Exam 2 Flashcards
(193 cards)
1
Q
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions
A
Asset
2
Q
Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer
A
Current Asset
3
Q
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions
A
Liability
4
Q
Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities
A
Current Liabilities
5
Q
The residual interest in the assets of an entity that remains after deducting its liabilities
A
Equity
6
Q
Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
A
Revenue
7
Q
Outflows or other using up of assets or incurrences of liabilities during a period from delivering goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
A
Expense
8
Q
Increases in equity from peripheral or incidental transactions of an entity
A
Gain
9
Q
Decreases in equity arising from peripheral or incidental transactions of an entity
A
Loss
10
Q
Items held for sale in the ordinary course of business, or goods to be used in the production of goods to be sold
A
Inventory
11
Q
Assets of a durable nature that are used in operations, long-term in nature and possess physical substance
A
Property, plant, and equipment
12
Q
Accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset
A
Depreciation
13
Q
Accounting process of allocating the cost of intangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset
A
Amortization
14
Q
Assets that lack physical existence but are not financial instruments
A
Intangible Assets
15
Q
Probably future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions
A
Liability
16
Q
Obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities
A
Current Liability
17
Q
An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur
A
Contingency
18
Q
A list of each account and its balance; used to prove equality of debit and credit balances
A
Trial balances
19
Q
Transferring amounts from journal to ledger
A
Posting
20
Q
_____ are recorded in the period in which the performance obligation is satisfied
_____ are recognized in the period in which they are incurred or matched to revenues
A
Revenues
Expenses
21
Q
Expenses paid in cash before they are used or consumed
A
Prepaid expenses
22
Q
Cash received before the services are performed
A
Unearned Revenues
23
Q
Revenues for services performed but not yet received in cash or recorded
A
Accrued Revenues
24
Q
Expenses incurred but not yet paid in cash or recorded
A
Accrued Expenses
25
Deferrals are either ____ expenses or ____ revenues
Prepaid expenses or unearned revenues
26
Assets paid for and recorded before a company uses them
Ex. Insurance, rent, supplies, etc.
Prepaid Expenses
27
Receipt of cash before the services are performed is recorded as a liability called _____
Ex. Rent, airline tickets, tuition, subscriptions
Unearned Revenues
28
Accruals are either ____ or ____
Accrued revenues or accrued expenses
29
Revenues recorded for services performed but cash has yet to be received at the statement date are ___
Ex. Rent, interest, services performed
Accrued Revenues
30
Expenses incurred but not yet paid in cash or recorded
Ex. Rent, salaries, taxes, interest
Accrued Expenses
31
Shows the balance of all accounts, after adjusting entries, at the end of the accounting period
Adjusted Trial Balance
32
To reduce the balance of the nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions
To transfer all income statement account balances to the retained earnings account in owner's equity
Closing Entries
33
Discontinued operations amounts are reported as ___
Net of tax
34
Reported after "Income from continuing operations" on Income Statement
Discontinued Operations
35
Elements of the balance sheet (3):
- Assets
- Liabilities
- Equity
36
Classification in the Balance Sheet:
Assets (5):
Liabilities and Owner's Equity (3):
Assets:
- Current assets
- Long-term investments
- Property, plant, and equipment
- Intangible assets
- Other assets
Liabilities and Owners' Equity:
- Current liabilities
- Long-term debt
- Owners' (stockholders') equity
37
Short-term highly liquid investments that mature within three months or less
Cash equivalents
38
Noncurrent assets:
Bonds, common stock, or long-term notes
Securities
39
Noncurrent assets not currently used in operations
Ex. Land held for speculation
Tangible fixed assets
40
Noncurrent assets like sinking fund, pension fund, plant expansion fund, or cash surrender value of life insurance
Special funds
41
Tangible long-lived assets used in the regular operations of the business
Physical property such as land, buildings, machinery, furniture, tools, and wasting resources
Property, plant, and equipment
42
The income statement, the statement of stockholders' equity, and the balance sheet - each present some information about the cash flows of an enterprise during a period
