PKU Accounting Final Flashcards
1
Q
Are purchased stocks of other companies assets?
A
Y
2
Q
examples of noncurrent assets
A
PPE (property, plants, and equipment)
3
Q
3 examples of cash
A
currency, bank deposits, investments witha maturity of 90 days or less
4
Q
What is PPE?
A
tangible long-lived assets to be used in operations over time (not purchased for resale)
5
Q
What cost are most assets reported?
A
Historical cost
6
Q
Asset depreciation is recorded in the ____ as _____
A
income statement
expense – depreciation and amortization expense
7
Q
Notes payable (def)
A
amount borrowed from creditors that are scheduled to be repaid more than 1 yr in the future
8
Q
Owner’s equity (def)
A
company’s owners’ residual claim on assets after debts have been paid
9
Q
Retained earnings (def)
A
total amount of earnings made by the firm over its lifetime - dividends paid to its shareholders
10
Q
4 basic accounting assumptions
A
separate entity assumption
continuity assumption
time period assumption
unit of measure assumption
11
Q
Separate entity assumption
A
the owner of the company is separate from the company itself
ex. X record personal financials
12
Q
Continuity assumtpion
A
Company will not go bankrupt and will continue to operate in the foreseeable future
13
Q
Time period assumption
A
accountant should divide up complex, ongoing activities of a business into periods. The precise time period covered is included in the heading of the IS and SoCF
14
Q
Unit of measure assumption
A
all transactions must be consistently recorded using the same currency
15
Q
For multinational companies, fin statements are usu reported in _____ currency
A
parent company’s
16
Q
Why do we need adjusting entries
A
Some revenues and expenses are accrued and unrecorded; rev/exp affect more than 1 accounting period
17
Q
Revenue recognition can affect multiple periods when (2)
A
company delivered products but has not collected cash
company collected cash but has not delivered products
18
Q
Expense recognition can affect multiple periods when (2)
A
1) the comapny incurred exp to generate rev but has not yet paid cash for the exp
2) company paid for some exp before using the exp to generate rev
19
Q
Matching principle
A
expenses should be recorded in the same period in which they are used to generate revenue
20
Q
Depreciation
A
gradual reduction in the recorded value of an asset over its useful life by charging it to expense
21
Q
Accumulated depreciation is classified as
A
conta asset
22
Q
an item is “material” if _____
A
knowledge of the item might reasonably influence the decisions of users of financial statements
23
Q
6 examples of items disclosed
A
1) lawsuits pending
2) schedules plant closings
3) governmental investigations
4) signif events occuring after BS date
5) specific customers that account for a large portion o revenue
6) unusual transactions and related party transactions
24
Q
Clear the balance of ____ and ____ accounts, so that in the next period, these accounts start from zero balance
A
dividends and [is] accounts
25
Profitability and 3 measures
How is company's ability to generate profits?
Return on assets (ROA)
Return on equity (ROE)
Net profit margin
26
Return on assets (ROA)
Return on equity (ROE)
Net profit margin
equations
1) net income/total assets
2) net income/total equity
3) net income/sales
27
Liquidity and 2 measures
Can the company pay off its ST liabilities
1) current ratio
2) cash ratio
28
Equations:
Current ratio
Cash ratio
current assets/current liabilities
cash /current liabilities
29
Cash def + 5 ex.
any deposit banks will accept
1) coins and paper $ 2) bank credit card sales 3) travelers checks 4) checks 5) money orders
30
cash equivalent
def + 2 ex
very safe + stable investments. usu maturity of 90- days
1) treasury bills 2) high-grade commercial papers
31
Restriction cash
def
cash held for a specific purpose and is not available for paying current liabilities
32
4 reasons for
Cash management
accurately account for cash
prevent theft and fraud
assure the availability of adeqaure amount of cash and anticipate need for borrowing
prevent unnecessarily large amounts of idle cash that produce no revenue
33
7 parts to
internal control over cash
1) sep f(x) o handling cash + maintaining accounting records
2) prep cash budget
3) req daily deposits o all cash reciepts
4) make all payments by check
5) rq that every expenditure be verified before payment
6) prep control listing o cash receipts
7) promptly reconcile bank statements
34
Statement of a depositor's account to the depositor
explains the diff btwn cash reported on bank statement + cash balance in the company's accounting records
35
--Ch 4--
4 steps to
Reconciling the bank statement
1) compare the deposits
2) adjust the bank statement
3) adjust the company's own records
4) compare the balances
36
-- 4 Reconciling the Bank Statement --
3 reasons to adjust the bank statement
1) add deposits in transit
2) deduct outstanding checks
3) add/deduct bank errors
37
-- 4 Reconciling the Bank Statement --
3 reasons to adjust the company's own records
1) add interest revenue
2) deduct service charges and NSF "not sufficient funds" checks
3) add/deduct errors
38
Accounts receivable is defined as a _____ asset
current
usu within 20-60 days
39
Net realizable value (eq)
Accounts receivable - allowance for doubtful accounts
40
--Estimating Credit Losses --
What is the Balance sheet approach? (3 steps)
1. separate a.receivable into groups based on how long they are past due (age classifications)
2) each age grouping has a diff likelihood of being uncollectible
3) compute a separate allowance for each age grouping
41
--Estimating Credit Losses --
Income statement approach: What is the amount for the journal entry?
