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Flashcards in Accounting 201Final Exam Deck (318):
1

Activity-based method

Allocates an asset's cost based on its use.

2

Addition

Occurs when a new major component is added to an existing asset.

3

Amortization

Allocation of the cost of an intangible asset over its service life.

4

Asset turnover

Net sales divided by average total assets, which measures the sales per dollar of assets invested.

5

Basket purchase

Purchase of more than one asset at the same time for one purchase price.

6

Big bath

Recording all losses in one year to make a bad year even worse.

7

Book value

Equal to the original cost of the asset minus the current balance in Accumulated Depreciation.

8

Capitalize

Record an expenditure as an asset.

9

Capitalized interest

Interest costs recorded as assets rather than interest expense.

10

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.

11

Declining-balance method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years.

12

Depletion

Allocation of the cost of a natural resource over its service life.

13

Depreciation

Allocation of the cost of a tangible asset over its service life.

14

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.

15

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.

16

Impairment

Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation).

17

Improvement

The cost of replacing a major component of an asset.

18

Intangible assets

Long-term assets that lack physical substance, and whose existence is often based on a legal contract.

19

Land improvements

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation.

20

Material

Large enough to influence a decision.

21

Natural resources

Assets like oil, natural gas, and timber that we can physically use up or deplete.

22

Patent

An exclusive right to manufacture a product or to use a process.

23

Profit margin

Net income divided by net sales; indicates the earnings per dollar of sales.

24

Repairs and maintenance

Expenses that maintain a given level of benefits in the period incurred.

25

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.

26

Return on assets

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets.

27

Service life

How long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life.

28

Straight-line method

Allocates an equal amount of depreciation to each year of the asset's service life.

29

Trademark

A word, slogan, or symbol that distinctively identifies a company, product, or service.

30

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.

31

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

32

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.

33

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.

34

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.

35

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.

36

Define intangible assets subject to amortization:

Assets having a finite useful life that we can estimate.
I.E. Patents, Copyrights, Franchises.

37

Define intangible assets not subject to amortization:

Assets having indefinite useful lives.
I.E. Goodwill, Trademarks.

38

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.

39

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.

40

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

41

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

42

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

43

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

44

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

45

Accumulated depreciation is
A) An expense account.
B) An asset.
C) A contra-asset.
D) A liability.

C

46

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

47

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

48

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

49

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

50

If equipment is retired, which of the following accounts would be debited?
A) Accumulated depreciation.
B) Depreciation expense.
C) Equipment.
D) Cash.

A

51

Acid-test ratio

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.

52

Commercial paper

Borrowing from another company rather than from a bank.

53

Contingencies

Uncertain situations that can result in a gain or a loss for a company.

54

Contingent gain

An existing uncertain situation that might result in a gain.

55

Contingent liability

An existing uncertain situation that might result in a loss.

56

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.

57

Current portion of long-term debt

Debt that will be paid within the next year.

58

Current ratio

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

59

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.

60

FICA taxes

Based on the Federal Insurance Contribution Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

61

Fringe benefits

Additional employee benefits paid for by the employer.

62

Liability

A present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past.

63

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.

64

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.

65

Notes payable

Written promises to repay amounts borrowed plus interest.

66

Quick assets

Includes only cash, current investments, and accounts receivable.

67

Sales tax payable

Sales tax collected from customers by the seller, representing current liabilities payable to the government.

68

Unearned revenue

A liability account used to record cash received in advance of the sale or service.

69

Unemployment taxes

A tax to cover federal and state unemployment costs paid by the employer on behalf of its employees.

70

Working capital

The difference between current assets and current liabilities

71

What is Liability?

A present responsibility to sacrifice assetsin the future due to a transaction or other eventthat happened in the past.

72

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.

73

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.

74

Current liabilities are also sometimes called?

short term liabilities.

75

What distinguishes between current and long-term liabilities when reporting liabilities?

One Year of Payable Dues. Less = Current. More = Long

76

Current liabilities are payable?

within one year.

77

Long term liabilities are payable?

longer than one year.

78

Distinguishing between current and long-termliabilities helps investors and creditors assess?

Risk

79

Companies often prefer to report a liability aslong-term because it may cause the firm toappear?

Less Risky

80

Many companies list notes payable first, followedby accounts payable, and then other currentliabilities?

from largest to smallest.

81

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

82

The borrower reports its liability as?

