Test1

Question 0

Income statement components

Answer 0

Revenues
Expenses
Net income for period

Reports success or failure of the company’s operations during a specific period

Question 1

Order of financial statements

Answer 1

Income statement
Retained earnings statement
Balance sheet

Question 2

Retained earnings statement

Answer 2

For point in time

Total net income or loss over life of company minus dividends paid out

Use previous retained earnings and add net income from income statement. Or subtract net loss from income statement.

Distinguished equity earned from that originally invested by owners

Question 3

Balance sheet

Answer 3

Represents a specific date

Assets = liabilities plus owners equity

Question 4

Assets

Answer 4

In order of liquidity

Cash
Accts receivable
Notes receivable
Equipment
Plant
Property
(Accumulated depreciation)

Has useful life of more than one year

Resources owned by the business

Question 5

Liabilities

Answer 5

Accts payable
Notes payable
Salaries payable
Unearned revenue

Creditors claims on total assets

Question 6

Stockholders (owners) equity

Answer 6

Capital stock
Retained earnings (from retained earnings statement)

Ownership claim on total assets

Question 7

Liquidity

Answer 7

Ability to pay near-term obligations

How easily readily can convert to cash

Question 8

Capital resources

Answer 8

Ability to fund operations

Question 9

Current asset

Answer 9

Something that you own that can turn to cash in less than one year.

Has useful lifetime of greater than one year

Question 10

Current liability

Answer 10

What you expect to pay off within one year.

Question 11

Goodwill

Answer 11

Fair market value - book value = goodwill.

Question 12

Contra asset

Answer 12

Listed as asset but causes overall assets to decrease

Ex accumulated depreciation

Question 13

GAAP

Answer 13

Generally accepted accounting principles

Question 14

FASB

Answer 14

Financial accounting standards board

Question 15

Relevant and reliable

Answer 15

Relevant to many audiences and free of error.

Question 16

Comparability and consistency

Answer 16

Compare different companies

Compare from year to year

Question 17

Materiality

Answer 17

Doesn’t make a difference financially.

Relative importance of an item or event. If immaterial do not need to do adjusting entries

Ex. Small items expense no need for depreciation. Utilities.

Question 18

Conservatism

Answer 18

In gray areas. Do not overstate assets or income

Provide estimate that gives lowest net income

Question 19

Full disclosure principle

Answer 19

Must include information that would effect how investors or creditors view the company

Question 20

Economic entity principle

Answer 20

Economic events traced to an individual entity

Has to do with subsidiaries

Question 21

Stable dollar assumption

Answer 21

Not adjusted for inflation or deflation

Question 22

Going concern assumption

Answer 22

Business will continue to operate

Not headed for bankruptcy

Question 23

Cost principle

Answer 23

Assets are recorded at cost

Question 24

Objectivity principle

Answer 24

Values are factual and can be verified

Question 25

Revenues

Answer 25

Increase in assets that result from sale of a product or service Results in cash or accounts receivable

Question 26

Expenses

Answer 26

Using up of assets or services to generate revenue Ex. Salary (uses cash asset)

Question 27

Net income

Answer 27

Derived number Doesn't really exist in any financial system. Created number.

Question 28

Classified balance sheet

Answer 28

``` Generally contains standard classifications: Current assets PPE other assets Current liabilities Long-term liabilities ```

Question 29

Depreciation

Answer 29

Allocating an assets cost over the useful life of the asset instead of expensing full cost of asset in year of purchase Arbitrary Linear

Question 30

Elements of financial annual reports

Answer 30

``` Income statement Statement if retained earnings Balance sheet Statement of cash flow Management discussion and analysis Notes to financial statement Auditors report ```

Question 31

Management discussion

Answer 31

Covers Liquidity Capital resources Results of operation

Question 32

Notes to financial statements

Answer 32

``` Additional info Not necessarily numerical Description of accounting policies Explanations Statistics ```

Question 33

Auditors report

Answer 33

Independent examination | Unqualified opinion that all in accordance with GAAP

Question 34

Ratio analysis

Answer 34

Relationship among selected items Percentage Rate Proportion

Question 35

Liquidity ratio

Answer 35

Short term ability to pay maturing obligations Working capital = current assets-current liabilities Current ratio=current assets/current liabilities. (Good to be 2:1). Good for external conparison

Question 36

Solvency ratio

Answer 36

Ability of company to survive over long period if time Total debt to total assets ratio Ratio> 50% means creditors have more at risk than owners

Question 37

Transaction analysis

Answer 37

External and internal events. Only need to record external transactions Exchange of assets liabilities or owners equity between company and outside party

Question 38

Revenue recognition principle | Realization principle

Answer 38

Revenue recognized in accounting period in which it is earned When service provided or goods delivered Remainder is a liability known as unearned revenue

Question 39

Matching principle

Answer 39

Requires that expenses be recorded in same period in which the revenues they helped produce are recorded

Question 40

Steps in transaction process

Answer 40

Analyze transaction Journalize each transaction Post each transaction to an account (T account) Each transaction must balance equation A=L+OE

Question 41

Recording of a transaction

Answer 41

Debits always written first. (This is assets, expenses, dividends) Credits written second and always indented (liabilities, owners equity, revenue)

Question 42

Note vs account receivable

Answer 42

Account is interest free Note need to pay interest. Usually longer term

Question 43

Dividends

Answer 43

Not an expense. Separate category called dividend that decreases stockholder equity

Question 44

4 basic types of adjustments

Answer 44

Convert assets to expenses Convert liabilities to revenue Accrue unpaid expenses Accrue uncollected revenue

Question 45

Accrual basis accounting

Answer 45

Revenue recorded only when earned not when cash is received Expense recorded when incurred not when cash paid

Question 46

Rule for adjusting entries

Answer 46

Adjusting entry effects income statement account and balance sheet account.

Question 47

Expenses cause Owners equity to decrease

Answer 47

Expenses cause owners equity to decrease

Question 48

Prepaid expense

Answer 48

Depreciation Insurance Assets

Question 49

Unearned revenue

Answer 49

Cash collected but not earned Magazine Year cleaning service Liability

Question 50

Revenue increases owners equity

Answer 50

Revenue increases owners equity

Question 51

Accrued revenue

Answer 51

Revenues earned but not received Adjustment results in revenue which increases owners equity

Question 52

Accrued expense

Answer 52

Expenses incurred but not paid. No original entry Need to add adjusted expense which decreases owners equity

Question 53

Temporary accounts

Answer 53

Revenues accounts Evidences accounts Dividends

Question 54

Permanent accounts

Answer 54

Asset accounts Liability accounts Owners equity accounts

Question 55

Return on assets

Answer 55

Net income/total assets

Question 56

Evaluating profitability

Answer 56

Net income percentage Return on equity

Question 57

Net income percentage

Answer 57

Net income/total revenue Measure of profitability Managements ability to control costs

Question 58

Return on equity

Answer 58

Net income/avg owners equity Measure of profitability

Question 59

Evaluating liquidity

Answer 59

Working capital Current ratio

Question 60

Working capital

Answer 60

Current assets-current liabilities Measure of liquidity

Question 61

Current ratio

Answer 61

Current assets/current liabilities Measure of liquidity

Question 62

Adequate disclosure

Answer 62

Must disclose all information for financial statements to be interpreted properly Need to disclose accounting methods used And due dates of major liabilities

Question 63

Sarbanes oxley act of 2002

Answer 63

Rules for reporting Hmmmm