Net credit sales * % Estimated Uncollectible
42
--Estimating Credit Losses --
Difference between BS and IS approach
BS -- estimate allowance, then record expense for increase in allowance; more accurate
IS -- estimate expense for current period then add to that allowance
43
2 ways to get cash quicker from ac.receivable
1) factoring accounts receivable -- co sell ac receivable to financial institutions for a lower price
2) credit card sales -- co can deposit credit card payment directly into
44
What was the Huanrui Century Pictures example?
fabricated receipt of ac receivable
avoided recording expense for uncollectible accounts
higher net income
45
Promissory note (def)
terms and conditions of the repayment of a note receivable
46
Accounts Receivable Turnover rate (eq)
Net sales/ avg ac receivable
47
Days sales outstanding
365/ac receivable turnover ratio
avg number of days needed to collect ac receivable
48
Merchandising v Manufacturing companies
Purchase inventory in read to sell condition v
produce inventory from raw material; longer operating cycle
49
Perpetual v periodic inventory system
All transactions and costs - recorded immediately as they occur; uses inventory subsidiary ledger, T account for each type of inventory
v
only count them periodically
50
Reasons for inventory shrinkage
Breakage, spoilage, theft
51
4 inventory cost flow methods
1) specific cost identification 2) avg cost 3) FIFO 4) LIFO
52
COGS eq for periodic
beginning + purchase - ending inventory
53
FIFO LIFO effect on income
overstate net income
v
understate income saving the most taxes
54
Lower of Cost or Market Rule
inventory valued at lower of its cost or market value
55
When is a drop in inventory value material?
Loss is more than 2% of current net income
56
FOB shipping v destination point
ownership passes to the buyer at the point of shipment
ownership belongs to the seller until the goods reach its destination
57
Oriental Ocean example
large amount of write-dwons for sea cucumbers
58
inventory turnover
COGS/ avg inventory
59
days inventory outstanding
365/inventory turnover
60
credit terms format
discount/days offered, n/deadline for full
61
What else is considered part of the cost of the asset being aquired? (2)
3 ex
transportation cost and cost of getting asset ready to use
sales taxes, delivery costs, installation costs
62
Gross profit method (3 steps)
determine cog avail for sale
2) est cogs by multiplying the net sales by cost ratio
3) deduct cogs from cog available for sale
63
cost ratio eq for gross profit method v retail method
cogs/sales
v
retail price/cost
64
gross profit ratio
(sales - cogs) / sales
65
retail method (3 steps)
1) determine both historical and retail prices and goods avail for sales
2) compute cost ratio
3) est ending inventory by multiplying retail value of ending inventory by cost ratio
66
Just in time inventories
purchases of raw materials just in time to process or completing goods just in time to ship to the customer
67
capitalize def
recording a cost as an asset on the balance sheet
68
PPE defined as (4 chara)
1) physical substance 2) used in operation of business 3) not intended for sale 4) expected to provide service to company for several years
69
capitalize v depreciate
land improvements
remodeling/instruction
interest on loan to remodel
dep
cap
cap
70
expense or capitalized once asset has been put in use
maintenence cost
improvement cost
expensed
capitalized
71
--depreciation --
straight-line method
depreciation expense = (cost -residual value)/years of useful life
72
--depreciation --
declining balance method
depreciation expense = remaining book value * accelerated depreciation rate
73
China Southern airlines example
change in depreciation policy
less expenses --> higher net income
74
Noncurrent assets (3 characterisitcs)
often provide exclusive rights or privleges
limited life or indef life
usu aquired for operational life
75
Amortization
Systematic write-off of the cost of intangible assets over their useful life or legal life, whichever is shorter
76
all expenditures classified as research and development should be charged to
expense when incurred
77
Eq for depletion of natural resources
(cost - residual value)/ total unit natural resource
78
Evidence of borrowing is issued when a company (3)
Obtains a bank loan
Purchases costly ppe or mech
3) replace a past-due account payable
79
Amortization table steps
1) interest expense = unpaid * interest%
2) reduce unpaid by installment - interest expense
80
4 types of bonds
1) mortage bonds
2) debenture bonds
3) convertible bonds
4) junk bonds
81
bond prices =
% of face value (usually 1,000)
