Financial Accounting Midterm #1
what are parts of a Form 10-K?
- Auditor reports - Financial statements - Management's discussion and analysis
Who has primary responsibility for making sure that a company's financial statements follow GAAP?
- Chief executive officer - Chief financial officer - Management
Identify the uses of generally accepted accounting principles (GAAP)
- Companies use GAAP when preparing financial statements. - Auditors need to be sure the financial statements are prepared in accordance with GAAP.
Miss Step, the bookkeeper, forgot to record the adjusting entry for supplies used during the period. This will cause which of the following on the balance sheet?
- Current assets will be overstated. - Retained earnings will be overstated. - Supplies will be overstated.
what are are major actors involved in ensuring the integrity of financial statements of a publicly-traded company?
- Management - Board of Directors - SEC - PCAOB - Independent Auditors
Net income statements
- Net income equals revenues earned minus expenses incurred, regardless of whether cash was collected or paid. - Net income on the income statement rarely equals cash flows from operating activities on the statement of cash flows.
Who are the external users of accounting information?
- Private investors - Institutional investors - The current and potential creditors
If there is an error in recording an adjusting entry on the income statement causing Net Income to overstated, then ______.
- Retained Earnings on the statement of stockholders' equity will be overstated - Total stockholders' equity on the balance sheet will be overstated
what appear on a statement of stockholders' equity?
- Retained earnings from the prior period - Net income - Dividends declared - Common stock
Why is it necessary to make adjustments to revenue accounts at the end of the accounting period?
- Revenues earned at the end of the period, but not yet billed to Accounts Receivable, should be recorded as a revenue. - Payments received in advance, and originally recorded as a liability, should be reduced for any portion earned during the current period.
Identify various sources of financial information for the investing public.
- SEC's EDGAR Service - Financial analysts' earnings forecasts - Companies' Websites
Which of the following would be found under Cash Flows from Investing Activities?
- Sales of productive assets - Purchases of productive assets - Investments in other companies
What are similarities and differences in the annual report and the 10-K report ?
- The 10-K includes significantly more information than the annual report - Both include the Report of Independent Accountants (Auditor's Opinion) - Both include the four basic financial statements
Why are the adjustments important to the preparation of the financial statements?
- Unadjusted financial statements could present a misleading and incomplete picture of the company's financial results. - Adjustments ensure that the revenues earned and expenses incurred during the period are reflected in the income statement. - Adjustments ensure that the balance sheet reports all of the economic resources the company owns and all of the obligations the company owes.
As of December 31, the unadjusted balance in Unearned Revenue contains $5,600 for unredeemed gift cards. An analysis of the monthly sales indicates that $3,200 worth of gift cards were redeemed during the month but not yet recorded. How will these transactions affect the adjustments at the end of the period?
- Unearned Revenue needs to be decreased by the amount of gift cards redeemed during the month. - Sales Revenue needs to be increased by the amount of gift cards redeemed during the month.
Profit is ______.
- a measure of performance - called net income
Although the unadjusted trial balance's debits equal credits, some balances are not properly stated because ______ have not yet been recorded.
- adjusting entries - some revenues earned - some expenses incurred
Adjusting entries are required before financial statements are prepared to ensure that ______.
- all revenues earned during the period are recorded - all expense incurred during the period are recorded
For accounting information to be relevant, the information should ______.
- allow users to predict future events of the business - allow users to assess past activities of the business
he notes to financial statements ______.
- are an integral part because the financial statements do not contain all the necessary details - provide supplemental information about the financial condition of a company - along with the financial statements provide a more complete picture of a company's financial health
Adjusting entries ______.
- are needed in order to measure the period's net income or loss - update the accounts to their proper balances
Careful consideration is taken when making changes in GAAP ______.
- because they may affect selling prices of public companies' stock - and is actively debated before the changes are required
A closing entry may include a ______.
- credit to Wages Expense - debit to Sales Revenue
When determining the effect of a transaction on a financial ratio, the steps include ______.
- determine if the accounts affected are included in the financial statement subtotals or totals in the ratio's numerator - journalize the transaction to see what accounts are affected - determine if the accounts affected are included in the financial statement subtotals or totals in the ratio's denominator
What is included in the general journal
- is where the effects of each transaction is recorded chronologically - does not provide account balances - is where transactions are first recorded
The purpose of an independent auditor's report is to ______.
- provide assurance that the financial statements represent what they claim to represent - reduce the risk that the company's financial condition is misrepresented in the financial statements
Press releases and conference calls are used by companies to ______
- provide timely information for external users - to limit the possibility of selective leakage of information - announce quarterly and annual earnings
The notes to financial statements may include ______.
