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MGT8803 > Financial Accounting > Flashcards

Financial Accounting Flashcards

1
Q

What are the 2 forms of Business we’re discussing in the class?

A

Proprietorship & Partnership and Corporation

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2
Q

What are the Tax and Liability implications of a Proprietorship & Partnership?

A

Unlimited Liability, No Taxation

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3
Q

What are the liability and tax implications for a Corporation

A

Limited Liability and the Corporation is taxed

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4
Q

What is the Separate Entity assumption?

A

We treat the business and the owners as separate entities, focusing on the accounting for the businesses, not the owners.

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5
Q

What is the Unit of Measurement assumption?

A

The currency in which the company is operating.

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6
Q

What is the Going Concern assumption?

A

We presume that the company will continue to operate.

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7
Q

What is the Periodicity assumption?

A

We presume that we can arbitrarily pick any time period that we want to and report the financial results for that time period.

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8
Q

What is the Materiality assumption?

A

The only information that needs to be disclosed in financial statements is information that will be useful for those who rely on the financial statements to make decisions.

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9
Q

Who are users of financial reports?

A

Investors (stockholders)
Creditors (banks)
Government Agencies (SEC)
Company Management
Financial Analysts

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10
Q

What are the 6 qualities of financial statements?

A

Understandability
Timeliness
Full disclosure
Comparability
Objectivity
Decision relevance

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11
Q

What are the required financial statements?

A

Balance sheet
Income statement
Statement of cash flows

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12
Q

What is the Accounting Formula?

A

Assets = Liabilities + Owners’ Equity

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13
Q

What is the definition of Assets?

A

Resources owned or rights to receive resources.

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14
Q

What are 3 types of assets?

A

Physical - cash, buildings, inventory, equipment
Intangible - copyrights, patents, trademarks
Legal rights - right to receive payment

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15
Q

What are some common asset accounts?

A

Cash
Accounts/Notes receivable
Inventory
Investments
Buildings & Equipment
Copyrights/patents

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16
Q

How are assets ordered on the balance sheet?

A

In order of most liquid to least liquid. Cash first. Intabgibles last.

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17
Q

What are the 4 types of Valuation?

A

Historical Cost
Sales Value
Replacement Cost
General Price-level adjustment cost

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18
Q

What valuation is given by the Cost Principle?

A

Assets are valued at their historical cost

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19
Q

What are liabilities?

A

Obligations owed to creditors

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20
Q

What are common types of liability accounts?

A

Accounts/notes payable
Interest payable
Accrued Sales
Deferred (unearned) Revenues

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21
Q

Classified balance sheets break assets and liabilities into what categories?

A

Current Assets/Liabilities (less than 1 year) and Long Term Assets/Liabilities

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22
Q

What is Capital Stock?

A

What the company received when selling shares of its stock

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23
Q

What are retained earnings?

A

Accumulated earnings - dividends

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24
Q

What are dividends?

A

Distribution of earning that occur when the board of directors decide to give the shareholders a bone

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25
Q

What is the formula for retained earnings??

A

Beginning Retained Earnings
+ Net Income
- Dividends

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26
Q

What is the formula for (simplified) Statement of Stockholders’ Equity?

A

Beginning Stockholders’ Equity
+ Net Income
- Dividends
+ Issuance of Capital Stock

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27
Q

Classify the account: Cash

A

Current Asset

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28
Q

Interest Expense

A

Expense

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29
Q

Sales Returns

A

Contra-Revenue

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30
Q

Wages Payable

A

Current Liability

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31
Q

Taxes Payable

A

Current Liability

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32
Q

Marketable Securities

A

Current Asset

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33
Q

Mortgage Payable

A

Long Term Liability

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34
Q

Common Stock Paid in Capital

A

Equity

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35
Q

Rent Expense

A

Expense

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36
Q

Deferred Revenues

A

Current Liability

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37
Q

Interest Payable

A

Current Liability

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38
Q

Discount on Bonds Payable

A

Contra-Liability (Long Term)

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39
Q

Common stock at part value

A

Equity

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40
Q

Prepaid Expenses

A

Current Asset

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41
Q

Allowance for Doubtful Accounts

A

Contra-Asset (Current)

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42
Q

Retained Earnings

A

Equity

43
Q

Land

A

Long term asset

44
Q

Bonds Payable

A

Long term liability

45
Q

Treasury Stock

A

Contra-Equity

46
Q

Sales

A

Revenue

47
Q

Premium on Bonds Payable

A

Long Term Liability

48
Q

Dividends Payable

A

Current Liability

49
Q

Bad Debt Expense

A

Expense

50
Q

Salaries Expense

A

Expense

51
Q

Building and Equipment

A

Long Term Asset

52
Q

Current Portion of Mortgage Payable

A

Current Liability

53
Q

Cost of Goods Sold (COGS)

A

Expense

54
Q

Sales Discounts

A

Contra-Revenue

55
Q

Inventory

A

Current Asset

56
Q

Goodwill

A

Long Term Asset

57
Q

Depreciation Expense

A

Expense

58
Q

Current Portion of Bonds Payable

A

Current Liability

59
Q

Salaries Payable

A

Current Liability

60
Q

Utilities Expense

A

Expense

61
Q

Interest Revenues

A

Revenue

62
Q

True or False: A Balance sheet shows the claims owners have against the assets of the firm

A

TRUE

63
Q

True or False: Depreciation is a liability on the Balance Sheet

A

FALSE

64
Q

True or False: Intangible assets are NOT an an example of a current asset

A

TRUE

65
Q

What is the formula for Net Income Before Interest and Taxes?