Notes Payable

83

Small firms rely heavily on what type of financing?

short-term financing

84

Large companies also use short-term debt as a significant part of their?

capital structure

85

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.

86

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.

87

Additional current liabilities companies report:

Unearned revenues
- Sales taxes payable
- The current portion of long-term debt
- Deferred taxes

88

An existing, uncertain situation that might result in a loss is called a?

Contingent liability

89

What are examples of Contingent liabilities.

Lawsuits, product warranties, environmental problems, and premium offers

90

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.

91

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.

92

Accounting Treatment of ContingentLiabilities.If payment is: Probable

Liability recorded and disclosure required. Disclosure required.

93

Accounting Treatment of Contingent Liabilities if payment is "Reasonably possible?"

Disclosure required

94

Accounting Treatment of Contingent Liabilities.If payment is "Remote?"

Disclosure not required

95

Liquidity refers to?

having sufficient cash to pay currently maturing debts.

96

Working Capital is the difference between?

It is the difference between current assets and current liabilities.

97

Quick assets include?

cash, short-term investments, and accounts receivable.

98

How do you perform the Acid-test ratio/Quick ratio?

Quick assets include cash, short-term investments, and accounts receivable.

99

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

100

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

101

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

102

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

103

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

104

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

105

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

106

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

107

A contingent liability that is probable and can be estimated must be
A) Disclosed.
B) Not disclosed.
C) Recorded.
D) Paid.

C

108

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

109

Amortization schedule

Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments.

110

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.

111

Bond indenture

A contract between a firm issuing bonds and the corporations or individuals who purchase the bonds.

112

Callable

A bond feature that allows the borrower to repay the bonds before their scheduled maturity date at a specified call price.

113

Capital lease

Contract in which the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

114

Capital structure

The mixture of liabilities and stockholders' equity in a business.

115

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.

116

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.

117

Debt financing

Obtaining additional funding from lenders.

118

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.

119

Default risk

The risk that a company will be unable to pay the bond's face amount or interest payments as it becomes due.

120

Discount

A bond's issue price is below the face amount.

121

Early extinguishment of debt

The issuer retires debt before its scheduled maturity date.

122

Equity financing

Obtaining additional funding from stockholders.

123

Installment payment

Includes both an amount that represents interest and an amount that represents a reduction of the outstanding balance.

124

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.

125

Market interest rate

Represents the true interest rate used by investors to value a bond.

126

Operating lease

Contract in which the lessor owns the asset and the lessee simply uses the asset temporarily.

127

Premium

A bond's issue price is above the face amount.

128

Private placement

Sale of debt securities directly to a single investor.

129

Return on assets

Net income divided by average total assets; measures the income generated per dollar of assets.

130

Return on equity

Net income divided by average stockholders' equity; measures the income generated per dollar of equity.

131

Secured bonds

Bonds that are supported by specific assets pledged as collateral.

132

Serial bonds

Bonds that require payment of the principal amount of the bond over a series of maturity dates.

133

Sinking fund

An investment fund used to set aside money to be used to pay debts as they come due.

134

Stated interest rate

The rate quoted in the bond contract used to calculate the cash payments for interest.

135

Term bonds

Bonds that require payment of the full principal amount of the bond at a single maturity date.

136

Times interest earned ratio

Ratio that compares interest expense with income available to pay those charges.

137

Unsecured bonds

Bonds that are not supported by specific assets pledged as collateral.

138

Explain financing alternatives:
Debt Financing?

borrowing money (liabilities).

139

Explain financing alternatives:
Equity Financing?

obtaining additional investmentfrom stockholders (stockholders’ equity).

140

Explain financing alternatives:
Capital Structure?

is the mixture of liabilities andstockholders’ equity used by a business.

141

What are the five points that define a bond?

1) 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.
2) In return, the borrower agrees to pay interest over the life of the bond.
3) Similar to notes payable, except bonds are usually issued to many lenders at the same time.
4) Traditionally, interest on bonds is paid twice a year (semi-annually).
5) Bonds are sold or underwritten by investment houses like JPMorgan, Citibank and Bank of America.

142

Issue bond price is calculated as?

The present value of the face amount plus the present value of the periodic interest payments.

143

What three amounts can bonds be issued at?

1) Face amount
2) Below face amount (discount)
3) Above face amount (premium)

144

What is Market Interest Rate?

True interest rate used by investors to value a company’s bond issue.

145

The higher the market interest rate, the higher or lower will be the bond issue price.

lower

146

What is Stated Interest Rate?