- revenues broken out by geographic region - relevant information, not disclosed on the statements - segment information - accounting policies applied
Accrual accounting results in recording ______.
- revenues when earned regardless of when collected - expenses when incurred regardless of when paid
A classified income statement is useful to financial statement users because it____
- separates cost of goods sold from other operating expenses, which allows the calculation of gross profit - presents income statement items in meaningful categories
Accumulated amortization is ______.
- similar to depreciation except it is netted against intangible assets instead of tangible assets - a contra-asset account similar to accumulated depreciation
The two principles underlaying the transaction analysis process
1. every transaction effects at least two accounts, and identify the effect is crucial (increase or decrease) 2. the accounting equation must remain in balance after each transaction
Rank the following steps applied in ethical decision making in the proper order, beginning with the first step.
1. identify the benefits of the decision and who will be harmed 2. identity the alternative courses of action 3. evaluate the courses of actions in terms of what you would like your friends and family to see
The income statement reports ______.
1. the profitability of the company for the accounting period 2. how well the company performed during the accounting period 3. the revenues minus the expenses for the accounting period
how many financial statements does a company prepare in a finance period
4
What would appear only on accrual-based, and not on cash-based, financial statements?
Accounts receivable on the balance sheet and Unearned revenue on the balance sheet
Mixed-Attribute Measurement Model
Applied to measuring different assets and liabilities of the balance sheet.
Why is the Unearned Revenue account reduced during the adjustment process?
As the revenue is earned, it is removed from the Unearned Revenue account and transferred into a revenue account.
Financial Equation
Assets = Liabilities + Stockholders' Equity
The adjusting entry to record revenues earned, but not yet billed (accrued revenues), affects which of the following financial statements?
Balance sheet Income statement Statement of stockholders' equity
What does a business typically receive when it issues stock to owners?
Cash
Under which of the following circumstances would cash basis accounting report higher expenses than accrual basis accounting in the current accounting period?
Cash is paid in advance of services being provided
Public companies file their quarterly reports on the SEC's ______.
Form 10-Q
Which financial statement is a company's primary measure of profit?
Income statement
Relevant Information
Information that can influence a decision; it has predictive and/or feedback value.
Who are the external users of accounting information?
Institutional investors The current and potential creditors Private investors
what do investors hope to gain?
Investors hope to receive dividends and to sell their shares at a higher price. Borrowers are legally obligated to pay creditors interest, not dividends, and repay the principal.
What are the basic decisions made by external users of accounting information?
Lending decisions Investing decisions
Which items appear on a balance sheet?
Liabilities Assets Stockholders' Equity Property, plant and equipment Inventories Accounts payable
Institutional Investors
Managers of pension, mutual, endowment, and other funds that invest on the behalf of others.
Net profit formula
Net Income = Total Revenue — Total Expenses
What information appears on the statement of stockholders' equity?
Net income Dividends Beginning balance of retained earnings Ending balance of retained earnings
return on assets (ROA)
Net income divided by average assets
Miss Step, the bookkeeper, forgot to record the adjusting entry for some accrued expenses during the period. This will cause which of the following items on the statement of stockholders' equity to be in error?
Net income will be overstated. Ending retained earnings will be overstated.
The Statement of Comprehensive Income includes items in which order?
Net income, Other comprehensive income items, Comprehensive income.
Deferred (Unearned) Revenues
Previously recorded liabilities (from collecting cash from customers in the past before the company provides goods or services to customers) that need to be adjusted at the end of the period to reflect the amount of revenue earned by providing goods or services over time to customers.
Accrual Basis Accounting
Records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments.
The ability to confirm past events and to predict future activities are components of which primary qualitative characteristic?
Relevant information
Faithful Representation
Requires that the information be complete, neutral, and free from error.
What are the 2 accounting principles underlying accrual accounting
Revenue and Expense recognition
Public companies issuing securities in the United States are required to file a number of detailed financial reports with the ______.
Securities and Exchange Commission
Identify the ways in which a business may be organized.
Sole proprietorship Corporation Partnership
Which financial statement shows the changes in equity accounts during the accounting period?
Statement of stockholders' equity
Monetary Unit Assumption
States that accounting information should be measured and reported in the national monetary unit without any adjustment for changes in purchasing power.
Separate Entity Assumption
States that business transactions are separate from the transactions of the owners.
Going Concern Assumption
States that businesses are assumed to continue to operate into the foreseeable future (also called the continuity assumption).
When a business issues common stock, what does it give to its owners?
Stock certificates
the Audit Committee
The Audit committee of the board of directors must consist of non-management, independent directors with financial knowledge and is responsible for hiring the independent auditors
Securities and Exchange Commission (SEC)
The U.S. government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements. - oversees financial reporting by US public companies - oversees the US stock exchanges
Cost (Historical Cost)
The cash-equivalent value of an asset on the date of the transaction.
