Accounting, Test 2

Front 1

Elements of financial statements

Back 1

Related to major or central operations:
Revenues
Expenses

From peripheral transactions:
Gains
Losses

Front 2

Multi-Step Income Statement order

Back 2

1. Operating section
-sales or revenue
-COGS
-selling expenses
-admin expenses
2. Nonoperating section
-other revenues and gains
-other expenses and losses
3. Income tax
4. Discontinued operations
5. Extraordinary items
6. Earnings per share

Front 3

Irregular items by category

Back 3

1. discontinued operations
2. extraordinary items
3. unusual gains and losses
4. changes in accounting principle
5. changes in estimates
6. correction of errors

Front 4

Discontinued operations criteria

Back 4

1. company eliminates the results of operations and cash flows of a component from its ongoing operations
AND
2. there is no significant continuing involvement in that component after the disposal transaction

Front 5

Extraordinary items criteria

Back 5

1. unusual nature
AND
2. infrequency of occurrence

Front 6

Unusual gains or losses criteria

Back 6

1. unusual nature
OR
2. infrequency of occurrence

Front 7

Usefulness of income statement

Back 7

1. evaluate past performance
2. predict future performance
3. help assess risk or uncertainty of achieving future cash flows.

Front 8

Which are reported net of tax?

1. discontinued operations
2. unusual gains and losses

Back 8

1. yes
2. no

Front 9

Which are retrospective?

1. changes in accounting principle
2. changes in estimates

Back 9

1. yes
2. no

Front 10

Limitations of income statement

Back 10

1. items unable to be measured reliably are omitted (i.e soft assets)
2. income is affected by accounting method used
3. income measurement involves judgment

Front 11

Quality of earnings vs income management

Back 11

There is incentive to manage income to meet/beat Wall Street expectations, but the quality of earnings is reduced if income management results in info that is less useful for predicting future earnings and cash

Front 12

Reporting discontinued operations on income statement

Back 12

Discontinued Operations:
Loss from discontinued ops, net of $135,000 tax
Loss on disposal, net of $81,000 tax
Total loss on discontinued ops

Front 13

Effect of gains and losses on total tax

Back 13

gains = increase total tax
losses = decrease total tax

Front 14

EPS formula

Back 14

(net income - preferred dividends) /
weighted avg # of shares outstanding

Front 15

How to report a correction of error on statement of retained earnings

Back 15

adjustment made to beginning retained earnings

Front 16

Net sales/revenue

Back 16

sales/revenue less
sales discounts and returns

Front 17

Periodic inventory method

Back 17

Uses accts:
Inventory
Purchases
Purchase Discounts and Returns
Transportation-in
COGS

Front 18

Transportation-in vs transportation-out

Back 18

Transportation-in is used in calculation of COGS.

Transportation-out is a selling expense.

Front 19

Order of assets on balance sheet

Back 19

1. current assets
2. long-term investments
3. PPE
4. intangible assets
5. other assets

Front 20

Current assets: order of liquidity

Back 20

1. cash
2. trading securities
3. AR, net of allowance for doubtful accounts
4. inventories
5. prepaid items

Front 21

What is a cash equivalent?

Back 21

short-term, highly liquid investment that matures within 90 days

Front 22

What 2 things are disclosed for inventory on the balance sheet?

Back 22

1. basis of valuation
2. pricing method (i.e. LIFO, FIFO, weighted avg)

Front 23

Classify: land for sale

Back 23

long-term investment

Front 24

PPE and depreciation

Back 24

all PPE items are depreciated, except for land

Front 25

Current liabilities

Back 25

liabilities that are expected to be paid within one year or the operating cycle, whichever is longer

Front 26

Covenants and restrictions of long-term liabilities

Back 26

disclosed in the notes of balance sheet

Front 27

3 parts of equity

Back 27

1. capital stock
2. additional paid-in capital
3. stockholders' equity

Front 28

3 categories of statement of cash flows

Back 28

1. cash from operating activity
2. cash from financing activity
3. cash from investing activity

Front 29

Significant noncash transactions and statement of cash flows

Back 29

significant noncash transactions that don't affect cash are shown in a separate schedule, shown at the bottom, or disclosed in notes

Front 30

Goods on consignment

Back 30

selling item belonging to someone else on their behalf. Since they don't belong to you, you don't report them on the balance sheet