Rate quoted in the bond contract used to calculate the cash payments for interest.

147

What are Periods to Maturity?

number of years to maturity multiplied by the number of interest payments per year.

148

Account (journal entry) for the issuance of bonds:On January 1, 2012, RC Enterprises issues $100,000 of 7% bonds, due in 10 years, with interest payable semi-annually on June 30 and December 31 each year.

Cash 100,000 Debit
Bonds Payable 100,000 Credit

149

Account for the issuance of bonds:The bonds issue for exactly $100,000, assuming a 7% market interest rate. RC Enterprises records the bond issue as: ($3500)

Interest Expense 3,500 Debit
Cash 3,500 Credit
(Record semiannual interest payment)
($100,000 x 7% 3 1/2 = $3,500)

150

When the issuing corporation buys back its bonds from the investors, it is said that the company has?

retired those bonds

151

A company can wait until the bonds mature to retire them, or in most cases, the issuer will choose?

to buy the bonds back early

152

Regardless of whether bonds are issued at face amount, a discount, or a premium, their carrying value at maturity will equal their?

face amount.

153

Record the retirement of its bond at maturity as:

Bonds Payable 100,000 Debit
Cash 100,000 Credit

154

When the issuer retires debt of any type before its scheduled maturity date, the transaction is called an?

extinguishment of debt.

155

If bonds are issued with a stated interest rate higher than the market interest rate, the bonds will be issued at
A) A premium.
B) Face amount.
C) A discount.
D) A discount or premium depending on the maturity date.

A

156

Which of the following is a primary source of corporate debt financing?
A) Accounts receivable.
B) Accounts payable.
C) Inventories.
D) Bonds.

D

157

Alliance Energy issues bonds at a discount. On the maturity date, the bonds' carrying value will be
A) Above face amount.
B) Below face amount.
C) At face amount.
D) Depending on the current market rates.

C

158

If bonds were issued at a discount, interest expense will be
A) Lower than cash interest paid.
B) Higher than cash interest paid.
C) Equal to cash interest paid.
D) Lower or higher depending on current market interest rates.

B

159

Schoene Corporation issues ten-year bonds at their face amount of $100 million with the option to call the bonds at $102 million. Two years later, interest rates have decreased and Schoene decides to call the bonds. Schoene estimates that over the next eight years, it will save $16 million of cash interest. The journal entry to retire the bonds will include a:
A) Gain of $2 million.
B) Loss of $2 million.
C) Gain of $16 million.
D) Gain of $14 million.

B

160

Callable bonds:
A) Provide potential benefits only to the issuer.
B) Provide potential benefits only to the investor.
C) Provide potential benefits to both the issuer and the investor.
D) Provide no potential benefits.

A

161

Which of the following is not an advantage of debt financing?
A) Interest is tax deductible.
B) The cost of borrowing may be lower than the return on equity.
C) The ownership interest of current stockholders is unchanged.
D) Debt financing often has no maturity date.

D

162

If bonds are issued at a premium, over the life of the bonds, the carrying value will:
A) Increase.
B) Decrease.
C) Stay the same.
D) Depend on the current market interest rate.

B

163

If bonds are issued at a premium, over the life of the bonds, interest expense will:
A) Decrease.
B) Increase.
C) Remain unchanged.
D) The effect cannot be determined from the information given.

A

164

Which of the following is true regarding a company assuming more debt?
A) Assuming more debt is always bad for the company.
B) Assuming more debt is always good for the company.
C) Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds.
D) Assuming more debt reduces leverage.

C

165

Accumulated deficit

A debit balance in Retained Earnings.

166

Additional paid-in capital

The portion of the cash proceeds above par value.

167

Angel investors

Wealthy individuals in the business community willing to risk investment funds on a promising business venture.

168

Articles of incorporation

Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors.

169

Authorized stock

The total number of shares available to sell, stated in the company's articles of incorporation.

170

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.

171

Cumulative

Shares receive priority for future dividends, if dividends are not paid in a given year.

172

Declaration date

The day on which the board of directors declares the cash dividend to be paid.

173

Dividends

Cash payments to stockholders. Distributions by a corporation to its stockholders.

174

Dividends in arrears

Unpaid dividends on cumulative preferred stock.

175

Double taxation

A corporation pays income taxes on its earnings, and when dividends are distributed to stockholders, the stockholders pay taxes a second time on the corporate dividends they receive.

