LO 2

Question 1

3 key components to income statement

Answer 1

how much revenue the company generated, the level of expenses incurred to generate that revenue, and how much money is left over as profit

Question 2

gross profit/margin

Answer 2

revenue less cost of sales

Question 3

operating profit

Answer 3

gross profit less all other operating expenses

Question 4

4 things necessary for seller for revenue recognition

Answer 4

1. no longer bears risks with respect to the goods
2. cannot tell the purchaser what to do with the goods
3. knows what they expect to collect from the buyer
4. can measure reasonably well how much the goods cost

Question 5

3 main revenue recognition methods used for long-term contracts

Answer 5

pro-rated method, percentage of completion method, and completed contract method

Question 6

in situations where the seller isn’t assured of collecting the selling price or unable to estimate the amount that will not be collected, two methods are

Answer 6

installment and cost recovery

Question 7

installment method

Answer 7

revenue is recognized only when the seller receives a cash installment, (as is cost and profit)

Question 8

cost recovery method

Answer 8

seller doesn’t report profit until cash amount received exceed the cost of good/service sold

Question 9

if the barter goods/services are similar, effect on cash flows or net income is

Answer 9

nothing

Question 10

revenue recognized for bartering

Answer 10

fair value if the company has historically received cash, or carrying amount of the asset surrendered

Question 11

two main forms of expenses

Answer 11

1. decreases in economic benefits relating to outflows or depletions of assets
2. incurring liabilities resulting in equity decreases (besides any amount distributed to equity holders directly)

Question 12

2 ways that companies categorize expenses

Answer 12

direct costs and period costs

Question 13

direct costs

Answer 13

costs directly related to generating revenues, and expense recognition follows the matching principle

Question 14

period costs

Answer 14

costs that do not match revenues directly and are more fixed than variable, and expenses are recognized in the period they are incurred when directly measurable or allocated systematically over long periods

Question 15

4 expense recognition issues

Answer 15

inventory cost methods
doubtful accounts
warranties
depreciation and amortization

Question 16

4 main ways to account for the associated costs from the sale of inventory

Answer 16

1. specific identification method
2. first in first out
3. last in first out
4. weighted average cost method

Question 17

specific identification method

Answer 17

cost of each unit is recorded and recognized when sold, only works when every unit is unique or when few units are bought/sold

Question 18

weighted average cost method

Answer 18

assigns the average cost of goods available for sale to all inventory on hand, proportion of inventory sold is used to determined associated expense, useful when there is high inventory turnover

Question 19

direct write off method for doubtful accounts

Answer 19

wait until default occurs to recognize loss (not consistent with GAAP)

Question 20

matching principles for doubtful accounts

Answer 20

companies must make estimates of uncollectible revenue when revenue is recognized on a sale

Question 21

warranties expense recognition

Answer 21

estimates for future expenses are made at the time of the sale

Question 22

depreciation

Answer 22

systematic allocation of costs to long-lived physical assets

Question 23

amortization

Answer 23

systematic allocation of costs to intangible long-lived assets

Question 24

double-declining balance

Answer 24

beings with straight-line estimate and then doubles expense in the first year, residual value is not taken into account for the purpose of calculating the book value

Question 25

2 things not subject to depreciation/amortization schedules since the useful life cannot be estimated

Answer 25

land and certain intangible assets

Question 26

assets

Answer 26

resources that the company owns or controls that are expected to generate future economic benefits

Question 27

liabilities

Answer 27

obligations the company has taken on that are expected to lead to an outflow of economic benefit

Question 28

equity

Answer 28

portion of the company that the owners own or control

Question 29

fundamental acct equation

Answer 29

E= A-L

Question 30

4 limitations to balance sheet

Answer 30

1. measuring at historical cost vs fair value 3. snap-shot 3. no good predictor of cash flows that the company can generate for its owners 4. intangibles

Question 31

items on balance sheet are listed in order of

Answer 31

liquidity

Question 32

5 current assets

Answer 32

1. cash and cash equivalents 2. marketable securities 3. accounts receivable 4. inventory 5. other current assets (prepaid expenses, deferred tax assets)

