing of the assets, liabilities, and stockholders' equity of a business as of a specific date. The statement of cash flows presents a summary of the cash receipts and cash payments of a business entity for a specific period of time.
Elements of an Acc Sys. : Controls
The integrated financial statement approach shown in Exhibit 1 has built-in controls to ensure that all transactions are correctly analyzed, recorded, and summarized. These controls include the following: 1. The accounting equation must balance. 2. The ending cash on the statement of cash flows must equal the cash on the balance sheet. 3. The net income on the income statement must equal the net effects of revenues and expenses on retained earnings.
On October 1, Wok Repair Service extended an offer of $100,000 for land that had been priced for sale at $150,000. On December 19, Wok Repair Service accepted the seller's counteroffer of $110,000. Describe how Wok Repair Service should record the land.
The land should be recorded at its cost of $110,000 to Wok Repair Service. This is consis-tent with the cost concept.
Responsible Reporting
The reliability of the financial reporting system is important to the economy and for the ability of businesses to raise money from investors. That is, stockholders and creditors require accurate financial reporting before they will invest their money. Scandals and financial reporting frauds threaten the confidence of investors. Managers typically involved in one or both of these factors... -Failure of Individual Character. Ethical managers and accountants are honest and fair. However, managers and accountants often face pressures from supervisors to meet company and investor expectations. In many of the cases in Exhibit 13, managers and accountants justified small ethical violations to avoid such pressures. However, these small violations became big violations as the company's financial problems became worse. - Culture of Greed and Ethical Indifference. By their behavior and attitude, senior managers set the company culture. In most of the companies listed in Exhibit 13, the senior managers created a culture of greed and indifference to the truth.
Liabilities
The rights of creditors are liabilities.
Role of Accounting in business:
The role of accounting is to provide information about the financing, investing, and operating activities of a company to its stakeholders. For example, accounting provides information for managers to use in operating the business. In addition, accounting provides information to other stakeholders, such as creditors, for assessing the economic performance and condition of the company. -AKA the language of business -an information system that provides reports to stakeholders about the economic activities and condition of a business.
What is the role of accounting in business?
The role of accounting is to provide information for managers to use in operating the business. In addition, accounting provides information to other stakeholders to use in assessing the eco-nomic performance and condition of the busi-ness.
Elements of an Acc Sys. : Rules
The rules for determining what, when, and the amount recorded are derived from the eight concepts discussed in Chapter 1. These concepts are the basis of generally accepted accounting principles (GAAP), which require the recording of transactions affecting elements of the financial statements.
Statement of Cash Flows
There are sources that we get cash (job, parents, etc.) you can spend it on food, buying a laptop, or whatever you want. The statement kind of scribes all of the cash that came into the company, all the cash that went out of the company by stating the type of activity.
Elements of an Acc Sys. : Framework
Transactions must be analyzed, recorded, and summarized using a framework. The accounting equation is the basis for all such frameworks.
A limited liability company (LLC)
combines attributes of a partnership and a corporation. The primary advantage of the limited liability company form is that it operates similar to a partnership, but its owners' (or members') liability for the debts of the company is limited to their investment. Many professional practices such as, lawyers, doctors, and accountants are organized as limited liability companies.
GAAP- Unit of measure concept
concept requires that all economic data be recorded in dollars. Other relevant, nonfinancial information may also be recorded, such as terms of contracts. However, it is only through using dollar amounts that the various transactions and activities of a business can be measured, summarized, reported, and compared. Money is common to all business transactions and thus is the unit of measurement for financial reporting.
What services does eBay offer its customers?
eBay services its customers by developing a Web-based community in which buyers and sel-lers are brought together in an efficient format to browse, buy, and sell items such as collectibles, automobiles, high-end or premium art pieces, jewelry, consumer electronics, and a host of practical and miscellaneous items
the following would appear on an income statement:
exploration expenses operating expenses sales selling expenses food and packaging costs used in operations income tax expense interest expense occupancy and rent expense payroll expense sales
Both KIA and BMW produce and sell automobiles. Describe and contrast the business emphasis of KIA and BMW.
he business emphasis of KIA is a low-cost emphasis. In contrast, the business emphasis of BMW is a premium-price emphasis. The difference in emphases is directly reflected in the prices of the autos. For example, a new KIA start just over $15,000, but a new BMW starts for just over $30,000.
partnership
is owned by two or more individuals. About 10% of the businesses in the United States are organized as partnerships. Like a proprietorship, a partnership may outgrow the financial resources of its owners. Also, the partners have unlimited liability to creditors for the debts of the company.
proprietorship
owned by one individual. More than 70% of the businesses in the United States are organized as proprietorships. The frequency of this form is due to the ease and low cost of organizing. The primary disadvantage of proprietorships is that the financial resources are limited to the individual owner's resources. In addition, the owner has unlimited liability to creditors for the debts of the company.
Service Business
provide services rather than products to customers. Delta Air Lines (transportation services) The Walt Disney Company (entertainment services)
Balance Sheet
reports the financial condition as of a point in time. This is in contrast to the income statement, statement of stockholders' equity, and statement of cash flows, which report changes in financial condition for a period of time. The financial condition of a business as of a point in time is measured by its total assets and claims or rights to those assets. The financial condition of a business as of a point in time is measured by its total assets and claims or rights to those assets. -prepared using the accounting equation
Retained Earnings
the portion of a corporation's net income retained in the business. A corporation may retain all of its net income for expanding operations, or it may pay a portion or all of its net income as dividends. Since retained earnings depend upon net income, the period covered by the statement of stockholders' equity is the same period as the income statement. Changes to stockholders' equity normally involve common stock and retained earnings.
Income Statement
tracks the operational performance of the company. How well they operate that business, shows whether or not they made a profit. Net income = profit. "Did you have a good year?" reports the change in financial condition due to the operations of the company. The time period covered by the income statement may vary depending upon the needs of stakeholders.
Managerial Accounting
used to guide management in making financing, investing, and operations decisions for the company..
Statement of Equity
what the company is worth. Shows if there are changes in the net worth of the company.
A low-cost strategy
where a company designs and produces products or services at a lower cost than its competitors. Such companies often sell no-frills, standardized products and services. EX: Walmart and Southwest airlines
A premium-price strategy
where a company tries to design and produce products or services that serve unique market needs, allowing it to charge premium prices. Such companies often design and market their products so that customers perceive their products or services as having a unique quality, reliability, or image. (EX. BMW, john deer, etc.)