176

Earnings per share

Measures the net income earned per share of common stock.

177

Growth stocks

Stocks that tend to have higher price earnings ratios and are expected to have higher future earnings. Stocks that have high expectations of future earnings growth and therefore usually trade at higher PE ratios.

178

Initial public offering

The first time a corporation issues stock to the public.

179

Issued stock

The number of shares sold to investors; includes treasury shares.

180

Limited liability

Stockholders in a corporation can lose no more than the amount they invested in the company.

181

Model Business Corporation Act

Serves as a guide to states in the development of their corporate statutes.

182

Mutual agency

Individual partners each have power to bind the partnership to a contract.

183

No-par value stock

Common stock that has not been assigned a par value.

184

Organization chart

Traces the line of authority for a typical corporation.

185

Outstanding stock

The number of shares held by investors; excludes treasury shares.

186

Paid-in capital

The amount stockholders have invested in the company.

187

Par value

The legal capital assigned per share of stock.

188

Payment date

The date of the actual cash distribution of dividends.

189

Preferred stock

Stock with preference over common stock in the payment of dividends and the distribution of assets.

190

Price-earnings (PE) ratio

Compares a company's share price with its earnings per share. The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis.

191

Privately held corporation

Does not allow investment by the general public and normally has fewer stockholders.

192

Publicly held corporation

Allows investment by the general public and is regulated by the Securities and Exchange Commission.

193

Record date

A specific date on which the company will determine the registered owners of stock and, therefore, who will receive the dividend.

194

Redeemable

Shares can be returned to the corporation at a fixed price.

195

Retained earnings

Cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. Represents all net income, less all dividends, since the company began.

196

Return on equity

Net income divided by average stockholders' equity; measures the income generated per dollar of equity.

197

Return on the market value of equity

Net income divided by the market value of equity.

198

S corporation

Allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership.

199

Stated value

The legal capital assigned per share to no-par stock.

200

Statement of stockholders' equity

A financial statement that summarizes the changes in stockholders' equity over an interval of time. Summarizes the changes in the balance in each stockholders' equity account over a period of time.

201

What is the accounting equation for Stockholders’ Equity?

Stockholders’ Equity = Assets - Liabilities

202

What are the three Primary Sections of Stockholders’ Equity and their meanings?

1) Paid-in capital = Amount stockholders have invested in the corporation.
2) Retained Earnings = Amount of earnings the corporation has retained.
3) Treasury Stock = Corporation’s own stock that it has reacquired.

203

Articles of incorporation (or corporate charter) describe?

a) the nature of the firm’s business activities
b) the shares to be issued
c) the initial board of directors

204

With corporation’s stockholders control the corporation how?

By voting their shares, they determine the makeup of the board of directors
- which in turn appoints the management to run the corporation.

205

Corporations may be either public or private describe how a public corporation operates:

1) Stocks trade on a stock exchanges such as NYSE, AMEX, NASDAQ; or by over-the-counter (OTC) trading.
2) Regulated by the Securities and ExchangeCommission (SEC)
I.E. Wal-Mart, Microsoft, Intel.

206

Corporations may be either public or private describe how a private corporation operates:

1)Does not allow investment by the general public and has fewer stockholders.
2) Not regulated by the Securities and ExchangeCommission (SEC) and do not need to file financialstatements with it.
I.E. Cargill (agricultural commodities), Koch Industries (oil andgas), Chrysler (cars).

207

What are the advantages of a Corporation?

1) Limited liability
2) Ability to raise capital
3) Lack of mutual agency

208

What are the dis-advantages of a Corporation?

1) Additional taxes
2) More paperwork

209

If a corporation has only one kind of stock, itusually is labeled as common stock. What are the three types of Common Stock and what defines them?

1) Authorized Shares = available to sell(issued and unissued).
2) Issued Shares = actually sold (includes treasury stock).
3) Outstanding Shares = held by investors(excludes treasury stock).

210

If a corporation has only one kind of stock, itusually is labeled as common stock. There are three types of Common Stock: Authorized Shares, Issued Shares, Outstanding Shares. What are the two accounting equations?

1) Authorized – Unissued = Issued
2) Issued – Treasury Stock = Outstanding

211

What two main reasons make preferred stock better than common stock?

1) Usually have first rights to a specified amount of Dividends.
2) Receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

212

Comparison of common stock, preferred stock, and bonds:
Voting rights?