Statement of Cash Flows
43
Detailed summary of all the cash inflows and outflows, or the sources and uses of cash during the period
Statement of cash flows
44
Statement of cash flows content and format (3):
- Operating
- Investing
- Financing
45
Cash effects of transactions that enter into the determination of net income
Operating
46
Making and collecting loans and acquiring and disposing of investments and property, plant, and equipment
Investing
47
Obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed
Financing
48
A ______ on a balance sheet reduces either an asset, liability, or owners' equity account
Ex. Accumulated depreciation, discount on bonds payable
Contra account
49
An _____ increases either an asset, liability, or owners' equity account
Ex. Premium on bonds payable
Adjunct account
50
Measures of the company's short-term ability to pay its maturing obligations
Liquidity Ratios
51
Measures of how effectively the company uses its assets
Activity Ratios
52
Measures of the degree of success or failure of a given company or division for a given period of time
Profitability Ratios
53
Measures of the degree of protection for long-term creditors and investors
Coverage Ratios
54
Current Ratio formula:
Current assets/Current liabilities
55
Asset turnover formula:
Net sales/Average total assets
56
Profit margin on sales formula:
Net income/Net sales
57
Rate of return on assets formula:
Net income/Average total assets
58
Rate of return on common stock equity formula:
(Net income - Preferred dividends)/Average common stockholders' equity
59
Earnings per share formula:
(Net Income - Preferred dividends) / Weighted shares outstanding
60
Price-earnings ratio formula:
Market price of stock/earnings per share
61
Payout ratio formula:
Cash dividends/Net income
62
Items held for sale in the ordinary course of business, or goods to be used in the production of goods to be sold
Inventories
63
Inventory accounts (3):
- Raw materials
- Work in process
- Finished goods
64
Perpetual System:
Purchases of merchandise are debited to ____
Inventory
65
Perpetual System:
Freight-in is ____ to inventory. Purchase returns and allowances and purchase discounts are ____ to inventory
Debited
Credited
66
Perpetual System:
Cost of goods sold is ____ and Inventory is ___ for each sale
Debited
Credited
67
The ____ inventory system provides a continuous record of inventory and cost of goods sold
Perpetual Inventory System
68
Periodic System:
Purchases of merchandise are debited to ____
Purchases
69
Periodic System:
Ending inventory determined by ____
Physical count
70
Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
FOB Shipping Point
71
Ownership of the goods remains with the seller until the goods reach the buyer
FOB Destination
72
Goods out on consignment are the property of the ____
The consignee makes ____ to the inventory account for goods received
Consignor
No entry
73
Often referred to as a repurchase (or product financing) agreement, usually involves a transfer (sale) with either an implicit or explicit repurchase agreement
These arrangements are often described in practice as ____
Sales with Repurchase Agreement
"Parking Transactions"
74
Costs directly connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition
Product Costs
75
Generally selling, general, and administrative expenses
Period Costs
76
- Used when handling a relatively small number of costly, easily distinguishable items
- Matches actual costs against actual revenue
Specific Identification
77
Prices items in the inventory on the basis of the average cost of all similar goods available during the period
Average-Cost
78
Assumes goods are used in the order in which they are purchased
First-In, First-Out (FIFO)
79
The cost of the total quantity sold or issued during the month comes from the most recent purchases
Last-In, First-Out (LIFO)
80
Many companies use ___ for tax and external financial reporting purposes and ____ for internal reporting purposes
LIFO
FIFO, average cost
81
Difference between the inventory method used for internal reporting purposes and LIFO
LIFO Reserve
82
Increases and decreases in a pool are measured in terms of total dollar value, not physical quantity of goods
Dollar-Value LIFO
83
Dollar-Value LIFO advantages (3):
- Broader range of goods in pool
- Permits replacement of goods that are similar
- Helps protect LIFO layers from erosion
84
Price Index for Current Year formula:
(Ending inventory for the period at current cost)/(Ending inventory for the period at Base-Year cost)
85
Issues related to LIFO:
Advantages (3):
Disadvantages (4):
Adv.
- Matching
- Tax benefits/Improved cash flow
- Future earnings hedge
Disadv.
