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ACCTING 306 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

_______ have future economic benefit.

A

Assets

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2
Q

Liabilities are probable _________ __________ of economic benefits arising from present obligations to transfer assets or provide services.

A

future sacrifices

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3
Q

Equity = total _______ - total ________

A

assets

liabilities

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4
Q

What financial statement reports a company’s financial position at a point in time?

A

balance sheet

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5
Q

T or F: The balance sheet provides an organized array of assets, liabilities, and shareholder’s equity.

A

True

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6
Q

What is another name for the balance sheet?

A

statement of financial position

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7
Q

Define liquidity.

A

The ability to convert an asset into cash.

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8
Q

__________ is a term that defines how well a company is able to pay off its liabilities.

A

Solvency

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9
Q

T or F: Financial flexibility is a measurement of a company’s ability to move it’s assets around.

A

False, its their ability to alter cash flows to take advantage of unexpected investment opportunities.

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10
Q

Does book value equal market value and why or why not?

A

No, market value is represented by trading price and assets are typically measured at historical costs rather than their fair market value.

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11
Q

List the two classifications of assets.

A
  1. current assets
  2. long-term assets
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12
Q

T or F: Paid-in capital and retained earnings are two classifications of stockholder’s equity

A

True

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13
Q

__________ and ____________ liabilities are the two classifications of liabilities on the balance sheet.

A

current

long-term

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14
Q

What is a limitation of the balance sheet.

A

Not all valuable resources are captured (employees, location of office, reputation etc).

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15
Q

Current assets are converted to cash within the coming year or within __________________ of the business, whichever is longer.

A

normal operating cycle

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16
Q

How are components of current assets listed on the balance sheet?

A

Most liquid to least liquid (in decreasing order)

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17
Q

The cash on the balance sheet also includes:

A
  • bank drafts
  • cashier’s checks
  • money orders
  • cash equivalents (highly liquid assets)
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18
Q

How do we know if a short-term investment is a current asset?

A

If the company has the ability and intent to sell it within the next 12 months, or operating cycle, whichever is longer.

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19
Q

Which receivables can be both short-term and long-term?

A

Nontrade - loans or advances to an individual or entity

Notes - supported by a formal agreement that specifies payment terms.

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20
Q

What three items are in the inventory account and how are they disclosed?

A
  • Raw materials
  • Work in process
  • Finished goods

Either on the balance sheet or disclosure note

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21
Q

What is the order of current assets on the balance sheet?

A
  1. Cash and cash equivalents
  2. Short-term investments
  3. Accts Rec
  4. Inventories
  5. Prepaid expenses
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22
Q

List some examples of long term assets.

A

Investments, PP&E, and intangible assets.

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23
Q

___________ are assets that are not used directly in the operations of the business.

A

investments

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24
Q

What kind of assets fall under PP&E? (property, plant and equip)

A

Tangible, long-lived assets used in the operations of the business.

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25
Q

What are some examples of PP&E?

A

Land, buildings, equipment, machinery, furniture and natural resources (they become depleted).

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26
Q

These assets generally represent exclusive rights to provide a product or service and are valuable resources in generating future revenues.

A

intangible assets

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27
Q

What contra asset account is paired with intangible assets?

A

accumulated amortization

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28
Q

List examples of intangible assets.

A

Patents, copyrights, trademarks, franchises or goodwill.

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29
Q

Which account represents a catch-all classification of assets that were not reported in one of the other long-term classifications?

A

Other Long-term Assets

Prepaids are often included here.

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30
Q

What is the key to understanding which category an asset is reported in?

A

management intent

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31
Q

List some current liabilities.

A

Accounts payable, notes payable, deferred rev, accrued liabilities, and currently maturing portion of LT debt.

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32
Q

T or F: Accounts payable are usually due in 30 to 60 days.

A

True.

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33
Q

Notes payable are ________ promises to pay cash at a future date and require explicit interest in addition to the obligation amt.

A

written

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34
Q

These liabilities represent obligations created when expenses are incurred but will be payed in the next reporting period.

A

accrued liabilities (ex: accrued salaries payable, int payable, or tax payable)

35
Q

Long-term liabilities are due to be settled or have a contractual right to be settled in more than ____ ______.

A

one year

36
Q

How is stockholder’s equity calculated?

A

Assets - Liabilities = SE.

37
Q

What two factors primarily increase SE?

A

paid-in capital (amt shareholders have invested)

Ret earnings (accumulted net Inc - divs)

38
Q

At the end of each year, companies with public securities are required to provide shareholders with a ___________ report.

A

annual

39
Q

What are the two disclosures that must be included in a company’s annual report?

A

(1) Summary of significant accounting policies
(2) Descriptions of subsequent events

40
Q

What kind of items are included in the summary of significant accounting policies disclosure section?

A

Information about a company’s choices for accounting methods (depreciation, inventory etc)

41
Q

What information is included in the description of subsequent events in the disclosure section of a company’s annual report?

A

Accounting events that occurred after fiscal year-end but before financial statements are issued that have a material effect on a company’s financial position.

42
Q

What section of the disclosure report section isn’t always present, but might be?

A

Other noteworthy events and transactions.

43
Q

What information is reported in “other noteworthy events and transactions?”