Common = Yes
Preferred = Usually
No Bonds = No

213

Comparison of common stock, preferred stock, and bonds:
Risk to the investor?

Common = Highest
Preferred = Middle
Bonds = Lowest

214

Comparison of common stock, preferred stock, and bonds:
Expected return to the investor?

Common = Highest
Preferred = Middle
Bonds = Lowest

215

Comparison of common stock, preferred stock, and bonds:
Risk of contract violations?

Common = Lowest
Preferred = Middle
Bonds = Highest

216

Comparison of common stock, preferred stock, and bonds:
Preference for payments?

Common = Lowest
Preferred = Middle
Bonds = Highest

217

Comparison of common stock, preferred stock, and bonds:
Tax deductibility of payments?

Common = No
Preferred = Usually
Bonds = Yes

218

What are the Features of Preferred Stock and what defines them?

1) Convertible = Shares can be exchanged for common stock.
2) Redeemable = Shares can be returned to the corporation at a fixed price.
3) Cumulative = Shares receive priority for future dividends, if dividends are not paid in a given year.

219

What is Treasury Stock?

A corporation’s own stock that it has reacquired

220

Why corporations repurchase their stock?

- To boost under-priced stock.
- To distribute surplus cash without paying dividends.
- To boost earnings per share.
- To offset issuance of shares under stock-based compensation plans.

221

Sometimes, corporations distribute to shareholders additional shares of the companies’ own stock rather than cash. Theseare known as _____________or __________ depending on the size of the stock distribution.

stock dividends or stock splits

222

Petite Fashions issued 500,000 of its 2 million shares of authorized common stock. At the end of the accounting period, 450,000 shares are outstanding. How many shares of treasury stock does Petite Fashions have?
A) 1.5 million shares.
B) 450,000 shares.
C) 50,000 shares.
D) 0 shares.

C

223

The advantages of owning a corporation include:
A) Lower total taxes.
B) The ability of stockholders to make operating decisions for their company.
C) Limited liability.
D) Less paper work.

C

224

Cash dividends are initially recorded on which date?
A) Date of declaration.
B) Date of record.
C) Date of payment.
D) Balance sheet date.

A

225

What is the effect of a stock dividend on total stockholders' equity?
A) Stockholders' equity increases.
B) Stockholders' equity decreases.
C) Stockholders' equity does not change.
D) The effect on stockholders' equity depends on the size of the stock dividend.

C

226

When treasury stock is resold, total stockholders' equity:
A) Increases.
B) Decreases.
C) Does not change.
D) The effect depends on the relationship between the purchase price and resale price.

A

227

Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:
A) Dividends and voting rights.
B) Par value and dividends.
C) The preemptive right and voting rights.
D) Dividends and distribution of assets if the corporation is dissolved.

D

228

Earnings per share measures:
A) Cash earned per share of common stock.
B) Cash earned per share of common and preferred stock.
C) Net income earned per share of common stock.
D) Net income earned per share of common and preferred stock.

C

229

Treasury stock is recorded as:
A) An asset.
B) A liability.
C) An increase in stockholders' equity.
D) A decrease in stockholders' equity.

D

230

If a company issues par-value stock, the amount credited to common stock will be:
A) The total market value of all the shares issued.
B) The par value per share times the number of shares issued.
C) The difference between the market and the par value per share times the total number of shares issued.
D) The amount the board of directors chooses to assign to the shares.

B

231

What is the effect of a 2-for-1 stock split on total paid-in capital?
A) Total paid-in capital increases.
B) Total paid-in capital decreases.
C) Total paid-in capital does not change.
D) Total paid-in capital will double.

C

232

Asset turnover

Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.

233

Cash flow to sales

Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales.

234

Cash return on assets

Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets.

235

Direct method

Adjusts the items on the income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes.

236

Financing activities

Transactions involving external sources of funding. Includes cash transactions resulting from the external financing of a business.

237

Indirect method

Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows.

238

Investing activities

Transactions involving the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery and (2) any resources not directly related to a company's normal operations.Includes cash transactions involving the purchase and sale of long-term assets and current investments.

239

Noncash activities

Significant investing and financing activities that do not affect cash.

240

Operating activities

Transactions involving the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. Includes cash receipts and cash payments for transactions relating to revenue and expense activities.

241

Statement of cash flows

A financial statement that measures activities involving cash receipts and cash payments over an interval of time. A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing activities.

