Chapters 1-3 Accounting Test

Front 1

Who are the providers of financial information?
- ________-oriented companies (corporations)
- ________ entities
- ________

Back 1

profit, not-for-profit, households

Front 2

The financial accounting environment:
Providers of financial information (profit-oriented companies, not-for-profit entities, households) provide relevant financial information to ________ user groups (investors, creditors, employees, labor unions, customers, suppliers, government agencies, financial intermediaries)

Back 2

external

Front 3

Who are the main external users of financial accounting information?

Back 3

investors & creditors

Front 4

Relevant financial information is provided primarily through ________ statements and related ________ notes.

Back 4

financial, disclosure

Front 5

What are the 4 most frequently provided financial statements?

Back 5

1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows
4. Statement of Shareholders' Equity

Front 6

________ notes explain what's in the financial statements.

Back 6

Disclosure

Front 7

A ________ is owned by a single individual.

Back 7

sole proprietorship

Front 8

A ________ is owned by two or more individuals.

Back 8

partnership

Front 9

A ________ is owned by shareholders.

Back 9

corporation

Front 10

Accounting information should help investors and creditors evaluate the amount, timing and uncertainty of the enterprise's ________ cash flows.

Back 10

future

Front 11

Financial accounting information is used to predict the ________ based on the ________

Back 11

future, past

Front 12

Shareholders receive cash in the form of ________ and ________ of stock.

Back 12

dividends, sale

Front 13

Creditors (bank) receive cash in the form of ________ and repayment of ________.

Back 13

interest, principle

Front 14

Revenue is recognized when cash is received. Expenses are recognized when cash is paid. This is known as ________ accounting.

Back 14

cash basis

Front 15

GAAP requires ________ accounting.

Back 15

accrual

Front 16

Revenue is recognized when earned. Expenses are recognized when incurred. This is known as ________ accounting.

Back 16

accrual

Front 17

Cash flows in any one year may not be a predictor of ________ cash flows. Accrual accounting is a better way of predicting future cash flows.

Back 17

future

Front 18

________ is considered a better indicator of future cash flows.

Back 18

Net income

Front 19

Concepts, principles, and procedures developed to meet the needs of external users

Back 19

Generally Accepted Accounting Principles (GAAP)

Front 20

The ________ has the ultimate authority to set accounting rules, which they delegate to the ________ sector, where the ________ sets accounting standards.

Back 20

SEC, private, FASB

Front 21

The current US Accounting Standard Setting is done by the ________.

Back 21

FASB (Financial Accounting Standards Board)

Front 22

The FASB is supported by the Financial Accounting Foundation, has ________ full-time, independent, voting members. Members of the FASB are not required to be ________.

Back 22

seven, CPAs

Front 23

The ________ project integrates and organizes all relevant accounting pronouncements into a searchable, online database.

Back 23

codification (FASB Accounting Standards Codification)

Front 24

The main objective of the ________ is to develop a single set of high quality, understandable, and enforceable global accounting standards to help participants in the world's capital markets and other users make economic decisions.

Back 24

International Accounting Standards Board (IASB)

Front 25

________ serve as independent intermediaries to help ensure that management has appropriately applied U.S. GAAP in preparing the company's financial statements.

Back 25

Auditors

Front 26

As a result of numerous financial scandals, Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002 (aka ________). The goal was to restore credibility and investor confidence in the financial reporting process.

Back 26

Sarbanes-Oxley Act

Front 27

The Code of ________ provides guidance and rules to help accounting professionals perform their professional responsibilities in an ethical manner.

Back 27

ethics

Front 28

The Conceptual Framework (what the rules are based on) has been described as an Accounting ________. It provides the underlying foundation for accounting ________.

Back 28

Constitution, standards

Front 29

Conceptual Framework -
Objective - To provide ________ information that is useful to ________ providers

Back 29

financial, capital

Front 30

one of the primary decision-specific qualities that make accounting information useful; made up of predictive value and/or feedback value, and timeliness.

Back 30

relevance

Front 31

one of the primary decision-specific qualities that make accounting information useful; made up of predictive value and/or feedback value, and timeliness.

Back 31

faithful representation

Front 32

confirmation of investor expectations about future cash-generating ability.

Back 32

predictive value/ confirmatory value

Front 33

confirmation of investor expectations about future cash-generating ability.

Back 33

materiality

Front 34

neutral with respect to parties potentially affected.

Back 34

neutrality

Front 35

practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.

Back 35

conservatism

Front 36

practice followed in an attempt to ensure that uncertainties and risks inherent in business situations are adequately considered.

Back 36

comparability

Front 37

permits valid comparisons between different periods.

Back 37

consistency

Front 38

permits valid comparisons between different periods.