Front 31

Classify: payroll deductions

Back 31

current liability

Front 32

Classify: income statement items for statement of cash flows

Back 32

anything on the income statement is cash from operating activity

Front 33

Classify: gains and losses for statement of cash flows

Back 33

cash from operating activity

Front 34

Types of cash

Back 34

1. cash
2. coin
3. checks
4. checking accts
5. savings accts
6. money orders
7. bank drafts
8. available funds on deposit at bank
9. money market accts when checks can be drawn on them

Front 35

Types of cash equivalents

Back 35

1. treasury bills
2. money market funds when checks cannot be drawn on them
3. commercial paper
4. short-term investments (less than 90 days) - ex:

Front 36

Reporting restricted cash

Back 36

segregated from "regular" cash for reporting purposes

Front 37

Classify: bank overdraft

Back 37

1. generally reported as current liability
OR
2. can be offset against cash only when cash is available in another acct at the same bank

Front 38

Debits/credits to petty cash acct

Back 38

1. when establishing fund
2. when changing fund amount

Front 39

Nontrade receivables

Back 39

receivables not relating to normal operations

Front 40

Trade discount

Back 40

1. reduction from list price
2. not recognized in accounting record
3. customers billed net of discount

Front 41

Cash discount

Back 41

1. inducements for prompt payment
2. gross method or net method

Front 42

Methods of cash discounts

Back 42

1. gross method
2. net method

Front 43

Gross method for cash discounts

Back 43

AR and sale recorded at selling price.
If payment is eligible for discount, Sales Discounts is debited.

Front 44

Net method for cash discounts

Back 44

AR and sale recorded net of discount.
If payment doesn't qualify for discount, Sales Discounts Forfeited is credited.

Front 45

What does the single-step income statement emphasize?

Back 45

total revenues and total expenses

Front 46

Background of multiple-step income statement

Back 46

1. separates operating and nonoperating transactions
2. matches costs and expenses with related revenues
3. highlights certain intermediate components of income that analysts use

Front 47

Why are irregular items required to be reported?

Back 47

so users can determine long-run earning power of the company

Front 48

Most common irregular item

Back 48

write downs, gains on asset sales

Front 49

What type of income statement includes irregular items?

Back 49

Both the single-step and multiple-step

Front 50

Reporting changes in accounting principles

Back 50

cumulative effect adjustment to beginning retained earnings on the statement of retained earnings

Front 51

Why do we record the cumulative effect for changes in accounting principle?

Back 51

to preserve comparability

Front 52

Does a change in estimate require a journal entry?

Back 52

no

Front 53

Intraperiod tax allocation

Back 53

Tax allocated to:
1. income from continuing operations before tax
2. discontinued operations
3. extraordinary items
4. changes in accounting principle
5. correction of errors

Front 54

Straight-line depreciation formula

Back 54

equipment cost - salvage value = depreciable base * useful life (in years) = annual depreciation

Front 55

Net book value

Back 55

equipment - accumulated depreciation = net book value

Front 56

Calculate depreciation expense after "change in estimate"

Back 56

net book value - salvage value (new) = depreciable base * useful life remaining = new annual depreciation

Front 57

Reporting allocated tax for extraordinary losses

Back 57

example:
extraordinary item - loss from casualty xx
less: applicable income tax reduction xx

Note: applicable income tax reduction is subtracted from loss

Front 58

Purpose of EPS

Back 58

important business indicator that measures the dollars earned by each share of common stock

Front 59

EPS components

Back 59

must show the effect of each income statement category on EPS

Front 60

Retained earnings is increased from...

Back 60

1. net income
2. change in accounting principle
3. correction of errors

Front 61

Retained earnings is decreased from...

Back 61

1. net loss
2. dividends
3. change in accounting principle (depends on effect of change)
4. correction of error (depends on effect of change)

Front 62

Define comprehensive income

Back 62

all changes in equity during a period except those resulting from investments by owners and distributions by owners

Front 63

Comprehensive income includes...

Back 63

1. all revenues, expenses, gains, and losses reported in net income
2. all gains and losses that bypass net income but affect stockholders' equity (other comprehensive income)

Front 64

Classify: unrealized gains/losses on available-for-sale securities

Back 64

part of other comprehensive income

Front 65

Other comprehensive income includes...

