Exam 2 - Financial Accounting - Intro TCU
The statement of cash flows explains changes in a firm's: a. Cash, cash equivalents, and prepaid assets b. Cash and cash equivalents c. Cash, cash equivalents, and accounts receivable d. Working capital
b. Cash and cash equivalents The statement of cash flows explains changes in a firm's "Cash and cash equivalents."
financial reporting quality: Objectives of Financial Reporting
- goal of financial accounting is to facilitate the efficient allocation of resources - financial reports provide investors, creditors, and lenders w information that is useful in making investment decisions - financial reports provide information about: company resources claims against those resources how effectively and efficiently the company deploys its resources
Financial reporting quality: Fundamental Qualities of Useful Accounting Information
- information must be relevant - must faithfully represent what it purports to represent
Laborto Inc. has an accrual basis net loss of $20,000 and the following related items: Depreciation expense: $11,000 Accounts receivable increase: 8,000 Inventory decrease: 6,000 Accounts payable decrease: 3,000 Accrued liabilities increase: 5,000 How much is Laborto's net cash flow from operating activities? Select one: a. $35,000 b. ($ 4,000) c. $1,000 d. ($13,000)
c. $1,000 Rationale: ($20,000) + $11,000 + $8,000 - $6,000 + $3,000 + $5,000 = $1,000
Stern Company's net income was $75,000 for Year 1, $81,250 for Year 2, and $69,800 for Year 3. Assume trend percentages for net income over the three-year period are computed, with Year 1 serving as the base year. The trend percentage for Year 3's net income is: a. 100.0 b. 108.7 c. 93.1 d. 73.6 e. None of these
c. 93.1
cash paid as dividends
cash flow from financing activities
issuance of common stock
cash flow from financing activities
retirement of bond
cash flow from financing activities
cash paid to purchased land
cash flow from investing activities
cash received from sale of equipment
cash flow from investing activities
Net Income
cash flow from operating activities
accounts payable increase
cash flow from operating activities
accounts receivable income
cash flow from operating activities
accrued liabilities decrease
cash flow from operating activities
amortization expense
cash flow from operating activities
depreciation expense
cash flow from operating activities
gain on sale of equipment
cash flow from operating activities
inventory decrease
cash flow from operating activities
net income
cash flow from operating activities
prepaid expenses increase
cash flow from operating activities
Financial reporting quality: comparability consistency
comparability: you are comparing 2 companies from the same time consistency: you are comparing the same company from different time periods
Financial reporting quality: verifiability
knowledge and independent individual can reach consensus
The following financial information is taken from the annual reports of the Smith Company and the Wesson Company: Smith: Net income: $10,000 Net sales: 50,000 Wesson Net income: $100,000 Net Sales: 400,000 Calculate the profit margin ratio for each company. Note: Round answers to one decimal place, if necessary (ex: 15.4%). Profit margin ratio Smith: ? Wesson: ? Which company is more profitable?
smith: 20% wesson 25% The Wesson Company is more profitable not only in an absolute sense (sales are higher) but also in a relative sense—Wesson's return on sales is higher.
Multi-Step Income Statement: Selling, general, and administrative expenses 186,000 Cost of goods sold 330,000 Interest expense 3,000 Sales Revenue 550,000 Income tax expense 10,000
Income Statement sales revenue 550,000 COGS 330,000 gross profit 220,000 (sales revenue - COGS) SG&A (186,000) Income from operations 34,000 other income expenses interest expense (3000) income b4 tax 31000 income tax 10,000 net income 21,000