Session 2

Question 1

Accrual Accounting

Answer 1

Recognition of revenue when earned and the matching of expenses when incurred

Question 2

Transaction Analysis

Answer 2

The process of identifying impacts of transactions and events on the balance sheet, income statement, or both.

Question 3

Deferred (unearned) revenue

Answer 3

A liability representing revenues received in advance.

Question 4

Asset

Answer 4

Economic resources of an entity that are owned, will provide future benefits, and can be reliably measured.

Question 5

What certain resources are expensed as incurred due to difficulty in measuring?

Answer 5

Internal R&D and advertising. Internally developed trade marks.

Question 6

How are assets reported?

Answer 6

Listed in order of liquidity.

Question 7

Current asset

Answer 7

Assets that can be converted to cash within a year.

Question 8

Noncurrent asset

Answer 8

(long-term assets) cannot be easily converted to cash within a year.

Question 9

How are liabilities reported?

Answer 9

Listed in order of maturity.

Question 10

Liabilities

Answer 10

The obligations or debts that an entity must pay in money or services at some time in the future because of past transactions or events.

Question 11

Current liabilities

Answer 11

Come due in less than a year

Question 12

Noncurrent (long term) liabilities

Answer 12

Come due after a year

Question 13

Net Working Capital

Answer 13

Current Assets - Current Liabilities

Question 14

Liquidity

Answer 14

How much cash a company has, how much is expected, and how much it can raise with short-term notice.

Question 15

Current Ratio

Answer 15

Current Assets / Current Liabilities

Question 16

Working Capital Ratio

Answer 16

Net Sales / Average Working Capital

Question 17

Tactics for more efficient use of working capital

Answer 17

Increase trade credit to minimize the cash invested in inventories

Reduce inventory levels by improved production systems and management

Decrease accounts receivable by better collection procedures

Question 18

Equity consists of:

Answer 18

Contributed Capital

Earned Capital (includes accounts besides retained earnings)

Question 19

Contributed capital makeup

Answer 19

Preferred stock
+ Paid in capital
- Treasury stock
= Contributed capital

Question 20

What is the relationship between par value and the market value of stock?

Answer 20

There is no relationship. Par value is just a legal value only.

Question 21

Shares of stock make up

Answer 21

Authorized - in articles of incorporation

Issued - sold to public in one time or another
- Treasury Shares
= Outstanding Shares

Question 22

Accumulated Other Comprehensive Income

Answer 22

All changes in stockholder’s equity excluding investments by owner’s and distributions to owners (dividends)

Example: Available for sale securities

Question 23

Available-for-sale securities

Answer 23

Investments in securities that management intends to hold for capital gains and dividend income, although it may sall them if the price is right.

Question 24

Retained Earnings equation

Answer 24

Beginning retained earnings
+ Net income
- Dividends
= Ending Retained Earnings

Question 25

Net Sales

Answer 25

Gross Sales

• sales discounts
• sales returns/alowances

Question 26

Gross Profit calculation

Answer 26

Net sales - Cost of Goods Sold

Question 27

Operating Income

Answer 27

Net Sales - Operating Expenses

Question 28

Operating Expenses

Answer 28

The usual and customary costs that a company incurs to support its main business activities

Question 29

Nonoperating Expenses

Answer 29

Relate to company’s financing and investing activities