Back 65

all gains and losses that bypass net income but affect stockholders' equity

Front 66

Reporting comprehensive income in an income statement

Back 66

on income statement, after Net Income total:

(section title) Other comprehensive income
list out each component xx
Comprehensive income xxx

Front 67

Reporting comprehensive income on balance sheet

Back 67

Reported in Stockholders' Equity section, after retained earnings.
Titled: Accumulated Other Comprehensive Income

works just as retained earnings in that it is cumulative

Front 68

Formats for displaying other comprehensive income

Back 68

Must be reported in 1 of 3 ways:
1. second separate income statement
2. combined income statement of comprehensive income
3. part of statement of stockholders' equity

Front 69

Does iGAAP allow extraordinary items?

Back 69

No

Front 70

Facts regarding iGAAP financial statements

Back 70

1. expenses must be classified by nature or function
2. if functional method used to classify expenses, nature must be disclosed in notes.
3. doesn't mention single- or multiple-step income statements
4. prohibits reporting of extraordinary items
5. primary required financial statement must be either Statement of Stockholders' Equity or Statement of Recognized Income and Expense (SoRIE)
6. also recognizes comprehensive income as part of equity
7. for comprehensive income, allows either Statement of Stockholders' Equity or SoRIE format
8. revaluation of land, buildings, and intangible assets is permitted

Front 71

Usefulness of the balance sheet

Back 71

1. evaluating capital structure
2. assess risk and future cash flows
3. analyze company's liquidity, solvency, and financial flexibility

Front 72

Limitations of the balance sheet

Back 72

1. most assets and liabilities are reported at historical cost
2. use of judgment and estimates
3. many items of financial value are omitted

Front 73

Classifications within the balance sheet

Back 73

assets:
current assets
long-term investments
PPE
intangible assets
other assets

liabilities and stockholders' equity:
current liabilities
long-term debt
common stock
additional paid-in capital
retained earnings

Front 74

Basis of valuation for current assets

Back 74

cash - fair value
cash equivalents - fair value, generally
receivables - estimated amount collectible
inventories - lower of cost or market
prepaid expenses - cost

Front 75

Reporting cash and restricted cash on the balance sheet

Back 75

Current assets
Cash (all cash)
Restricted Cash (subtract from cash)

Front 76

Portfolios of short-term investments

Back 76

1. held-to-maturity
2. trading
3. available-for-sale

Front 77

Characteristics of short-term investment portfolio: held-to-maturity

Back 77

Type - debt
Valuation - amortized cost
Classification - current or noncurrent

Front 78

Characteristics of short-term investment portfolio: trading

Back 78

Type - debt or equity
Valuation - fair value
Classification - current

Front 79

Characteristics of short-term investment portfolio: available-for-sale

Back 79

Type - debt or equity
Valuation - fair value
Classification - current or noncurrent

Front 80

Should major categories of receivables be shown on the balance sheet?

Back 80

Yes, they should be shown within the balance sheet or in the notes

Front 81

How is accounts receivable reported on the balance sheet?

Back 81

1 of 2 ways:
1. AR
Less: allowance for doubtful accounts
2. accounts receivable, net of $xx allowance

Front 82

How is inventory reported on the balance sheet if the company uses the perpetual inventory method?

Back 82

Inventory broken down into:
Finished goods
Works-in-progress
Raw materials

Front 83

Intangibles

Back 83

lack physical substance and are not financial instruments

Front 84

Limited-life vs indefinite-life intangibles

Back 84

limited-life are amortized
indefinite-life are tested for impairment

Front 85

Other assets section of balance sheet

Back 85

only includes unusual items sufficiently different from assets in other categories

Front 86

Formats of the classified balance sheet

Back 86

1. account - asset section and liab/equity section are side-by-side (1 per page)
2. report (all on same page)

Front 87

Classify: investment in preferred stock

Back 87

current asset/investment

Front 88

Classify: treasury stock

Back 88

equity

Front 89

Classify: common stock

Back 89

equity

Front 90

Classify: cash dividends payable

Back 90

current liability

Front 91

Classify: accumulated depreciation

Back 91

contra-asset

Front 92

Classify: interest payable

Back 92

current liability

Front 93

Classify: deficit

Back 93

equity

Front 94

Classify: trading securities

Back 94

current asset

Front 95

Which format of the classified balance sheet is most popular?