82
contract rate
a bond's stated rate of interest
83
interest payment =
principle * contract rate * time
84
Selling price of the bond =
present value of the bond + accrued interest since the last interest payment date
85
bond issued at a discount v premium
company recieved a smaller amount of cash than the face value of the bond v larger
86
discount rate aka effective interest rate
rate used to compute the PV of future cash flows
87
carrying value of bond
bonds payable - discount on bonds payable
88
If a bond is issued at discount, company must repay additional cost of borrow as a _____ which is ______ over its lifetime
interest expense
amortized
89
bond prices vary _____ with changes in market interest rates
inversely
90
bonds can be retired by
exercising a pcall provision
purchasing the bonds on the open market
91
corporations 3 characteristics
1) created by law
2) rights and responsibilities are separate from those of its owners
3) assets and debts belong to the corp not its owners
92
advantages of incorporation
1) limited personal liability for s.holders
2) ownership transferability
3) professional management
4) continuity of existence
93
disadvantages of incorporation
1) heavy taxation
2) greater regulation
3) cost of formation
4) separation of ownership and management
94
publicly owedn corporations must (4)
prep financial statements with GAAP
2) have fin statement audited by an indep CPA
3) comply w federal securities laws
4) submit fin info for SEC review
95
3 stockholder rights
voting rights to elect director or set policies
2) proportionate distribution of dividends
3) proportionate distribution of assets in case of liquidation
96
2 ways to increase S.Equity
1) paid-in capital -- contributions by investors in exchange for capital stock
2) retention of profits earned by corporation -- retained earnings
97
outstanding v treasury shares
issued shares that are owned by stockholders
issued shares that have been required by the corp
98
loss contingencies
existing uncertain situation that may reuslt in a possible loss
99
loss contingencies are only reported as a liability if both:
likelihood that result = loss will occur
loss amount can be reasonably estimated
100
commitments
contracts for future transactions; not a liability
101
estimated liability
known to exist, but precise dollar amount cannot be determined until a later date
102
accrued liabilities
recognition of expenses for which payment will be made in the future
103
unearned revenue
cash collected from customer before revenue is earned, liability
104
interest coverage ratio
operating income/ interest expense
margin of protection for creditors, higher = better
105
3 special types of liabilities
leases -- contracts where lessor gives lessee right to use an asset for x time for periodic rental payments
postretirement benefits -- obligation of the employer for benefits that employees earn the right to recieve while they are working for that employer
deferred taxes -- the portion of income taxes expense that is deferred to future tax returns as a result of timing diff btwn accounting principles and tax rules
106
preferred stock
separate class of stock, typically having priority over common shares in 1) dividend distributions 2) distribution of assets in case of liquidation 3) cumulative dividend rights 4) usu callable by co 5) normally has no voting rights
107
cumulative preferred stock
if all or part of the regular dividend on the preferred stock is omitted in a given year, the amount omitted is called divdend in arrears and must be paid in the next year before any dividend can be paid on common stock
108
book value per share of common stock
(total s.equity - preferred stock and p.stock dividends in arrears)/number of common shares outstanding
109
what is the price corporation records treasury stock
at cost (purchase price)
110
dvidend characteristics (4)
declared by board of directors
not legally rq
created liability at declaration
rq sufficient REarnings and cash
111
stock dividends
increasing each stockholders stock by some percentage, no change in par values
112
prior period adjustments
correction of an error identified as affecting net income in a prior period; under statement of retained earnings
113
prior period adjustment value
value forgotten * (1-tax rate)
114
return on total assets
net income/ avg total assets
115
return on common s.equity
net income/avh common s.equity
116
comprehensive income
net income + other comprehensive income
released as its own statement or combined with net income on income statement
117
how is a company's investment in another valued?
