Final Review Flashcards

Terms Definitions
Who invests funds into a business and is considered an owner?
stockholder
an organization that lends funds to a business entity and expects repayment of the funds ____
A creditor
financial statement that shows if a company distributed any of its profits to its shareholders
statement of retained earnings
How is the balance sheet linked to the other financial statements?
Net income increases retained earnings on the statement of retained earnings, which ultimately increases retained earnings on the balance sheet.
correct date format for balance sheet
Balance sheet - December 31, 2008
describes the term “retained earnings”
The cumulative profits earned less all dividends distributed
describes the term “assets"
The economic resources of a business entity.
financial statement that reports an entity's financial position at a specific date
balance sheet
distribution of the net income of a business to its owners
Dividends
The costs of doing business through the sale of goods and services are called
Expenses
Which concept is the reason the 'dollar' is used in the preparation of financial statements
Monetary unit
What assumption made in the preparation of financial statements?
Financial statements are prepared for a specific entity that is distinct from the entity owners.
Why is the time period assumption required?
Users demand information about the entity on a regular basis
Which one of the following activities can be performed only by certified public accountants (CPAs)?
Rendering an opinion on the fairness of financial statements
What is the primary objective of financial reporting?
To provide useful information for decision-making.
The preparation of financial statements requires that the information be understandable ____
To those willing to spend the time to understand it
Information that is material means that an error or alternative method of handling a transaction would possibly....
Would possibly affect the judgment of someone relying on the financial statements
If two amounts are about equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is characterized by this action?
Conservatism
To determine the source of a company's assets, on which financial statement will you look>
balance sheet
How are assets which are expected to be realized in cash, sold, or consumed within the normal operating cycle of a business or within one year (if the operating cycle is shorter than one year) reported on a classified balance sheet?
Current Assets
Which of the following terms characterizes the time period between the investment of cash in merchandise and the collection of cash from the sale of that merchandise?
Operating cycle
One significant difference between a classified and a non-classified balance sheet is the distinction between what?
Current and noncurrent items
For which of the following is the current ratio is most useful?
Evaluating a company’s liquidity
Liquidity relates to a company's ability to do which of the following
Pay its current debts when they come due
A question asked by stockholders is, "How much profit did the company make?" What should the stockholder examine to get the most information that will help evaluate the answer to this question?
The income statement since revenues and expenses are listed
A company need not prepare both a _____ and a ______
Statement of stockholders' equity and statement of retained earnings
What effect does the payment of weekly employee salaries have on the accounting equation?
Assets decrease and owners’ equity decreases
What effect does the purchase of office equipment on credit have on the accounting equation?
Assets increase and liabilities increase
What effect does providing services to customers for immediate payment have on the accounting equation?
Assets increase and owners’ equity increases
Norfolk Restaurant collected $20,000 each from two investors in return for shares of Norfolk Restaurant's stock as evidence of their ownership interests. Identify the effects on the accounting equation.
Assets increase and owners’ equity increases
Services are provided for customers who are sent bills for the amount they owe. Identify the effects on the accounting equation.
Assets increase and owners’ equity increases
Payment is received from customers who were billed earlier for services provided for them. Identify the effects on the accounting equation.
Assets increase and decrease
Payment is made for a computer purchased earlier on credit. Identify the effects on the accounting equation.
Liabilities decrease and assets decrease
what are the effects on the accounting equation of recognizing revenue earned by a business entity?
Assets and owners’ equity increase
Which one of the following statements best describes the effects of recognizing expenses incurred by a business entity?
A decrease to another asset or an increase to liabilities or owners’ equity.
When are revenues recognized under the accrual basis of accounting?
When earned
When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?
Under the cash basis of accounting
When is revenue from the sale of merchandise normally recognized under accrual accounting?
The revenue is recognized on the date the sale is made
Aster Company sells merchandise to customers. Aster should normally recognize revenue when......and the expenses when.....
revenue when the cash is collected and the expenses when Aster pays its creditor for the merchandise
true or false:
Assets become expenses when their economic benefits expire
true
true of false: Adjustments are necessary only if cash receipts and payments occur before or after the point in time when revenues and expenses should be recognized under the accrual basis of accounting
true
What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is recorded?
Assets decrease and owners’ equity decreases
What is the effect on the accounting equation when a company recognizes rent as earned that had previously been received in advance from customers?
Increases net income
Failure to record amounts earned for services provided to customers but not yet paid results in which of the following?
Total assets being understated
Balance sheet accounts are also known as which of the following?
Real accounts
Income statement accounts are also known as which of the following?
Nominal accounts
. Utley Inc. reported net income of $150,000 for 2007, but its cash balance decreased $40,000. Which financial statement should Utley management refer to for an explanation of this situation?
Statement of cash flows
Rollins & Co. reported net income for the current year. Which of the following business transactions would cause cash from operating activities to be higher than the amount of net income?
Depreciation expense was recorded for the year.
Cash flows from acquiring and selling products are classified as
operating activities.
Cash flows from acquiring and disposing of long-term assets are classified as
investing activities.
Cash flows from issuing and repurchasing stock or issuing and repaying (retiring) debt are classified as
financing activities.
what type of activites primarily involve transactions that affect noncurrent assets.
Investing activities .
Which balance sheet accounts are affected by operating activities?
Current assets and current liabilities
Which balance sheet accounts are affected by investing activities?
Long-term assets
Which balance sheet accounts are affected by financing activities?
Long-term liabilities and stockholders' equity
true or false: Most companies use the indirect method of preparing the operating activities section of the statement of cash flows.
true
A financial analyst is comparing two companies. Which of the following would cause major problems in the evaluation process?
The companies operate in different industries.