Back 95

report form

Front 96

Supplemental info provided on balance sheet

Back 96

1. contingencies
2. accounting policies
3. contractual situations
4. fair values

Front 97

Techniques of disclosure on balance sheet

Back 97

1. parenthetical explanations
2. notes
3. cross-reference and contra items
4. supporting schedules
5. terminology

Front 98

Statement of cash flows vs basic objectives of financial reporting

Back 98

meets the objective of financial reporting which states, "assessing the amounts, timing, and uncertainty of cash flows"

Front 99

Purpose of statement of cash flows

Back 99

to provide relevant info about cash receipts and cash payments during a period

Front 100

What questions does the statement of cash flows answer?

Back 100

Where did the cash come from?
What was it used for?
What was the change in cash balance?

Front 101

Classify: net income/loss for statement of cash flows

Back 101

operating activity

Front 102

Classify: accounts receivable/payable for statement of cash flows

Back 102

operating activity

Front 103

Classify: dividends paid/payable for statement of cash flows

Back 103

financing activity

Front 104

Classify: sale/purchase of PPE for statement of cash flows

Back 104

investing activity

Front 105

Classify: sale/purchase of debt or equity securities of other entities for statement of cash flows

Back 105

investing activity

Front 106

Classify: loans to other entities for statement of cash flows

Back 106

investing activity

Front 107

Classify: issuance of equity securities for statement of cash flows

Back 107

financing activity

Front 108

Classify: depreciation expense for statement of cash flows

Back 108

operating activity

Front 109

Classify: issuance of debts for statement of cash flows

Back 109

financing activity

Front 110

Classify: issuance of bonds for statement of cash flows

Back 110

financing activity

Front 111

Classify: issuance of notes for statement of cash flows

Back 111

financing activity

Front 112

Classify: redemption of debt for statement of cash flows

Back 112

financing activity

Front 113

Classify: reacquisition of capital stock for statement of cash flows

Back 113

financing activity

Front 114

Classify: issuance of common stock to purchase assets, for statement of cash flows

Back 114

significant noncash transaction

Front 115

Classify: conversion of bonds into common stock, for statement of cash flows

Back 115

significant noncash transaction

Front 116

Classify: exchanges of long-lived assets, for statement of cash flows

Back 116

significant noncash transaction

Front 117

High vs low amount of cash flows from operating activity

Back 117

high - company is able to generate sufficient cash to pay its bills
low - company may have to borrow or issue equity securities to pay bills

Front 118

Common reasons for restricted cash, according to book

Back 118

1. for plant expansion
2. for retirement of long-term debt
3. for compensating balances

Front 119

Classify: short-term paper (maturity in less than 3 months)

Back 119

cash equivalent

Front 120

Classify: short-term paper (maturity in 3-12 months)

Back 120

temporary investment

Front 121

Classify: postdated check

Back 121

receivable

Front 122

Classify: IOU

Back 122

receivable

Front 123

Classify: travel advance

Back 123

receivable

Front 124

Classify: compensating balance

Back 124

?????????

Front 125

Effect of uncollectible AR on financial statements

Back 125

1. decrease in income (due to loss of revenue)
2. decrease in assets
3. decrease in retained earnings

Front 126

Accounting methods for uncollectible receivables

Back 126

1. direct write-off (GAAP non-compliant)
2. allowance method

Front 127

Direct write-off method for uncollectible receivables

Back 127

1. not matching
2. receivable not stated at net realizable value (essentially overstated receivables)
3. GAAP non-compliant

Front 128

Why is the direct write-off method for uncollectible receivables not compliant with GAAP?

Back 128

It doesn't match the loss with the revenues since receivables are usually not deemed uncollectible within the same accounting period

Front 129

Allowance method for uncollectible receivables

Back 129

1. losses are estimated
2. GAAP compliant

Front 130

Types of allowance methods for uncollectible receivables

Back 130

1. percentage-of-sales
2. percentage-of-receivables

Front 131

Percentage-of-sales allowance method

Back 131

1. focus on income statement
2. focus on matching (sales to bad debt expense)
3. allowance account is used, but its balance doesn't affect the amount recorded as bad debt expense

Front 132

Percentage-of-receivables allowance method

Back 132

1. focus on balance sheet
2. focus on net realizable value (receivables less allowance)
3. allowance balance affects the amount recorded as bad debt expense

Front 133

Percentage-of-sales allowance method is appropriate for which companies?