- Reduced earnings
- Inventory understated
- Physical flow
- Involuntary liquidation/poor buying habits
86
The estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation
Net Realizable Value (NRV)
87
Measures the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use
Historical cost
88
Cost of Land typically includes (5):
- Purchase price
- Closing costs (Title to the land, attorney's fees, recording fees)
- Costs of grading, filling, draining, and clearing
- Assumption of any liens, mortgages, or encumbrances on the property
- Additional land improvements that have an indefinite life
89
Improvements with limited lives, such as private driveways, walks, fences, and parking lots, are recorded as ____ and depreciated
Land Improvements
90
Land acquired and held for speculation is classified as an ___
Investment
91
Land held by a real estate concern for resale should be classified as ___
Inventory
92
Cost of buildings include (2):
- Materials, labor, and overhead costs incurred during construction
- Professional fees and building permits
93
Cost of equipment includes (6):
- Purchase price
- Freight and handling charges
- Insurance on the equipment while in transit
- Cost of special foundations if required
- Assembling and installation costs
- Costs of conducting trial runs
94
Self-Constructed Assets costs include (2):
- Materials and direct labor
| - Overhead (Assign no fixed overhead or assign a portion of all overhead to the construction process)
95
Capitalization on interest considers three items:
- Qualifying assets
- Capitalization period
- Amount to capitalize
96
Interest costs during construction qualifying assets two types:
- Assets under construction for a company's own use
| - Assets intended for sale or lease that are constructed or produced as discrete projects
97
Capitalization on Interest period begins when (3):
And ends when (1):
Begins:
- Expenditures for the asset have been made
- Activities for readying the asset are in progress
- Interest costs are being incurred
Ends:
-The asset is substantially complete and ready for use
98
Interest cost during construction amount to capitalize
Capitalize the lesser of (2):
- Actual interest costs
| - Avoidable interest
99
The amount of interest cost during the period that a company could theoretically avoid if it had not made expenditures for the asset
Avoidable interest
100
Companies should record property, plant, and equipment at (2):
(Whichever is more clearly evident)
-The fair value of what they give up
or
-The fair value of the asset received
101
Discount for prompt payment
Cash Discounts
102
Assets purchased on long-term credit contracts at the present value of the consideration exchange
Deferred-Payment Contracts
103
Allocate the total cost among the various assets on the basis of their relative fair market values
Lump-Sum Purchases
104
The market price of the stock issued is a fair indiction of the cost of the property acquired
Issuance of Stock
105
Exchanges of Nonmonetary Assets:
Companies should recognize immediately any gains or losses on the exchange when the transaction has ____
Commercial substance
106
Exchange has _____ if the future cash flows change as a result of the transaction. That is, if the two parties' economic positions change, the transaction has ___^
Commercial substance
107
Companies recognize a ___ immediately whether the exchange has commercial substance or not
Loss
108
If the exchange has commercial substance: Companies usually record the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset at the _____, and immediately recognizes a gain
Fair value of the asset given up
109
General formula for gain recognition on a transaction that lacks commercial substance:
((Cash Received (Boot))/(Cash Received (Boot) + Fair Value of Other Assets Received) x Total Gain = Recognized Gain
110
In general, costs incurred to achieve greater future benefits should be ____, whereas expenditures that simply maintain a given level of services should be ____.
Capitalized
Expensed
111
In order to capitalize costs, one of three conditions must be present:
1. Useful life must be increased
2. Quantity of units produced must be increased
3. Quality of units produced must be enhanced
112
Costs subsequent to acquisition
Major types of expenditures (4):
- Additions
- Improvements and replacements
- Rearrangement and reinstallation
- Repairs
113
Increase or extension of existing assets
Additions
114
Substitution of an improved asset for an existing one
Improvements and replacements
115
Movement of assets from one location to another
Rearrangement and reinstallation
116
Expenditures that maintain assets in condition for operations
Repairs
117
Accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset
Depreciation
118
Allocating costs of long-lived assets:
Fixed assets =
Intangibles =
Natural resources =
Fixed assets = Depreciation expense
Intangibles = Amortization expense
Natural Resources = Depletion expense
119
Special Depreciation Method:
Used when the assets are similar in nature and have approximately the same useful lives
Group method
120
Special Depreciation Method:
Used when the assets are dissimilar and have different lives
Composite Method
121
Special Depreciation Method:
The choice of method depends on the ______
The computation for group or composite method is essentially the same: find an ___ and ______
Nature of the assets involved
Find and average and depreciate on that basis
122
The process of allocating the cost of natural resources
Depletion
123
When the carrying amount of an asset is not recoverable, a company records a write-off referred to as an ____
Impairment
124
An impairment has occurred if:
The sum of the expected future net cash flows from the long-lived asset is ___ than the carrying amount of the asset
Less
125
The impairment loss is the amount by which the carrying amount of the asset ____ the fair value of the asset
Exceeds
126
The market value or the present value of expected future net cash flows
Fair value
127
After recording an impairment loss, the reduced carrying amount becomes its new ____
Cost basis
128
Intangible asset characteristics (2):
1. Lack physical existence
| 2. Not financial instruments
129
Intangibles are normally classified as _____
Long-term assets
130
Common types of intangibles:
```
Patents
Copyrights
Franchises or licenses
Trademarks or trade names
Goodwill
```
131
Intangible valuation:
Recorded at ___
Typical costs include (3):
Cost
- Purchase Price
- Legal fees
- Other incidental expenses
132
Intangible asset valuation:
Internally created intangibles are recorded at ___, are generally ____, and only capitalize _____ incurred in developing intangible, such as ___ costs.