242

Name a list, in order, and summarize cash inflows and cash outflows during the reporting period: (Standard List)

Cash Flows from Operating Activities
Net income $42,000
Adjustments for noncash effects:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
Decrease in income tax payable (2,000)
Net cash flows from operating activities $50,000

243

Name a list, in order, and summarize cash inflows and cash outflows during the reporting period: (Reporting List)

Cash Flows from Investing Activities
Purchase of investment (35,000)
Sale of land 6,000
Net cash flows from investing activities (29,000)Cash Flows from Financing Activities
Issuance of common stock 5,000
Payment of cash dividends (12,000)
Net cash flows from financing activities (7,000)Net increase (decrease) in cash 14,000
Cash at the beginning of the period 48,000
Cash at the end of the period $62,000
Note: Noncash ActivitiesPurchased equipment by issuing a note Payable $20000

244

Name three Categories of Cash Flows and define them:

1) Operating activities = Include cash receiptsand cash payments for transactions relatingto revenue and expense activities.
2) Investing activities = Include cash transactions involving the purchase and saleof long-term assets and current investments.
3) Financing activities = Inflows and outflowsof cash resulting from the external financingof a business.

245

Describe the four steps in Preparing the Statement of Cash Flows:

Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the comparative balance sheets.
Step 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the comparative balance sheets.
Step 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders’equity accounts from the comparative balance sheets.
Step 4. Combine the operating, investing, and financing activities, and make sure the total agrees with the net increase (decrease) incash.

246

Operating Activities – Indirect Method
Both net income and cash flows from operating activities represent the same?

operating activities

247

Operating Activities – Indirect Method
The income statement reports net income on an ____________. On the other hand, the statement of cash flows reports the very same activities on a ____________.

accrual basis
cash basis

248

Operating Activities – Indirect Method
We remove the noncash components from net income so that what’s left is?

cash flows from operating activities.

249

We can classify the noncash components as:

1) revenues and expenses that don’t affect cash at all (adjustments for noncash components of net income).
2) revenues and expenses that do affect cash, but not by the amount reported as the revenue or expense (adjustments for changes in current assets and current liabilities).

250

Cash Flows from Operating ActivitiesAdjustments for noncash effects:For noncash components of income: + or - Depreciation expense+ or - Loss on sale of assets+ or - Gain on sale of assets

Depreciation expense+ Loss on sale of assets– Gain on sale of assets

251

Cash Flows from Operating Activities
For changes in current assets and current liabilities
+ or - Increase in a current asset
+ or - Decrease in a current asset
+ or - Increase in a current liability
+ or - Decrease in a current liability
+ or - Net cash flows from operating activities

– Increase in a current asset
+ Decrease in a current asset
+ Increase in a current liability
– Decrease in a current liability
= Net cash flows from operating activities

252

Operating Activities-Direct Method:We report the cash inflows and cash outflowsdirectly on the ______ __ ______ ______.

statement of cash flows

253

Operating Activities-Direct MethodWe report cash received from customers as the cash effect of_________ ________.

sales activities

254

Operating Activities-Direct MethodWe report cash paid to suppliers as the cash effect of _______ __ ________ _______.

cost of goods sold

255

Income statement items that have no casheffect—such as depreciation expense or gainsand losses on the sale of assets are?

not reported under the direct method.

256

Operating Activities-Direct MethodName three Cash Inflows:

1) Cash received from customers
2) Cash received from interest
3) Cash received from dividends

257

Operating Activities-Direct MethodName four Cash Outflows:

1) Cash paid to suppliers
2) Cash paid for operating expenses
3) Cash paid for interest4) Cash paid for income taxes

258

Which of the following methods for preparing the statement of cash flows is acceptable under U.S. GAAP?
A) The direct method.
B) The indirect method.
C) Both the direct and the indirect method are acceptable.
D) The accrual accounting method.

C

259

Which of the following is the correct sequence of presenting the activities in the statement of cash flows?
A) Investing activities, financing activities, operating activities.
B) Operating activities, investing activities, financing activities.
C) Operating activities, financing activities, investing activities.
D) Financing activities, investing activities, operating activities.

B

260

Smith Company's sales revenues for the year are $200,000 and its accounts receivable balance increased by $10,000. How much is "cash collected from customers"?
A) $210,000.
B) $200,000.
C) $190,000.
D) $10,000.

C

261

Which of the following is an example of a cash inflow from investing activities?
A) Receipt of interest.
B) Payment of cash dividends.
C) Cash received from the sale of equipment.
D) Receipt of cash dividends.