Back 133

For companies that show a fairly stable relationship between previous years' credit sales and bad debts

Front 134

Ways to apply the percentage-of-receivables allowance method

Back 134

1. one composite rate
2. aging schedule of AR

Front 135

Which allowance method offers a more accurate valuation of receivables?

Back 135

percentage-of-receivables, since its focus is on net realizable value

Front 136

Is a note receivable a negotiable instrument?

Back 136

yes

Front 137

Interest on notes receivable

Back 137

1. interest-bearing note: has a stated interest rate
2. zero-interest-bearing: interest included in face amount

Front 138

Where do notes receivable generally originate?

Back 138

1. customers that need to extend payment period of an outstanding receivable
2. high-risk customers
3. new customers
4. loans to employees and subsidiaries
5. sales of PPE
6. lending transactions (majority of notes)

Front 139

Where do notes receivable mostly originate?

Back 139

lending transactions

Front 140

Valuation of notes receivable

Back 140

1. short-term: reported at net realizable value (same as accounting for AR)
2. long-term: FASB requires its cost be reported along with a note disclosure of its fair value (OR companies can opt to use fair value as their basis of measurement for financial statements)

Front 141

Why would an owner want to transfer receivables to another company for cash?

Back 141

1. competition
2. money is tight
3. billing/collection is time-consuming and costly

Front 142

How is a transfer of receivables accomplished?

Back 142

1. secured borrowing
2. sale of receivables

Front 143

Sale with recourse

Back 143

Applies to sales of receivables:
1. seller guarantees payment to purchaser
2. financial components approach used to record transfer

Front 144

Sales without recourse

Back 144

Applies to sales of receivables:
1. purchaser assumes risk of collection
2. transfer is the outright sale of receivables
3. seller records loss on sale
4. seller uses Due from Factor acct to cover discounts, returns, and allowances

Front 145

In terms of sales of receivables, what is a "factor?"

Back 145

buyer of the receivables

Front 146

Problems mgmt faces in accounting for cash transactions

Back 146

1. must establish proper controls to prevent unauthorized transactions by officers or employees
2. must provide info necessary for properly managing cash on hand and cash transactions

Front 147

According to book, how can mgmt obtain desired control objectives?

Back 147

vary the number and location of banks and the types of accounts

Front 148

Physical protection of cash balances

Back 148

1. minimize cash on hand
2. only have on hand petty cash and current day's receipts
3. keep funds locked up
4. transmit each day's receipts to the bank as soon as possible
5. periodically reconcile general ledger's balance

Front 149

Reconciling items (for reconciliation of bank balances)

Back 149

1. deposits in transit (time lag)
2. outstanding checks (time lag)
3. bank charges and credits
4. bank or depositor errors

Front 150

Time lag reconciling items

Back 150

Don't require adjusting entries when reconciling

Front 151

When reconciling bank balances, is an adjusting entry necessary for a bank error?

Back 151

no

Front 152

When reconciling bank balances, is an adjusting entry necessary for a bank service charge?

Back 152

yes

Front 153

When reconciling bank balances, is an adjusting entry necessary for a deposit in transit?

Back 153

no (time lag)

Front 154

When reconciling bank balances, is an adjusting entry necessary for an outstanding check?

Back 154

no (time lag)

Front 155

When reconciling bank balances, is an adjusting entry necessary for a depositor error?

Back 155

yes

Front 156

Bank reconciliation form and content

Back 156

[1st section is bank balance only]
Balance per bank statement (end of period)
Add: deposits in transit
undeposited receipts (cash on hand)
bank errors that understate the bank statement balance
Deduct: outstanding checks
bank errors that overstate the bank statement balance
Correct cash balance

[2nd section is book balance only]
Balance per depositor's book
Add: Bank credits and collections not yet recorded in the books
Book errors that understate the book balance
Deduct: Bank charges not yet recorded in the books
Book errors that overstate the book balance
Correct cash balance

[Correct cash balances should match]