Cost
Expensed
Direct Costs
Legal costs
133
Limited-life Intangible asset amortization:
Amortize to expense over _____
Credit ___ account or ______
Useful life
Asset account or accumulated amortization
134
Limited-life intangibles:
Useful life should reflect the periods over which the asset will contribute to _____
Amortization should be ___ less ___
Cash flows
Cost less residual value
135
Indefinite-Life intangibles amortization:
No foreseeable limit on time the asset is expected to _____
Must test indefinite-life intangibles for impairment at least ____
No _____
Provide cash flows
Annually
No amortization
136
Represents the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized
Goodwill
137
Goodwill is only recorded when an ______
Entire business is purchased
138
Goodwill is measured as the ______ over the _______
Excess of cost of the purchase over the FMV of the identifiable net assets purchased
139
____ created goodwill should not be capitalized
Internally
140
Goodwill considered to have an ____
Indefinite life
141
Is goodwill amortized?
No
142
Only adjust carrying value when goodwill is ___
Impaired
143
Purchase price less than the fair value of net assets acquired
Bargain Purchase
144
Bargain purchase amount is recorded as a __ by the purchaser
Gain
145
Impairment of Goodwill:
Two Step Process:
Step 1: If fair value is ___ than the carrying amount of the net assets (including goodwill), then perform a second step to determine possible impairment
Step 2: Determine the ___ value of the goodwill (implied value of goodwill) and compare to ___ amount
Less
Fair value
Carrying amount
146
Not in themselves intangible assets
Research and Development Costs (R&D)
147
R&D costs frequently results in something that a company ______ such as new product, process, idea, formula, composition, or literary work
Patents or copyrights
148
Companies must ____ all research and development costs when incurred
Expense
149
Balances owed to others for goods, supplies, or services purchased on open account
Accounts Payable
150
Written promises to pay a certain sum of money on a specified future date
Notes Payable
151
Discount on notes payable is a ____ account to notes payable, and therefore is ___ from notes payable on the balance sheet
Contra
Subtracted
152
Discount on notes payable:
Represents the cost of _____, debited to _____ expense over the ___ of the note, and represents ____ expense shareable to ___ periods
Borrowing
Interest expense
Life
Interest
Future
153
Amount owed by a corporation to its stockholders as a result of board of directors' authorization
Dividends Payable
154
Dividends payable are generally paid within _____, undeclared dividends on cumulative preferred stock not recognized as _____, and dividends payable in the form of additional shares of stock are reported in ______
3 months
Liability
Stockholders' equity
155
Received from customers and employees to guarantee performance of a contract or service or as guarantees to cover payment of expected future obligations. May be classified as current or long-term liabilities
Returnable cash deposits
156
Payments received before delivering goods or rendering services
Unearned Revenues
157
Retailers must collect sales taxes from customers on transfers of tangible personal property and on certain services and then remit to the proper governmental authority
Sales tax payable
158
Many companies do not segregate the sales tax and the amount of the sale at the time of sale. Instead, the company credits both amounts in total in the _____ account
Sales Revenue
159
Taxes payable are a ____ liability, corporations must make ____ tax payments, and differences between ___ income and ___ income sometimes occur
Current liability
Periodic tax payments
Taxable income
Accounting income
160
Amounts owed to employees for salaries or wages are reported as a current liability
Employee-Related liabilities
161
Current liabilities related to employee compensation may include (3):
- Payroll deductions
- Compensated absences
- Bonuses
162
Most common types of payroll deductions are (4):
- Taxes
- Insurance premiums
- Employee savings
- Union dues
163
Paid absences for vacation, illness, and holidays
Compensated Absences
164
Accrue a liability for compensated absences if all the following conditions exist:
The employer's obligation is attributable to employees' services ______, the obligation relates to rights that ______, payment of the compensation is ____, and the amount can be _____.
