Accounting 201Final Exam Flashcards
Activity-based method
Allocates an asset’s cost based on its use.
Addition
Occurs when a new major component is added to an existing asset.
Amortization
Allocation of the cost of an intangible asset over its service life.
Asset turnover
Net sales divided by average total assets, which measures the sales per dollar of assets invested.
Basket purchase
Purchase of more than one asset at the same time for one purchase price.
Big bath
Recording all losses in one year to make a bad year even worse.
Book value
Equal to the original cost of the asset minus the current balance in Accumulated Depreciation.
Capitalize
Record an expenditure as an asset.
Capitalized interest
Interest costs recorded as assets rather than interest expense.
Copyright
An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.
Declining-balance method
An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.
Depletion
Allocation of the cost of a natural resource over its service life.
Depreciation
Allocation of the cost of a tangible asset over its service life.
Franchise
Local outlets that pay for the exclusive right to use the franchisor company’s name and to sell its products within a specified geographical area.
Goodwill
The value of a company as a whole, over and above the value of its identifiable net assets. Goodwill equals the purchase price less the fair value of the net assets acquired.
Impairment
Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation).
Improvement
The cost of replacing a major component of an asset.
Intangible assets
Long-term assets that lack physical substance, and whose existence is often based on a legal contract.
Land improvements
Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation.
Material
Large enough to influence a decision.
Natural resources
Assets like oil, natural gas, and timber that we can physically use up or deplete.
Patent
An exclusive right to manufacture a product or to use a process.
Profit margin
Net income divided by net sales; indicates the earnings per dollar of sales.
Repairs and maintenance
Expenses that maintain a given level of benefits in the period incurred.
Residual value
The amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value.
Return on assets
Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets.
Service life
How long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life.
Straight-line method
Allocates an equal amount of depreciation to each year of the asset’s service life.
Trademark
A word, slogan, or symbol that distinctively identifies a company, product, or service.
What are categories of Long-Term Assets
1) Property, Plant and Equipment = Land, land improvements, buildings, equipment, and natural resources. = Physical substance.
2) Intangible Assets = Patents, trademarks, copyrights, franchises, and goodwill = Lacks physical substance.
What is the equation used to Identify and record the major types of Property, plant, and equipment?
Cost + All expenditures necessary to get the asset ready for use
When you purchase intangible assets like patents, copyrights, trademarks, or franchise rights from other entities how do you record them?
Record purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use.
When you create intangible assets internally through research and development or advertising how do you record them?
Most of the costs for internally developed intangible assets are expensed to the income statement as they are incurred.
What are the accounting treatment of expenditures after acquisition? (List of expenditures: Repairs and maintenance, additions, improvements, or litigation costs)
1) Capitalize as an asset if it increases future benefits.
2) Expense if it benefits only the current period.
How do you calculate the depreciation of property, plant, and equipment.
Cost incurred to purchase an asset (future benefit) allocation of a portion of the asset’s cost to an expense over all periods benefited.
I.E. $1200 quarterly is $400 ever 3 months.
Define intangible assets subject to amortization:
Assets having a finite useful life that we can estimate.
I.E. Patents, Copyrights, Franchises.
Define intangible assets not subject to amortization:
Assets having indefinite useful lives.
I.E. Goodwill, Trademarks.
What are three ways to dispose of assets and the result?
1) Sale = Can result in either a gain or a loss.
2) Retirement = Occurs when a long-term asset is no longer useful but cannot be sold.
3) Exchange = Occurs when two companies trade assets.
To maximize profitability, a company ideally strives to increase both net income per dollar of sales (profit margin) and sales per dollar of assets invested (asset turnover). How? Mathematically?
Analyze the relation between Return on Assets, Profit Margin and Asset Turnover to analyze the profitability of a company’s assets.
Return on Assets = Profit Margin x Asset Turnover Net Income/Average
Total Assets = Net Income/ Net Sales x Net Sales/Average Total Assets.
Asset Impairment…. Impairment occurs when the future cash flows (future benefits) generated for a long-term asset is
Impairment loss = Asset’s book value (-) its fair value
Which of the following correctly describes the nature of depreciation?
A) Depreciation represents the valuation of property, plant, and equipment over its service life.
B) Depreciation represents the valuation of an intangible asset over its service life.
C) Depreciation represents the allocation of the cost of property, plant, and equipment over its service life.
D) Depreciation represents the allocation of the cost of an intangible asset over its service life.
C
Which of the following expenditures should be recorded as an asset?
A) Interest during the construction period of a new building.
B) Repair of a machine.
C) Property taxes incurred on an existing building.
D) Depreciation during the first year of an existing building.
A
Which of the following depreciation methods typically results in the highest depreciation expense during the first year of an asset’s life?
A) Straight-line method.
B) Activity-based method.
C) Double declining balance method.
D) Each method will result in the same depreciation during the first year.
