Financial accounting exam 2 PDF

Preview

Summary

Financial accounting exam 2...

Description

The historical cost principle states that: (a) assets should be initially recorded at cost and adjusted when the fair value changes. (b) activities of an entity are to be kept separate and distinct from its owner. (c) assets should be recorded at their cost. (d) only transaction data capable of being expressed in terms of money be included in the accounting records. (c) assets should be recorded at their cost. The historical cost principle states that assets should be recorded at their cost. The other choices are incorrect because (a) the historical cost principle does not say that assets should be adjusted for changes in fair value, (b) describes the economic entity assumption, and (d) describes the monetary unit assumption.

Which of the following statements about basic assumptions is correct? (a) Basic assumptions are the same as accounting principles. (b) The economic entity assumption states that there should be a particular unit of accountability. (c) The monetary unit assumption enables accounting to measure employee morale. (d) Partnerships are not economic entities. (b) The economic entity assumption states that there should be a particular unit of accountability. The economic entity assumption states that there should be a particular unit of accountability. The other choices are incorrect because (a) basic assumptions are not the same as accounting principles, (c) the monetary unit assumption allows accounting to measure economic events, and (d) partnerships are economic entities.

The three types of business entities are: (a) proprietorships, small businesses, and partnerships. (b) proprietorships, partnerships, and corporations. (c) proprietorships, partnerships, and large businesses. (d) financial, manufacturing, and service companies. (b) proprietorships, partnerships, and corporations. Proprietorships, partnerships, and corporations are the three types of business entities. Choices (a) and (c) are incorrect because small and large businesses only denote the sizes of businesses. Choice (d) is incorrect because financial, manufacturing, and service companies are types of businesses, not business entities.

Net income will result during a time period when: (a) assets exceed liabilities. (b) assets exceed revenues. (c) expenses exceed revenues. (d) revenues exceed expenses. (d) revenues exceed expenses. Net income results when revenues exceed expenses. The other choices are incorrect because (a) assets and liabilities are not used in the computation of net income; (b) revenues, not assets, are included in the computation of net income; and (c) when expenses exceed revenues, a net loss results.

As of December 31, 2019, Reed Company has assets of $3,500 and stockholders' equity of $1,500. What are the liabilities for Reed Company as of December 31, 2019? (a) $1,500. (b) $1,000. (c) $2,500. (d) $2,000. (d) $2,000. Using a variation of the basic accounting equation, Assets − Stockholders' equity = Liabilities, $3,500 − $1,500 = $2,000. Therefore, choices (a) $1,500, (b) $1,000, and (c) $2,500 are incorrect.

Performing services on account will have the following effects on the components of the basic accounting equation: (a) increase assets and decrease stockholders' equity. (b) increase assets and increase stockholders' equity. (c) increase assets and increase liabilities. (d) increase liabilities and increase stockholders' equity. (b) increase assets and increase stockholders' equity. When services are performed on account, assets are increased and stockholders' equity is increased. The other choices are incorrect because when services are performed on account (a) stockholders' equity is increased, not decreased; (c) liabilities are not affected; and (d) stockholders' equity is increased and liabilities are not affected.

Which of the following events is not recorded in the accounting records?

(a) Equipment is purchased on account. (b) An employee is terminated. (c) A cash investment is made into the business. (d) The company pays a cash dividend. (b) An employee is terminated. If an employee is terminated, this represents an activity of a company, not a business transaction. Assets, liabilities, and stockholders' equity are not affected. Thus, there is no effect on the accounting equation. The other choices are incorrect because they are all recorded: (a) when equipment is purchased on account, both assets and liabilities increase; (c) when a cash investment is made into a business, both assets and stockholders' equity increase; and (d) when a dividend is paid, both assets and stockholders' equity decrease.

During 2019, Seisor Company's assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore: (a) increased $40,000. (b) decreased $140,000. (c) decreased $40,000. (d) increased $140,000. (a) increased $40,000. Using the basic accounting equation, Assets = Liabilities + Stockholders' equity, −$50,000 = −$90,000 + Stockholders' equity, so stockholders' equity increased $40,000, not (b) decreased $140,000, (c) decreased $40,000, or (d) increased $140,000.

Payment of an account payable affects the components of the accounting equation in the following way. (a) Decreases stockholders' equity and decreases liabilities. (b) Increases assets and decreases liabilities. (c) Decreases assets and increases stockholders' equity. (d) Decreases assets and decreases liabilities. (d) Decreases assets and decreases liabilities. Payment of an account payable results in an equal decrease of assets (cash) and liabilities (accounts payable). The other choices are incorrect because payment of an account payable (a) does not affect stockholders' equity, (b) does not increase assets, and (c) does not affect stockholders' equity.