A

Income before Interest and Taxes = Gross Margin - Operating Expenses

Gross Margin = Sales - COGS

66
Q

True or False: A firm’s balance sheet provides a representation of the current market value for the company

A

FALSE

67
Q

A Balance sheet dated December 31, 2021 represents the financial position of the firm when.

A

Only for December 31, 2021

68
Q

Describe the accounting equation without using the formula

A

Resources of the firm equal the creditor’s and owner’s claim to those resources

69
Q

What is accrual basis accounting?

A

In this form of accounting, revenues are recognized when earned rather than when the cash is collected

70
Q

True or False: The income statement represents a snapshot of the firm’s account balances at a point in time

A

FALSE that’s the balance sheet

71
Q

What is the effect on assets and liabilities on the payment of a liability?

A

Assets decrease and Liabilities decrease

72
Q

What is the formula for the Interest Coverage ratio?

A

Earnings before interest and taxes /
Interest expense

73
Q

What is the formula for Return on Assets?

A

Net Income / Average total Assets

74
Q

What is the formula for the Current Ratio?

A

Total current assets / Total Current Liabilities

75
Q

What is the formula for the Quick Ratio?

A

Cash + Marketable Securities + Receivables / Total Current Liabilities

76
Q

What is the formula for Return on (Average) Assets?

A

Net Income / Average total assets

77
Q

What is the formula for Asset Turnover Ratio?

A

Sales / Average Total Assets

78
Q

What is the formula for Gross Margin %?

A

Net income / Sales

79
Q

What is the formula to determine retained earnings?

A

RE = RE_beginning - Net Income - Dividend

80
Q

How do you calculate a new Bad Debt Expense?

A

It’s the weighed average of the amount receivable to get the ending allowance, then subtract the current balance in the allowance to get the bad debt expense.

81
Q

How do you determine the gain or loss on a bond if it’s retired early?

A

Cash required to retire the bonds - carrying value of the bonds

82
Q

How do you determine the dividends received by Common Shareholders?

A

The common shareholders get what’s left after the premium shareholder’s percent and anything that was retained get paid out.

83
Q

How do you calculate total stockholder’s equity from the following accounts: Common Stock, Paid-In Capital in Excess of Par, Retained Earnings, Treasury Stock

A

Common Stock + Paid-In Capital in Excess of Par + Retained Earnings - Treasury Stock

84
Q

How do you Calculate Goodwill?

A

Goodwill Created = total amount paid - total fair value (Assets - Liabilities)

85
Q

If bonds are issued at a PREMIUM, the stated interest rate is what in relation to the market rate of interest?

A

The stated interest rate for the bond is HIGHER than the market rate of interest

86
Q

Financial statements must be consolidated when a company owns more than what percent of another company?

A

More than 50% of another company

87
Q

Who owns the retained earnings of a firm?

A

The common shareholders

88
Q

The direct write off approach for uncollectible accounts is…

A

inconsistent with the matching principle

89
Q

If company A is a wholly owned subsidiary of Company B with their own ledgers, who should prepare the consolidated financial statements?

A

Only Company B

90
Q

In periods of RISING prices, FIFO produces…

A

A lower cost of goods sold, higher net income, higher ending inventory costs, and higher gross margins

91
Q

When do Contingent liabilites need to be recorded as a liability?

A

Only when the loss is probable and can be reasonably estimated.

92
Q

If 25% of the common stock of an investee company is purchased as an investment, what is the appropriate method of accounting for the investment?

A

The Equity Method

93
Q

How should ownership of <20% of a company’s stock be reported on the financial documents?

A

It should be the same as Short-Term Investments

94
Q

For Software Development, when should the R&D costs be expensed?

A

Software R&D are expensed until “technological feasibility” is reached. Then it can be capitalized and amortization begins on General Release.

95
Q

What is the formula for Working Capital?

A

Working Capital = Current Assets - Current Liabilities

96
Q

What is the Face Value of a bond?

A

Amount to pay when the bond matures (not necessarily the initial selling price of the bond)

97
Q

What is the carrying value of a bond?

A

Bonds Payable +/- Premium/Discount

98
Q

What are 4 properties of Bonds?

A
  1. Must repay bonds
  2. Must pay interest
  3. Interest reduces net income
  4. No dilution of ownership
99
Q

What are 4 properties of Capital Stock?

A
  1. No repayment of stock
  2. Need not pay dividends
  3. Dividends DO NOT reduce net income
  4. Dilutes ownership
100
Q

What are the 4 types of Ratios?

A
  1. Liquidity
  2. Capital Adequacy (Financial Leverage)
  3. Asset Quality (Asset Management)
  4. Earnings (Profitability)
101
Q

Current Ratio and Quick Ratio measure what?

A

They are liquidity Ratios

102
Q

True of False: Liquidity Ratios >1 are better

A

TRUE This shows that the company is liquid enough to cover it’s current liabilities

103
Q

The Debt Ratio and the Interest Coverage Ratio are what types of ratios?

A

Capital Adequacy Ratios

MGT8803 (4 decks)

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