Already rendered
Vest or accumulate
Probable
Reasonably estimated
165
Payments to certain or all employees in addition to their regular salaries or wages
Bonus Agreements
166
Bonuses paid are an ____ expense, unpaid bonuses should be reported as a _____
Operating
Current liability
167
Portion of bonds, mortgage notes, and other long-term indebtedness that matures within the next fiscal year
Current Maturities of Long-Term Debt
168
Exclude long-term debts maturing currently if they are to be (3):
- Retired by assets accumulated that have not been shown as current assets
- Refinanced, or retired from the proceeds of a new debt issue
- Converted into capital stock
169
Short-term obligations expected to be refinanced:
Exclude from current liabilities if both of the following conditions are met:
1. Must ______ the obligation on a long-term basis
2. Must ______ to refinance (Actual refinancing or enter into a financing agreement)
Intend to refinance
Demonstrate an ability
170
An existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur
Contingencies
171
Typical gain contingencies are (4):
1. Possible receipts of monies from gifts, donations, asset sales, etc.
2. Possible refunds from the government in tax disputes
3. Pending court cases with a probable favorable outcome
4. Tax loss carryforwards
172
Gain contingencies are ______, disclosed only if probability of _____
Not recorded
Receipt is high
173
FASB uses three areas of probability of loss contingencies:
- Probably
- Reasonably probable
- Remote
174
Loss contingencies:
Probability to Accounting:
Probable =
Reasonably probable =
Remote =
Probable = Accrue, Footnote
Reasonably probably = Footnote
Remote = Ignore
175
Common loss contingencies (4):
- Litigation, claims, and assessments
- Guarantee and warranty costs
- Premiums and coupons
- Environmental liabilities
176
Companies must consider the following factors, in determining whether to record a liability with respect to pending or threatened litigation and actual or possible claims and assessments:
_____ in which the action occurred, ____ of an unfavorable outcome, ability to make a ____ of the loss
Time period
Probability
Reasonable estimate
177
Warranty that the product meets agreed-upon specifications in the contract at the time the product is sold
Assurance-Type Warranty
178
Assurance-Type Warranty should be expensed in the period the ______ and should record a _____
Goods are provided or services performed
Warranty liability
179
Warranty that provides an additional service beyond the assurance-type warranty
Service-Type Warranty
180
Service-Type Warranty is recorded as a ______, usually recorded in an _____ account, and recognize revenue on a ____ basis over the period the service-type warranty is in effect
Separate performance obligation
Unearned Warranty Revenue account
Straight-line basis
181
Companies should charge the costs of premiums and coupons to expense in the period of the sale that benefits from the plan
Consideration Payable
182
Consideration Payable:
Company estimates the number of _____ that customers will present for redemption and the company charges the cost of premium offers to _____ and credits _____
Outstanding premium offers
Premium Expense
Premium Liability
183
A company must recognize an ______ when it has an existing legal obligation associated with the retirement of a long-lived asset and when it can reasonably estimate the amount of the liability
Asset Retirement Obligation (ARO)
184
Asset Retirement Obligation (ARO) should be recorded as ___ value
Fair
185
Self-Insurance is not insurance, but ____
Risk assumption
186
Long-term debt is not payable within ____ or the operating cycle of the company, whichever is ____
Within a year
Longer
187
Issuing bonds
Bond contract known as a _____
Represents a promise to pay (2):
Bond indenture
1. Sum of money at designated maturity date, plus
2. Periodic interest at a specified rate on the maturity amount (face value)
188
Bonds interest payments usually made _____
Semiannually
189
Investment community values a bond at the present value of its expected future cash flows, which consist of ___ and ___
Interest and principal
190
How do you calculate the amount of interest that is actually paid to the bondholder each period?
Stated Rate x Face Value of the Bond
191
How do you calculate the amount of interest that is actually recorded as interest expense by the issuer of the bonds?
Market Rate x Carrying Value of the Bond
192
When companies issue bonds on other than the interest payment dates, buyers will pay the seller the interest accrued from the last _____ to the date of ___. On the next semiannual interest payment date, purchasers will receive the _____ payment
Interest payment date to the date of issue
Full six months' interest
193
Produces a periodic interest expense equal to a constant percentage of the carrying value of the bonds
Effective-Interest Method