Back 38

verifiability

Front 39

information that is available to users early enough to allow its use in the decision process.

Back 39

timeliness

Front 40

users must understand the information within the context of the decision being made.

Back 40

understandability

Front 41

the perceived benefit of increased decision usefulness exceeds the anticipated cost of providing that information. (key constraint)

Back 41

cost effectiveness

Front 42

What assumption says that all economic events identified with a particular economic entity?

Back 42

Economic Entity

Front 43

What assumption says that a business will continue to operate indefinitely?

Back 43

Going concern

Front 44

What assumption says that the life of a company is divided into time periods to provide timely information?

Back 44

Periodicity

Front 45

What assumption says that financial statements are measured in a particular monetary unit (like the U.S. dollar)?

Back 45

Monetary Unit

Front 46

Process of admitting information into the basic financial statements (criteria: definition, measurability, relevance, reliability)

Back 46

recognition

Front 47

Process of associating numerical amounts with the elements (measurement attributes: historical cost, net realizable value, current cost, present value of future cash flows, fair value)

Back 47

measurement

Front 48

Process of including additional supplemental information

Back 48

disclosure

Front 49

Two criteria for revenue recognition (Realization)
1. Earnings process is _______ pr virtually complete.
2. Reasonable certainty as to the _______ of the asset to be received (usually cash).

Back 49

complete, collectability

Front 50

The matching principle requires that all _______ incurred in generating revenue for a period also be recognized in the same period.

Back 50

expenses

Front 51

What is the Accounting Equation?

Back 51

A = L + OE

Front 52

What is the Accounting Equation for a Corporation?

Back 52

A = L + SE

Front 53

Stockholders' Equity is made up of what two things:
1.
2.

Back 53

Paid-in Capital (Common Stock)
Retained Earnings

Front 54

Equation for Retained Earnings

Back 54

Revenues + Gains - Expenses - Losses - Dividends

Front 55

Retained earnings = total _______ the company has earned less _______

Back 55

net income, dividends

Front 56

What are the permanent accounts and where are they located?

Back 56

assets, liabilities, paid-in capital, retained earnings

Balance Sheet

Front 57

What are the temporary accounts that we close at the end of the period?

Back 57

revenues, gains, expenses, losses

Front 58

Debit = _______

Back 58

Left

Front 59

Credit = _______

Back 59

Right

Front 60

The Accounting Processing Cycle:
1. _______ Documents (invoice, check, receipt - anything that triggers a transaction)
2. _______ Analysis
3. Record in _______
4. Post to _______
5. Prepare an _______ trial balance
6. Record & post _______ entries
7. Prepare an _______ trial balance
8. Prepare _______ statements

At the end of the year:
9. Close _______ accounts.
10. Post _______ trial balance.

Back 60

1. Source
2. Transaction
3. Journal
4. Ledger
5. Unadjusted
6. Adjusting
7. Adjusted
8. Financial
9. Temporary
10. Closing

Front 61

A _______ balance is a list of all accounts and their balances at a particular date.

Back 61

trial

Front 62

At the end of the period, adjusting entries are required to satisfy the _______ principle and the _______ principle.

Back 62

realization, matching

Front 63

Transactions where cash is paid or received before a related expense or revenue is recognized

Back 63

prepayments

Front 64

Transactions where cash is paid or received after a related expense or revenue is recognized

Back 64

accruals

Front 65

Accountants must often make _______ in order to comply with the accrual accounting model

Back 65

estimates

Front 66

The process of allocating the cost of plant and equipment over their expected useful lives

Back 66

depreciation

Front 67

Straight line depreciation equation

Back 67

(Asset Cost - Salvage Value) / Useful Life

Front 68

BV = Asset netted with _______

Back 68

accumulated depreciation

Front 69

Accumulated Depreciation is a _______ asset, and _______ assets.

Back 69

contra, reduces

Front 70

Accountants often must make estimates of future events to comply with the accrual accounting model. Examples: _______ and _______

Back 70

Depreciation, Uncollectible Accounts

Front 71

The _______ statement summarizes the results of profit-generating activities of the company.

Back 71

income

Front 72

A few types of gains and losses, called other _______ income (OCI) or loss items, are excluded from the determination of net income and the income statement, but are included in the broader concept of comprehensive income.

Back 72

comprehensive

Front 73

The Statement of Comprehensive Income:
- In the _______ statement approach, net income is a subtotal within the statement followed by these OCI items, culminating in a final total of comprehensive income.
- In the _______ statement approach, a company presents an income statement followed by a statement of comprehensive income.

Back 73

single, two

Front 74

The _______ sheet presents the financial position of the company on a particular date.

Back 74

balance

Front 75

The statement of _______ discloses the changes in cash during a period.