Question 33

examples of cash equivalents

Answer 33

bank deposits, US treasury bills, commercial paper and money-market funds

Question 34

marketable securities

Answer 34

financial assets that are traded in public markets and price can be looked up

Question 35

examples of marketable securities

Answer 35

treasury bills, notes, bonds, mutual funds and common stocks

Question 36

accounts receivable

Answer 36

amounts owed by customers to the company for products or services already delivered

Question 37

standard cost method for inventory

Answer 37

measures actual cost of materials, labor and capacity

Question 38

retail method for inventory

Answer 38

reduces sales by gross margins to calculate inventory value indirectly

Question 39

4 current liabilities

Answer 39

1. accounts payable 2. notes payable 3. accrued expenses 4. deferred income/unearned revenue

Question 40

accrued expenses includes

Answer 40

income taxes, interest, warranty cost and wages payable

Question 41

5 non-current assets

Answer 41

1. property, plant and equipment 2. investment property 3. intangible assets 4. goodwill 5. financial assets

Question 42

furniture is included in

Answer 42

property, plant, and equipment

Question 43

PPE is carried at

Answer 43

historical cost less accumulated depreciation less impairment losses

Question 44

depreciation is recognized as

Answer 44

an expense on the income statement

Question 45

for intangible assets, amortization costs are

Answer 45

calculated over the useful life of the intangible assets and reduce the carrying value

Question 46

goodwill

Answer 46

the difference between the higher purchase price and the book value of an acquired firm

Question 47

3 main reasons that an acquiring company would pay more than the fair value

Answer 47

1. certain items are not recognized in a company's financials: reputation, management skill, distribution networks 2. research and development in progress that has more economic value than currently reported on the balance sheet 3. synergies that can be released and provide more value than the current reported book value

Question 48

goodwill is not amortized but

Answer 48

tested for impairment periodically

Question 49

amortized cost of financial assets

Answer 49

cost of the asset less principal repayments and impairments, adjusted for amortization of discount or premium

Question 50

assets held for trading (intended to be sold in the short term) are accounted for using the

Answer 50

fair value method

Question 51

2 non-current liabilities

Answer 51

long term financial liabilities | deferred tax liabilities

Question 52

long-term financial liability examples

Answer 52

borrowed funds, notes payable and bonds that the company has issued

Question 53

long-term financial liabilities usually accounted for using

Answer 53

the amortized cost method such that the carrying value equals the face value at maturity

Question 54

6 main components of equity

Answer 54

1. capital contributed by owners 2. preferred shares 3. treasury shares 4. retained earnings 5. accumulated other comprehensive income 6. non-controlling interest

Question 55

treasury shares

Answer 55

shares that were originally issued but have been repurchased by the company and are being held rather than being canceled

Question 56

retained earnings

Answer 56

cumulative amount of earnings recognized from the company's income statements since inception

Question 57

accumulated other comprehensive income

Answer 57

not recognized on the company's income statement

Question 58

non-controlling interest

Answer 58

equity interest of minority shareholders in subsidiary companies that aren't wholly owned by the parent company

Question 59

3 main components of cash flow statement

Answer 59

1. operating activities 2. investing activities 3. financing activities

Question 60

investing activities

Answer 60

cash flow from all transactions involving long-term assets and other investments

Question 61

financing activities

Answer 61

cash flow from obtaining and repaying capital (equity and long term debt)

Question 62

interest paid and dividends received are considered __ under GAAP

Answer 62

operating activities

Question 63

interest received and dividends paid are considered ____ under GAAP

Answer 63

financing activities

Question 64

cost of goods sold plus increase in inventory is

Answer 64

total amount of inventory purchased from suppliers

Question 65

if wages payable went up over the reporting period that meant

Answer 65

more cash was withheld by the company and less cash was paid out

Question 66

if prepaid expenses increased over the reporting period, that means

Answer 66

cash outflows were higher than expenses accrued

Question 67

changes in the long term debt on the balance sheet determine the

Answer 67

cash in/outflow

Question 68

free cash flow to the firm

Answer 68

cash available to debtholders and shareholders after all operating expenses, taxes, working capital investment and fixed capital investment

Question 69

in terms of a shipment, revenue should be recognized when it is

Answer 69

earned (either received or shipped, depending on the liability)

Question 70

revenue generally includes

Answer 70

ordinary activities that are expected to continue going forward

Question 71

inventory decrease reduces

Answer 71

assets