Which of the following statements is false?

(a) A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. (b) A balance sheet reports the assets, liabilities, and stockholders' equity at a specific date. (c) An income statement presents the revenues, expenses, changes in stockholders' equity, and resulting net income or net loss for a specific period of time. (d) A retained earnings statement summarizes the changes in retained earnings for a specific period of time. (c) An income statement presents the revenues, expenses, changes in stockholders' equity, and resulting net income or net loss for a specific period of time. An income statement represents the revenues, expenses, and the resulting net income or net loss for a specific period of time but not the changes in stockholders' equity. The other choices are true statements.

On the last day of the period, Alan Cesska Company buys a $900 machine on credit. This transaction will affect the: (a) income statement only. (b) balance sheet only. (c) income statement and retained earnings statement only. (d) income statement, retained earnings statement, and balance sheet. (b) balance sheet only. This transaction will cause assets to increase by $900 and liabilities to increase by $900. The other choices are incorrect because this transaction (a) will have no effect on the income statement, (c) will have no effect on the income statement or the retained earnings statement, and (d) will affect the balance sheet but not the income statement or the retained earnings statement.

The financial statement that reports assets, liabilities, and stockholders' equity is the: (a) income statement. (b) retained earnings statement. (c) balance sheet. (d) statement of cash flows. (c) balance sheet. The balance sheet is the statement that reports assets, liabilities and stockholders' equity. The other choices are incorrect because (a) the income statement reports revenues and expenses, (b) the retained earnings statement reports details about stockholders' equity, and (d) the statement of cash flows reports inflows and outflows of cash.

Services performed by a public accountant include: (a) auditing, taxation, and management consulting. (b) auditing, budgeting, and management consulting. (c) auditing, budgeting, and cost accounting. (d) auditing, budgeting, and management consulting. (a) auditing, taxation, and management consulting. Auditing, taxation, and management consulting are all services performed by public accountants. The other choices are incorrect because public accountants do not perform budgeting or cost accounting.

The effect of expenses is negative a decrease in stockholders' equity coupled with a decrease in assets or an increase in liabilities

Relevance and faithful representation two primary qualities that make accounting information useful for decision making balance sheet the purpose of this, sometimes referred to as the statement of financial position, is to report a companys financial position on a particular date. this presents an organized array of assets, liabilities, and shareholders equity at a point in time. it is useful for assessing future cash flows, liquidity, and long term solvency

income statement a change statement reporting events that occurred during a period of time

liquidity refers to the period of time before an asset is converted to cash or until liability is paid. this information is useful in assessing a companys ability to pay its current obligations

AdvertisementUpgrade to remove ads

long term solvency refers to the riskiness of a company with regard to the amount of liabilities in its capital structure

Financial flexibility the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs

book value assets minus liabilities as shown in the balance sheet

market value number of shares of common stock outstanding multiplied by the price per share

assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. simply, these are the economic resources of a company

liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide service to other entities in the future as a result of past transactions or events. simply, these are obligations of the company

equity (or net assets) called shareholders equity or stockholders equity for a corporation, is the residual interest in the assets of an entity that remains after deducting liabilities. stated another way, equity equals total assets minus total liabilities

operating cycle for a typical manufacturing company refers to the period of time necessary to convert cash to raw materials, raw materials to finished product, the finished product to receivables, and then finally receivables back to cash

current assets include cash and all other assets expected to become cash or be consumed within one year or the operating cycle whichever is longer

cash equivalents frequently include certain negotiable items such as commercial paper, money market funds, and US treasury bills. these are highly liquid investments that can be quickly converted to cash, usually 3 months or less

short term investments liquid investments not classified as cash equivalents are reported as either this, or sometimes called temporary investments or short term marketable securities. management has the ability an intent to liquidate the investment in the near term (within the next 12 months or operating cycle)

accounts receivable result from the sale of goods or services on credit. usually are due in 30 to 60 days

trade receivables arise in the course of a companys normal trade

nontrade receivables result from loans or advances by a company to individuals and other entities

inventories include goods awaiting sale (finished goods), goods in the course of production (work in process), and goods to be consumed directly or indirectly in production (raw materials).