Accounting Entity
The organization for which financial data are to be collected.
a true statement about the post closing trial balance
The post-closing trial balance is an internal report prepared as the last step in the accounting cycle.
Public Company Accounting Oversight Board (PCAOB)
The private sector body given the primary responsibility to work out detailed auditing standards.
Financial Accounting Standards Board (FASB)
The private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles.
Transaction Analysis
The process of studying a transaction to determine its economic effect on the business in terms of the accounting equation.
Statement of Stockholders' Equity
The statement reports the changes in each of the company's stockholders' equity accounts during the period.
What is the purpose of the audit report?
To add credibility to the financial statements.
Which of the following accounting cycle steps describes the process of recording journal entries?
Transactions are recorded chronologically showing the accounts debited along with the corresponding accounts credited
Paid dividends
a negative cash flow - financing activity
Purchase of equipment
a negative cash flow - investing activity
Purchase inventory
a negative cash flow - operating activity
Cash collected from customers
a positive cash flow - operating activity
Reporting revenues when they are earned and expenses when they are incurred is called _____ basis accounting
accrual
The SEC's "Fair Disclosure" requires publicly traded companies to provide access to ______.
all important company news
If a company debits Interest Receivable and credits Interest Revenue, it must be recording ______.
amounts earned from its investments but not yet collected
How often is a 10 k filed
annually
IFRS and US GAAP ______.
are similar but have differences that are currently being resolved with the aim of having one set of standards
If a real estate company fails to record the amount of commission revenue it has earned but not yet collected, then ______.
assets are understated and net income is understated
A balance sheet shows ______.
assets, liabilities, and stockholders' equity at a single point in time
when are adjusting entries made
at the end of the period
Reporting revenues only when cash is received and expenses only when cash is paid is called the _____ basis accounting.
cash
The statement of stockholders' equity reports the ______.
changes in earnings and dividends for a specified period of time
Income before income tax expense is an important measure of financial performance as it allows investors ______.
compare companies' pretax levels of income
During the closing process, the closing entry to reduce the sales revenue normal account balance to zero requires the revenue account be...
debited
Cash basis accounting may be used by organizations that ______.
do not need to report to external users
The main goal of US GAAP is to ______.
ensure that companies produce useful information for users of financial statements
A net loss is reported when ______. Multiple choice question.
expenses are greater than revenues
The purpose of a balance sheet is to report the ______.
financial position of a business at a particular point in time
what financial statement is a company's primary measure of profit?
income statement
When a company gives common stock to an investor, the effect is to ______.
increase stockholders' equity
If a company reports Amortization Expense for the period, it must have ______.
intangible assets on its balance sheet
The board of directors gets their job how? and does what?
is elected by the stockholders and is responsible for ensuring that processes are in place for maintaining the integrity of the company's accounting records.
To determine how transactions affect ratios, such as the the effect of purchasing land for cash on a company's current ratio, you need to ______.
know the journal entry and its effect on the ratio's numerator and denominator and then evaluate the combined effect
Assets are listed in order of ______ and liabilities are in order of ______ on the balance sheet
liquidity and due dates
Property and equipment, net is reported on the balance sheet at the ______.
net book value
The net profit margin ratio is calculated by dividing net income by ______.
net sales
Net income ______.
on the income statement causes retained earnings to increase on the statement of stockholders' equity
The statement of stockholders' equity is ______.
one of the four financial statements usually prepared by profit-making organizations
How often is an 8k filed
only as needed
what activities are the primary sources of revenue and expenses involved in running a business.
operating activities
Borrow from a bank
positive cash flow - financing activity
Sale of equipment
positive cash flow - investing activity
How often is a 10 q filed
quarterly
Corporate governance
refers to procedures designed to ensure that the company is managed in the interests of the shareholders.
comparative financial statements
report financial statement values for the current period and one or more other prior period
The two principles underlying accrual accounting are the ______ and _____ recognition principles.
revenue and expense
Enter one word for each blank. The five elements of the accounting equation are.
stockholders' equity assets liabilities revenues expenses
IFRS are ______.
the International Financial Reporting Standards
To see the detail of increases and decreases in a company's Cash account, you should look at ______.
the company's general ledger
notes
the notes to the financial statements are an integral part of the financial statements and provide a more complete understanding of the company
Are Operating activities are the primary sources of revenue and expenses involved in running a business.
true
True or false: Comparative financial statements include separate columns for more than one period's results. True false question.
true
True or false: Operating activities are the primary sources of revenue and expenses involved in running a business.
true
True or false: The SEC, FASB, external auditors, and management of companies are involved in ensuring the integrity of financial statements.
true