Horizontal analysis is analysis ____
of dollar changes and percentage changes over several years.
Which of the following is a measure of the time that it takes to convert current assets into cash?
cash to cash operating cycle
True or false: The Inventory turnover ratio is used to analyze a company's solvency
false, the Inventory turnover ratio is used to measure liquidity
Which profitability ratio requires the use of earnings per share in its calculation?
Price/earnings ratio
true or false: A decrease in the number of days' sales in receivables is not desirable
false
Which of the following solvency ratios is the best measure to determine the degree to which a company relies on outsiders for funds?
Debt-to-equity ratio
Which of the following ratios is the best measure in analyzing a company's ability to pay interest on long-term debt and to repay the long-term debt over several years?
Debt service coverage ratio
True or false: The return on assets ratio considers the investment made by all creditors and stockholders.
true
Whickerbill Gift Shop’s inventory turned over six times during the year. Similar gift shops have an inventory turnover equal to twelve times per year. What explains Whickerbill's state of inventory management?
Whickerbill needs to increase sales and decrease the amount of goods on hand.
The current ratio is larger when ....
the company is more liquid.
The acid-test ratio differs from the current ratio in that it
is a stricter test of a company's ability to pay its current debts as they are due.
Solvency and liquidity differ in a company's ability
to remain in business over a long or short period of time.
Return ratios are measures of the relationship between the
income earned and the investment made in the company by the various groups.
Newberry, Inc. wants to measure the relationship between profitability and the investment made by stockholders. Newberry should use the
return on stockholders' equity ratio.
In a vertical analysis of the income statement, the 100% amount is
total assets.
The concept of leverage is
it is appropriate to borrow if the return on the assets is greater than the cost of the financing.
Which one of the following types of inventory accounts would be used by a wholesaler or retailer?
Merchandise inventory
hich one of the following accounts most likely would appear on the income statement of a merchandise company but not on the income statement of a service company?
Cost of goods sold
The recognition of cost of goods sold expense in the same period that sales revenue is recognized from the sale of merchandise is a good example of the
matching principle.
In order to determine inventory for its balance sheet, a company must count the inventory at the end of its accounting period for
Both the periodic and perpetual inventory systems
For which type of inventory would a company most likely use the specific identification method?
Custom-designed diamond rings
During the year, prices rose. Which cost flow assumption creates the "best" current ratio?
FIFO
On January 1, 2008, the accounts receivable balance was $7,000 and the balance in the allowance for doubtful accounts was $700. On January 15, 2008, a $200 uncollectible account was written off. The net realizable value of accounts receivable immediately
6,300
If a company uses the direct write-off method of accounting for bad debts, it will record bad debt expense only when an account _____
is determined to be uncollectible
Shermanator Corp. uses the direct write-off method to account for bad debts. What are the effects on the accounting equation of the entry to record the write-off of a customer's account balance?
Assets and owners' equity decrease
Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad debts expense with revenue on the income statement?
The percentage of net credit sales approach
Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net realizable value of accounts receivable on the balance sheet?
The percentage of accounts receivable approach
Beginning accounts receivable were $10,000. All sales were on account and totaled $700,000. Cash collected from customers totaled $650,000. Calculate the ending accounts receivable balance.
60,000
The Allowance for Doubtful Accounts represents:
The difference between the face value of accounts receivable and the net realizable value of accounts receivable
What are the effects on the accounting equation when Rick E. Pooh makes the adjustment to record bad debt expense using the allowance method?
Assets and owners' equity decrease
The cumulative amount of plant and equipment already expensed is reported on the balance sheet in which account?
Accumulated Depreciation
Assets classified as property, plant, and equipment are reported at
Each asset's original cost less depreciation since acquisition
Caribou Publishing Company purchased equipment at the beginning of 2008 for $200,000. The company decided to depreciate the equipment using the straight-line method. The effect of recognizing depreciation expense for 2008 is an increase to
Accumulated Depreciation and a decrease in owners' equity
Why is land not depreciated?
Because land has an unlimited useful life.
Depreciation expense is recorded so that
Expenses are matched against revenues using a reasonable allocation method.
True or false: There is no cash outflow associated with depreciation expense.
true
Which of the following statements best describes the term “Depreciation”?
Depreciation is an effort to achieve proper matching of the cost of plant assets with the use of the plant assets to produce revenues.
Why do many companies use the Modified Accelerated Cost Recovery System of depreciation (MACRS)?
Many companies use the MACRS for tax purposes because of a desire to report higher expenses in order to pay lower taxes.
Why can you not use two differentdepreciation methods for the same asset for different reporting purposes
It is the direct result of the differing goals of financial and tax accounting.
Which of the following terms describes the method by which costs of natural resources are assigned to expense during an accounting period?
Depletion
True or false: U.S. Treasury bills with an original maturity of 6 months are considered a cash equilvalent
false
True or false: external auditors Attest to the fairness of the financial statements
true
Current liabilities are defined as those liabilities that will be satisfied
within 1 year or within the operating cycle, whichever is longer.
Current portion of long-term debt should be classified as a(n)
current liability
Authorized stock represents the
maximum number of shares that can be issued.
With regard to a corporation's stock, par value is
an arbitrary amount that exists to fulfill legal requirements.
Stockholders may prefer to invest in preferred stock because
the dividends are paid on preferred stock before they are paid on common stock.
True or false: The cost of the treasury stock reduces stockholders' equity.
True
In a statement of cash flows prepared under the indirect method, depreciation expense is reported as a(n)
Operating activity
In a statement of cash flows prepared under the indirect method, stock issued for cash is reported as a(n)
Financing activity
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Term:
Definition:
Definition:

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