A
Weiss Company purchased a new machine and incurred the following costs: Cost of Machine $50000
Sales Tax 8% $40000 Shipping $3000
Installation $2000
Depreciation during first month $1000
What is the total recorded cost of the new machine?
A) $60,000.
B) $59,000.
C) $57,000.
D) $50,000.
B
Accumulated depreciation is A) An expense account. B) An asset. C) A contra-asset. D) A liability.
C
The original cost of a piece of equipment was $100,000. The equipment was depreciated using the straight-line method with annual depreciation of $20,000. After two years, the fair value of the equipment is $82,000. How much is the book value of the equipment at the end of the second year? A) $100,000. B) $82,000. C) $80,000. D) $60,000.
D
Which of the following is properly recorded as an intangible asset? A) An internally developed trademark. B) A piece of land. C) A purchased patent. D) An internally developed copyright.
C
Over the entire service life of an asset, which depreciation method records the highest total depreciation?
A) The straight-line method.
B) The double declining method.
C) The activity-based method.
D) All the methods result in the same total depreciation.
D
Equipment originally costing $100,000 has accumulated depreciation of $65,000. If it is sold for $30,000, the company should record: A) A loss of $5,000. B) A gain of $5,000. C) A loss of $70,000. D) A gain of $70,000.
A
If equipment is retired, which of the following accounts would be debited? A) Accumulated depreciation. B) Depreciation expense. C) Equipment. D) Cash.
A
Acid-test ratio
Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.
Commercial paper
Borrowing from another company rather than from a bank.
Contingencies
Uncertain situations that can result in a gain or a loss for a company.
Contingent gain
An existing uncertain situation that might result in a gain.
Contingent liability
An existing uncertain situation that might result in a loss.
Current liabilities
Debts that, in most cases, are due within one year. However, when a company has an operating cycle of longer than a year, its current liabilities are defined by the length of the operating cycle, rather than by the length of one year.
Current portion of long-term debt
Debt that will be paid within the next year.
Current ratio
Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.
Debt covenant
An agreement between a borrower and a lender that requires that certain minimum financial measures be met or the lender can recall the debt.
FICA taxes
Based on the Federal Insurance Contribution Act; tax withheld from employees’ paychecks and matched by employers for Social Security and Medicare.
Fringe benefits
Additional employee benefits paid for by the employer.
Liability
A present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past.
Line of credit
An informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork.
Liquidity
Having sufficient cash (or other assets convertible to cash in a relatively short time) to pay currently maturing debts. Refers to a company’s ability to pay its current liabilities.
Notes payable
Written promises to repay amounts borrowed plus interest.
Quick assets
Includes only cash, current investments, and accounts receivable.
Sales tax payable
Sales tax collected from customers by the seller, representing current liabilities payable to the government.
Unearned revenue
A liability account used to record cash received in advance of the sale or service.
Unemployment taxes
A tax to cover federal and state unemployment costs paid by the employer on behalf of its employees.
Working capital
The difference between current assets and current liabilities
What is Liability?
A present responsibility to sacrifice assetsin the future due to a transaction or other eventthat happened in the past.
What is a defines a current liability?
Current liabilities are usually, but not always, duewithin one year. Notes payable, accounts payable,and payroll liabilities are the three main categories.
If a company has an operating cycle longerthan one year, its current liabilities are defined by:
the operating cycle rather than by the length of ayear.
Current liabilities are also sometimes called?
short term liabilities.
What distinguishes between current and long-term liabilities when reporting liabilities?
One Year of Payable Dues. Less = Current. More = Long
Current liabilities are payable?
within one year.
Long term liabilities are payable?
longer than one year.
Distinguishing between current and long-termliabilities helps investors and creditors assess?
Risk
Companies often prefer to report a liability aslong-term because it may cause the firm toappear?
Less Risky
Many companies list notes payable first, followedby accounts payable, and then other currentliabilities?
from largest to smallest.
oA company borrowing cash (borrower) from a bank is required to sign a note promising to repay the amount borrowed plus interest.
What’s the accounting definition?
Notes Payable
The borrower reports its liability as?
Notes Payable
Small firms rely heavily on what type of financing?
short-term financing
Large companies also use short-term debt as a significant part of their?
capital structure
Prior to depositing a monthly payroll check, an employer withholds?
- Federal and state income taxes,
- Social Security and Medicare,
- Health, dental, disability, and life insurance premiums, and- Employee investments to retirement or savings plans.
As an employer, the costs of hiring an employee are higher than the salary.
What are other significant costs?
- Federal and state unemployment taxes,
- The employer portion of Social Security and Medicare,
- Employer contributions for health, dental, disability, and life insurance,
- Employer contributions to retirement or savings plans.
Additional current liabilities companies report:
Unearned revenues
- Sales taxes payable
- The current portion of long-term debt
- Deferred taxes
An existing, uncertain situation that might result in a loss is called a?