C

262

Depreciation expense is added to net income in the statement of cash flows - indirect method because:
A) Cash was received.
B) Cash was paid.
C) Depreciation expense reduced net income, but is a noncash item.
D) Depreciation is tax deductible.

C

263

The purchase of an intangible asset is classified in the statement of cash flows as a(n):
A) Operating activity.
B) Investing activity.
C) Financing activity.
D) Noncash activity.

B

264

The payment of semi-annual interest on outstanding bonds payable is classified in the statement of cash flows as a(n):
A) Operating activity.
B) Investing activity.
C) Financing activity.
D) Noncash activity.

A

265

We can identify investing activities from additional information and changes in:
A) Current asset and current liability accounts.
B) Long-term asset accounts.
C) Long-term liability accounts.
D) Stockholders' equity accounts.

B

266

Whichh of the following is a noncash transaction?
A) Purchase of long-term assets by issuing debt.
B) Purchase of long-term assets by issuing stock.
C) Conversion of bonds payable into common stock.
D) All of these are noncash transactions.

D

267

Neuman Corporation's income tax expense is $10,000 and its income tax payable decreased by $1,000 during the year. How much did Neuman pay for income taxes during the year?
A) $11,000.
B) $10,000.
C) $9,000.
D) $1,000.

A

268

Acid-test ratio

Cash, current investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.

269

Aggressive accounting practices

Practices that result in reporting higher income, higher assets, and lower liabilities.

270

Asset turnover

Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.

271

Average collection period

Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio.

272

Average days in inventory

Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.

273

Conservative accounting practices

Practices that result in reporting lower income, lower assets, and higher liabilities.

274

Current ratio

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

275

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.

276

Discontinued operation

The sale or disposal of a significant component of a company's operations.

277

Extraordinary item

An event that is (1) unusual in nature and (2) infrequent in occurrence.

278

Gross profit ratio

Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales.

279

Horizontal analysis

Analyzes trends in financial statement data for a single company over time.

280

Inventory turnover ratio

Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period.

281

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.

282

Price-earnings (PE) ratio

Compares a company's share price with its earnings per share.The stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis.

283

Profit margin

Net income divided by net sales; indicates the earnings per dollar of sales.

284

Profitability ratios

Measure the earnings or operating effectiveness of a company.

285

Quality of earnings

Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings.

286

Receivables turnover ratio

Net credit sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected ("turns over").

287

Return on assets

Net income divided by average total assets; measures the income generated per dollar of assets.

288

Return on equity

Net income divided by average stockholders' equity; measures the income generated per dollar of equity.

289

Solvency

Refers to a company's ability to pay its long-term liabilities.

290

Times interest earned ratio

Ratio that compares interest expense with income available to pay those charges.

291

Value stocks

Stocks that tend to have lower price earnings ratios and are priced low in relation to current earnings. Stocks that have lower share prices in relationship to their fundamental ratios and therefore trade at lower (bargain) PE ratios.

292

Vertical analysis

Expresses each item in a financial statement as a percentage of the same base amount.

293

Name a list, in order, and summarize cash inflows and cash outflows during the reporting period: (Standard List)

Cash Flows from Operating Activities
Net income $42,000
Adjustments for noncash effects:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
Decrease in income tax payable (2,000)
Net cash flows from operating activities $50,000

294

Name a list, in order, and summarize cash inflows and cash outflows during the reporting period: (Reporting List)

Cash Flows from Investing Activities
Purchase of investment (35,000)
Sale of land 6,000
Net cash flows from investing activities (29,000)Cash Flows from Financing Activities
Issuance of common stock 5,000
Payment of cash dividends (12,000)
Net cash flows from financing activities (7,000)Net increase (decrease) in cash 14,000
Cash at the beginning of the period 48,000
Cash at the end of the period $62,000
Note: Noncash ActivitiesPurchased equipment by issuing a note payable $20,000

295

Name three Categories of Cash Flows and define them:

1) Operating activities = Include cash receiptsand cash payments for transactions relatingto revenue and expense activities.2) Investing activities = Include cash transactions involving the purchase and saleof long-term assets and current investments.3) Financing activities = Inflows and outflowsof cash resulting from the external financingof a business.

296

Describe the four steps in Preparing the Statement of Cash Flows:

Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the comparative balance sheets.
Step 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the comparative balance sheets.
Step 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders’equity accounts from the comparative balance sheets.
Step 4. Combine the operating, investing, and financing activities, and make sure the total agrees with the net increase (decrease) incash.