cost method if ownership 0-20%
equity method if 20-50% ownership
consolidation if 50-100%
118
cost method
investment is recorded at cost
119
equity method
record investment at cost and subsequently adjusts investment account each period for the investors share of the associates net income and divdends received by the investor
120
2 types of securities (2+2)
debt investments -- trading securities and held-for-collection securities
share investments -- trading investments and non-trading securities
121
trading v non-trading v held-for-collection
trading -- sell soon, record at fair.v and changes as net income
non-trading -- hold for a while and see how they before, record at fv and changes - part of equity
held-for-collection -- hold until maturity
122
other comprehensive income
gains and losses that have not been realizes yet and are excluded from net income on an income statement
123
accumulated other comprehensive income
equity account that accumulates OCIs over time
124
earning per share
net income/ common shares
125
price earnings ratio and meaning
market price per share of common stock/earnings per share of common stock
rep how much the market is willing to pay per dollar of a company's earnings
126
3 types of cash flows and their def
operating -- related ot main busi operation
investing -- related to fin investments or LT assets
financing -- activities related to funding
127
what is under investing activites?
cash proceeds from selling investments and intangible assets; collecting principal amounts on loans
128
indirect method for cash flows from operations
start from net income and make adjustments to arrive at new cash flow from operations
adjustments made for noncash expenses (depreciation expense and amortization), nonoperating gains and losses, timing differences
129
direct materials
raw materials and component parts used in production
can be traced directly to the specific products manufactured
130
direct v indirect labor
direct labor hrs * wage rate; work directly on goods being manufactured
part of manufacturing overhead
131
What does manu o/h include and not include?
incl/ supervisors, depreciation, utilities
DOES NOT INCL selling or general and admin expenses (not related to the production of goods)
132
3 cost accounting systems
absorption -- all manu costs in the cost of product
variable -- all variable manu costs in cost of product
activity based costing -- multiple OH rates to allocate manu OH costs for different activites
133
what can absorption costing be separated into
job order costing
process costing
134
job order costing
use predetermined overhead rate = est total overhead cost/estimated total units in activity base for coming period
uses a job cost sheet
135
material requsition form and time ticket
-- absorption costing.job order costing.job cost sheet--
authorizes the use of materials on a job
work record
136
where do fixed costs go in absorption and variable costing?
1. capitalized as inventory
more inventory than sold = higher profit
2. expensed
137
product v period costs
costs directly related to the production of a product
not directly related to specific product; selling and administrative expenses
138
flow of product costs
materials inventory + direct materials = WIP inventory + direct labor + manu o/h = finished goods inventory --> COGS
139
contribution margin
revenue - variable costs
140
break even point in units and in dollars
fixed units / contribution margin per unit
fixed costs/ contribution margin ratio: unit contribution margin/unit sales price
141
margin of safety
actual sales - break even sales
142
sales mix
relative combination in which a company's different products are sold
143
high low method
take highest - lowest cost period
estimate VC per unit
estimate FC
144
3 assumptions of CVP
limited range of activity where CVP relationships are linea
2. sales mix - constant
3. production = sales
145
out of pocket costs
costs that have not yet been incurred and may vary among the possible courses of action
146
special order decisions
should be based on incremental costs and incremental revenues (what youll get/give if you do it)
147
profit center v investment center v cost center
control over both costs and revenues but no control over investment funds
profit center where management also makes capital investment decisions
control over incurrence of costs but no control over revenues or investment funds
148
financial budget
plans for sources o funds and capital expenditures, externally focused
149
2 apporaches to setting budget amounts
behavioral approach -- reasonable and achievable budget amounts
total quality management approach -- set at absolute efficeincy
150
ROI
operating income/avg total assets
capital turnover * reutrn on sales
151
3 ways to imporve roi
increase sales prices
decrease expenses
lower invested capital
152
residual income
operating earnings - (investment capital * minimul reutn * minimum return)
153
economic value added
after tax operating income - (total assets - current liabilities)*weighted avg cost of capital
154
4 parts of balanced scorecard lens
financial, customer, business porcess, learning and grotwh perspective
155
where does US file financial reports?
EDGAR
156
What is disclosed in financial reports? (3+3)
financial information -- 1) management discussion and analysis 2) audit opinion 3) financial statements; notes to fin statements
non-financial information -- 1) internal control 2) corporate social responsibility 3) environmental, social, and governance
157
3 steps of auditing financial reports (1, 4, 4)
audit standard -- AICPA
.process -- planning, risk assessment, testing and evidence, reporting
.opinion -- unqualified opinion, qualified opinion, adverse opinion, disclaimer of opinion