Contingent liability
What are examples of Contingent liabilities.
Lawsuits, product warranties, environmental problems, and premium offers
A contingent liability may not be a liability at all. Whether it is, depends on?
Whether an uncertain event that might result in a loss occurs or not.
As the auditor, you could choose one of three options to report the contingent liability situation:
1) report a liability for the full $100 million or for some lesser amount.
2) provide full disclosure in a financial statement footnote but not report a liability in the balance sheet.
3) provide no disclosure at all.
Accounting Treatment of ContingentLiabilities.If payment is: Probable
Liability recorded and disclosure required. Disclosure required.
Accounting Treatment of Contingent Liabilities if payment is “Reasonably possible?”
Disclosure required
Accounting Treatment of Contingent Liabilities.If payment is “Remote?”
Disclosure not required
Liquidity refers to?
having sufficient cash to pay currently maturing debts.
Working Capital is the difference between?
It is the difference between current assets and current liabilities.
Quick assets include?
cash, short-term investments, and accounts receivable.
How do you perform the Acid-test ratio/Quick ratio?
Quick assets include cash, short-term investments, and accounts receivable.
Assume that Klein Company’s current ratio is greater than 1. Which of the following will decrease Klein’s current ratio?
A) Purchasing inventory on account.
B) Collecting an accounts receivable.
C) Issuing common stock for cash.
D) Purchasing equipment, signing a long-term note.
A
Schmitt Corporation sells its products with a three-year manufacturing warranty. Schmitt's sales revenue is $600,000 during 2012. Based on prior experience, the company estimates that warranty costs are 5% of sales revenue. Actual warranty costs related to these sales were $5,000 during 2012. How much warranty expense should the company record in 2012? A) $30,000. B) $25,000. C) $10,000. D) $ 5,000.
A
Refer to the previous question. How much is the estimated warranty liability reported in the balance sheet in 2012? A) $30,000. B) $25,000. C) $10,000. D) $ 5,000.
B
If Speedy Inc. borrows $50 million on September 1, 2012 for one year at 9% interest, how much interest expense should it record for the year ended December 31, 2012? A) $4.5 million. B) $3.0 million. C) $1.5 million. D) $0.
C
Suppose that Neuman Corporation has filed a lawsuit against a competitor for an alleged copyright violation. At the end of the year, Neuman's attorney estimates that the company will win the lawsuit and be awarded between $1.5 and $2 million, with the most likely amount being $1.8 million. How much should Neuman record as a gain? A) $2.0 million. B) $1.8 million. C) $1.5 million. D) $0.
D
Which of the following increases an employer’s payroll costs? A) FICA withholding from the employee. B) State income tax. C) Federal income tax. D) Employer’s FICA contribution.
D
Which of the following is reported as a current liability? A) Notes payable due in two years. B) Notes payable due in 15 months. C) Notes payable due in 11 months. D) Unused line of credit.
C
Which of the following is not included in calculating the acid-test ratio?
A) Accounts receivable.
B) Current investment in marketable securities. C) Accounts payable.
D) Inventory.
D
A contingent liability that is probable and can be estimated must be A) Disclosed. B) Not disclosed. C) Recorded. D) Paid.
C
Which the following represents a characteristic of a liability?
A) A probable future sacrifice of economic benefits.
B) Arising from present obligations to other entities.
C) Resulting from past transactions or events. D) All of these are characteristics of a liability.
D
Amortization schedule
Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments.
Bond
A formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date.
Bond indenture
A contract between a firm issuing bonds and the corporations or individuals who purchase the bonds.
Callable
A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.
Capital lease
Contract in which the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.
Capital structure
The mixture of liabilities and stockholders’ equity in a business.
Carrying value
The balance in the bonds payable account, which equals the face value of bonds payable minus the discount or the face value plus the premium.
Convertible
A bond feature that allows the lender (or investor) to convert each bond into a specified number of shares of common stock. Shares can be exchanged for common stock.
Debt financing
Obtaining additional funding from lenders.
Debt to equity ratio
Total liabilities divided by total stockholders’ equity; measures a company’s risk. Total liabilities divided by stockholders’ equity; measures a company’s solvency risk.
Default risk
The risk that a company will be unable to pay the bond’s face amount or interest payments as it becomes due.
Discount
A bond’s issue price is below the face amount.
Early extinguishment of debt
The issuer retires debt before its scheduled maturity date.
Equity financing
Obtaining additional funding from stockholders.
Installment payment
Includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance.
Lease
A contractual arrangement by which the lessor (owner) provides the lessee (user) the right to use an asset for a specified period of time.
Market interest rate
Represents the true interest rate used by investors to value a bond.
Operating lease
Contract in which the lessor owns the asset and the lessee simply uses the asset temporarily.
Premium
A bond’s issue price is above the face amount.