297

Operating Activities – Indirect MethodBoth net income and cash flows from operating activities represent the same?

operating activities

298

Operating Activities – Indirect MethodThe income statement reports net income on an ____________. On the other hand, the statement of cash flows reports the very same activities on a ____________.

accrual basiscash basis

299

Operating Activities – Indirect MethodWe remove the noncash components from net income so that what’s left is?

cash flows from operating activities.

300

We can classify the noncash components as:

1) revenues and expenses that don’t affect cash at all (adjustments for noncash components of net income).
2) revenues and expenses that do affect cash, but not by the amount reported as the revenue or expense (adjustments for changes in current assets and current liabilities).

301

Cash Flows from Operating Activities
Adjustments for noncash effects:
For noncash components of income:
+ or - Depreciation expense
+ or - Loss on sale of assets
+ or - Gain on sale of assets

Depreciation expense+ Loss on sale of assets– Gain on sale of assets

302

Cash Flows from Operating Activities
For changes in current assets and current liabilities
+ or - Increase in a current asset
+ or - Decrease in a current asset
+ or - Increase in a current liability
+ or - Decrease in a current liability
+ or - Net cash flows from operating activities

– Increase in a current asset+ Decrease in a current asset+ Increase in a current liability– Decrease in a current liability= Net cash flows from operating activities

303

Operating Activities-Direct Method:We report the cash inflows and cash outflowsdirectly on the ______ __ ______ ______.

statement of cash flows

304

Operating Activities-Direct MethodWe report cash received from customers as the cash effect of_________ ________.

sales activities

305

Operating Activities-Direct MethodWe report cash paid to suppliers as the cash effect of _______ __ ________ _______.

cost of goods sold

306

Income statement items that have no casheffect—such as depreciation expense or gainsand losses on the sale of assets are?

not reported under the direct method.

307

Operating Activities-Direct MethodName three Cash Inflows:

1) Cash received from customers
2) Cash received from interest
3) Cash received from dividends

308

Operating Activities-Direct MethodName four Cash Outflows:

1) Cash paid to suppliers
2) Cash paid for operating expenses
3) Cash paid for interest4) Cash paid for income taxes

309

Which of the following ratios is more useful in evaluating solvency?
A) Receivables turnover ratio.
B) Debt to equity ratio.
C) Current ratio.
D) Inventory turnover ratio.

B

310

A loss from discontinued operations is reported A) As an operating expense.
B) As part of other revenues and expenses.
C) Before income tax expense.
D) Below income from continuing operations.

D

311

Which of the following qualifies as an extraordinary item?
A) Damage from a summer storm. Storms of this nature occur occasionally.
B) Damage from a warehouse fire.
C) A loss from a lawsuit.
D) A penalty payable to the IRS.

B

312

The Pernell Company reports net sales of $2 million, cost of goods sold of $1 million, operating expenses of $500,000, and other revenues and expenses of $100,000. Pernell Company's gross profit ratio is:
A) 50%.
B) 25%.
C) 100%.
D) 5%.

A

313

If a company's sales revenue and cost of goods sold increase by a higher percentage than its inventory balances, inventory turnover will:
A) Increase.
B) Decrease.
C) Remain the same.
D) Increase or decrease depending on whether the inventory is purchases on account or for cash.

A

314

Neuman Corporation reports net income of $250,000, sales revenue of $24 million, and average assets of 3 million. The asset turnover is:
A) 12 times.
B) 8 times.
C) 1.5 times.
D) 0.8 times.

B

315

Which of the following is an example of conservative accounting?
A) Adjusting the allowance for uncollectible accounts to a smaller amount.
B) Recording inventory at lower of cost or market.
C) Changing to a longer useful life for depreciating a long-lived asset.
D) Recording the lowest possible warranty expense.

B

316

Which of the following is classified as a liquidity ratio?
A) Inventory turnover ratio.
B) Gross profit ratio.
C) Profit margin.
D) Debt to equity ratio.

A

317

The times interest earned ratio is classified as an indicator of a company's:
A) Liquidity.
B) Profitability.
C) Solvency.
D) Long-term survival.

C

318

Growth stocks tend to have relatively
A) High P/E ratios.
B) Low P/E ratios.
C) Constant P/E ratios.
D) Negative P/E ratios.

A