A

Related party transactions - transactions with owners, management, families

Errors and fraud - unintentional errors or intentional, which is fraud

Illegal acts - bribes, kickbacks, illegal contributions to political candidates etc.

44
Q

The _________ _______ & ________ section of a
K-1 provides management’s views on significant events, trends, and uncertainties.

A

Management’s Discussion & Analysis

45
Q

Which statement includes compensation information for directors and top executives as well as invites to shareholder’s annual meeting?

A

Proxy statement

46
Q

List the three sustainability disclosures.

A

(1) Environmental - environmental impact

(2) Social - issues of interest to broader stakeholders / society at large

(3) Governance - company’s actions & policies related to division of power w/in company

47
Q

What are the 4 types of auditor reports?

A

(1) Unqualified

(2) Unqualified w/ explanatory or emphasis

(3) Qualified

(4) Adverse or disclaimer

48
Q

This auditor report says the financial statements “present fairly” and company operations conform with GAAP.

A

unqualified

49
Q

This auditor report generally says the financial statements are good to go but might have additional information that needs to be emphasized.

A

Unqualified w/ an explanatory/emphasis paragraph

50
Q

Which report is issued when the audit process has been limited or a departure from GAAP, but not serious enough to invalidate the financial statements?

A

qualified

51
Q

What is an adverse or disclaimer audit report?

A

One where the financial statements or disclosures are misstated/misleading or the auditor isn’t able to gather sufficient evidence that the financial statements conform to GAAP.

52
Q

The income statement reports a company’s profit during a particular _____________ ___________.

A

reporting period

53
Q

When is “income from continuing operations” a section that is included on the income statement?

A

Only when the company has discontinued operations.

54
Q

Revenues, expenses, gains, and losses that occur during the reporting period are included in which section of the income statement?

A

Income from continuing operations

55
Q

List the sections of the income statement.

A

(1) Operating items
- Operating Income
(2) Nonoperating items
- Income from continuing operations before tax
(3) Income taxes
- Income from continuing operations

56
Q

What income is related to the primary revenue-generating activities of the company?

A

operating income

57
Q

Non-operating income is related to the ___________ or __________ activities of the company.

A

peripheral

incidental

58
Q

T or F: Most real world income statements use the single-step statement format.

A

False, they typically use the multi-step income statement.

59
Q

What does earnings quality mean?

A

To what extent does the reported income predict the company’s future earnings.

60
Q

T or F: When analysts are determining the earnings quality of a company, they separate their earnings into temporary earnings and permanent earnings.

A

True

61
Q

What is income smoothing and is it against GAAP?

A

When expenses are overestimated in CY but later underestimated which makes future income look higher.

It is not against GAAP.

62
Q

Classification shifting is when you shift __________ expenses to _____________ expenses. This is done to make operating ___________ appear higher.

A

operating

nonoperating

income

63
Q

Not all items included in operating income is indicative of a company’s ____________ earnings.

A

permanent

64
Q

Some examples of costs that are unusual or infrequent but are included in included in operating expense section are __________________________ and _____________________.

A

restructuring costs

other unusual items - goodwill and asset impairments

65
Q

T or F: Restructuring costs are those that materially change the scope of business operations.

A

True

66
Q

What are discontinued operations?

A

Operations that are going out of business either because the business is being sold or disposed of.

67
Q

Discontinued operations are reported when both a _____________ of an entity or _______ of components has been sold or disposed of and the disposal represents a ______________ shift and will have a ________________ on a company’s operations.

A

component; group

strategic; major effect

68
Q

Where are discontinued operations reported?

A

Below income from continuing operations

69
Q

When income from discontinued operations is reported, what are the 2 parts that are included?

A

Income or loss from operations (of that component) until it was sold

Gain or loss on disposal

70
Q

What is income tax benefit?

A

It is taxes paid on discontinued operations that acts as a benefit.

71
Q

A component held for sale is like to be sold within a ___________.

A

year

72
Q

What are discontinued operations?

A

When an component of an entity has been sold/stopped and is being disposed of.

73
Q

Disposal will have a _________ shift which in turn has a major ________ on a company’s operations and financial results.

A

strategic

effect

74
Q

What are the two components in discontinued operations?

A

1) Income/loss from ops

2) Gain/loss on disposal of assets

75
Q

What is OCI (other comprehensive income)?

A

Other gains and losses reported on an income statement, which ultimately will provide comprehensive income

76
Q

What are two popular ways that comprehensive income is presented?

A

1) Single, continuous statements

2) Two separate, but consecutive statements

77
Q

When is the statement of cash flows prepared?

A

Each period when the balance sheet and income statement are presented.

78
Q

What does the statement of cash flows help people do?

A

Assess future probability, liquidity, and LT solvency.

79
Q

What is one odd item in the OE on the statement of cash flows?

A

Interest and dividends from investment.

80
Q

____________ _________ are the cash flows from activities reported on the income statement.

A

Operating activities

81
Q

What are the two formats used to report operating activities?

A

Indirect and direct

82
Q

The __________ reporting method of operating activities starts with net income and works backwards to convert that amount to cash basis.

A

indirect

83
Q

List the three components of the direct reporting method for a statement of cash flows.

A

1) Revenue (adjusted with A/R)

2) General and admin expenses

3) Income tax expense

ACCTING 306 (3 decks)

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