consists of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale

prepaid expense represents an asset recorded when an expense is paid in advance, creating benefits beyond the current period

noncurrent assets assets are expected to provide economic benefits beyond the next year, or operating cycle

investements assets not used directly in operations

property plant and equipment tangible, long lived assets used in the operations of the business

intangible assets generally represent exclusive rights that a company can use to generate future revenues

deferred charges long term prepaid expenses

liabilities obligations to other entities

current liabilties those obligations that are expected to be satisfied through the use of current assets. these are expected to be satisfied within one year or the operating cycle, whichever is longer

accounts payable obligations to suppliers of merchandise or of services purchased on open account, with payment usually due in 30 to 60 days

notes payable written promises to pay cash at some future date. usually require the payment of explicit interest in addition to the original obligation amount

deferred revenues sometimes called unearned revenues, represent cash received from a customer for goods or services to be provided in a future period

accrued liabilties represent obligations created when expenses have been incurred but will not be paid until a subsequent reporting period

long term liabilities obligations that will not be satisfied in the next year or operating cycle, whichever is longer

current maturities of long term debt when long term debt is payable in installments, the installment payable currently is reported as a current liability

stockholders equity is composed of paid in capital (invested capital) and retained earnings (earned capital)

paid in capital represented by common stock and additional paid in capital less treasury stock, which collectively represent cash invested by shareholders in exchange for ownership interests

retained earnings represents the accumulated net income reported since the inception of the corporation and not yet paid to shareholders as dividends

full disclosure principle requires that financial statements provide all material relevant information concerning the reporting entity

summary of significant accounting policies conveys valuable information about the companys choices from among various alternative accounting methods

subsequent event (disclosure note) a significant development that occurs after a companys fiscal year-end but before the financial statements are issued or available to be issued

illegal acts such as bribes, kickbacks, illegal contributions to political candidates, and other violations of the law

related party transactions sometimes a company will engage in transactions with owners, management, families of owners or management, affiliated companies, and other parties that can significantly influence or be influenced by the company. the economic substance of these transactions should be disclosed, including dollar amounts involved.

management discussion and analysis (MD&A) provides a biased but informed perspective of a companys (a) operations (B)liquidity, and (c) capital resources

auditors report provides the financial statement user with an independent and professional opinion about the fairness of the representation in the financial statements and about the effectiveness of internal controls

lack of consistency due to a change in accounting principle such that comparability is affected even though the auditor concurs with the desirability of the change

uncertainty as to the ultimate resolution of contingency for which a loss is material in amount but not necessarily probable or probable but not estimable

emphasis of a matter concerning the financial statements that does not affect the existence of an unqualified opinion but relates to a significant event such as a related party transaction

qualified opinion

this contains an exception to the standard unqualified opinion but not of sufficient seriousness to invalidate the financial statements as a whole

adverse opinion this is necessary when the exceptions (a) and (b) are so serious that a qualified opinion is not justified. These are rare because auditors usually are able to persuade management to rectify problems to avoid this undesirable report

disclaimer an auditor will disclaim an opinion for item (c) such that insufficient information has been gathered to express an opinion

proxy statement contains disclosures on compensation to directors and executives (pg131)

comparative financial statements allow financial statement users to compare year to year financial position, results of operations, and cash flows

horizontal analysis expressing each item as a percentage of that same item in the financial statements of another year (base amount) in order to more easily see year to year changes

vertical analysis involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, but within the same year

ratio analysis the most common way of comparing accounting numbers to evaluate the performance and risk of a firm

default risk a companys ability to pay its obligations when they come due

operational risk relates more to how adept a company is at withstanding various events and circumstances that might impair its ability to earn profits

working capital the difference between current assets and current liabilities, is a popular measure of a companys ability to satisfy its short term obligations

acid test ratio provides a more stringent indication of a companys ability to pay its current obligations

debt to equity ratio indicates the extent of reliance on creditors, rather than owners, in providing resources

current ratio computed by dividing current assets by current liabilties

liquidity ratios should be assessed in the context of both profitability and efficiency of managing assets

financial leverage the debt to equity ratio indicates the extent of trading on the equity by using this

times interest earned ratio indicates the margin of safety provided to creditors

management approach used in determining which segments of a company are reportable. based on the way that mangement organizes the segments within the enterprise for making operating decisions and assessing performance economic events cause changes in the financial position of the company

external events involve an exchange between the company and another entity

internal events do not involve an exchange transaction but do affect the companys financial position

AdvertisementUpgrade to remove ads

transactions these have a dual effect on the accounting equation

paid in capital ...

retained earnings equals net income less distributions to shareholders (primarily dividends) since the inception of the corporation

double entry system refers to the dual effect that each transaction has on the accounting equation

general ledger a collection of storage areas called accounts

accounts storage areas used to keep track of increases and decreases in financial position elements

T account has space at the top for the account title and two sides for recording increases and decreases

debit in a double entry system, this is the left side of the account<...