Back 75

cash flows

Front 76

The statement of _______ presents the changes in permanent shareholder accounts.

Back 76

shareholders' equity

Front 77

When closing temporary accounts, close all _______ and _______ to _______(which should equal net income) and then close _______ to _______.

Back 77

revenues, expenses, income summary, income summary, retained earnings

Front 78

Balance Sheet - Reports a company's financial position on a particular date

Limitations:
- The balance sheet does not report _______ value.
-Resources such as _______ skills and _______ are not recorded in the balance sheet.

Back 78

market, employee, reputation

Front 79

Usefulness of the Balance Sheet:
- It describes many of the resources a company has for generating _______ cash flows.
- It provides _______ information useful in assessing a company's ability to pay its current obligations.
- It provides long-term _______ information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure.

Back 79

future, liquidity, solvency

Front 80

Assets are listed in the balance sheet in order of _______.

Back 80

liquidity

Front 81

A Classified balance sheet splits the balance sheet into _______ and _______ assets.

Back 81

current, noncurrent

Front 82

A comparative balance sheet shows _______ years.

Back 82

2

Front 83

_______ Assets will be converted to cash or consumed within one year or the operating cycle, whichever is longer.

Back 83

Current

Front 84

Cash _______ include certain negotiable items such as commercial paper, money market funds, and U.S. treasury bills (mature in 3 months or less).

Back 84

equivalents

Front 85

Current operating cycle or 1 year, whichever is _______

Back 85

longer

Front 86

_______ Assets are not expected to be converted to cash or consumed within one year or the operating cycle, whichever is longer.

Back 86

Noncurrent

Front 87

Some examples of noncurrent assets: _______, property, plant & _______, _______ assets, & other assets

Back 87

investments, equipment, intangible

Front 88

Noncurrent Assets -
Investments - Include both _____ and _____ securities of other corporations, land held for speculation, noncurrent receivables, and cash set aside for special purposes

Back 88

debt, equity

Front 89

Noncurrent Assets -
Property, Plant, and Equipment - Are _____, long-lived, and used in the operations of the business

- Include land, buildings, equipment, machinery, and furniture as well as natural resources such as mineral mines, timber tracts, and oil wells

- Reported at _____ cost less _____ depreciation, except for land which is not depreciated (doesn't decrease in value)

Back 89

tangible, original, accumulated

Front 90

Noncurrent Assets
Intangible Assets -
- Used in the operations of the business but have no _____ substance.
- Include: _____, _____ and _____
- Reported net of accumulated _____

Back 90

physical, patents, copyrights, franchises, amortization

Front 91

With noncurrent assets, _____ assets is a catch all for everything that doesn't fit into the other categories (investments, PPE, intangibles)

Back 91

other

Front 92

Obligations to other entities

Back 92

liabilities

Front 93

Obligations expected to be satisfied through current assets or creation of other current liabilities within one year or the operating cycle whichever is longer

Back 93

current liabilities

Front 94

When you accrued an expense before you pay for it, that is an accrued _____.

Back 94

liability

Front 95

When you receive cash before you perform a serve, that is _____ revenue.

Back 95

unearned

Front 96

Current liabilities are due in _____ 1 year. Some examples are: A/P, N/P, accrued liabilities, unearned revenues, and current maturities of long-term debt (what's due in the cycle)

Back 96

less than

Front 97

Obligations that will not be satisfied within one year or the operating cycle, whichever is longer

Back 97

long-term liabilities

Front 98

There are more similarities than differences in balance sheets prepared according to U.S. GAAP and those prepared applying IFRS.

Some differences are:
- FASB doesn't specify a _____ list of items to be presented in the balance sheet, while the IFRS does
- Under FASB, some U.S. companies use the statement of _____ title, it is officially the title under the IFRS(although title is not required)
- Under FASB, current assets and liabilities are presented before noncurrent assets & liabilities, whereas the IFRS usually reports _____ items first

Back 98

minimum, financial position, noncurrent

Front 99

The _____ and _____ are working together on the Financial Statement Presentation project to establish a common standard for presenting information in the financial statements.

Back 99

FASB, IASB

Front 100

Disclosure notes:
- _____ - Conveys valuable information about the company's choices form among various alternative accounting methods
- _____ - A significant development (ex: lawsuit) that occurs after the company's fiscal year-end but before the financial statements are issued or available to be issued
- _____ Events and Transactions - Transactions or events that are potentially important to evaluating a company's financial statements, e.g., related-party transactions, errors and irregularities, and illegal acts

Back 100

summary of significant accounting policies, subsequent events, noteworthy

Front 101

The _____ discussion & analysis provides a biased but informed perspective of a company's operations, liquidity, and capital resources

Back 101

management

Front 102

_____ is responsible for preparing the financial statements and other information in the annual report.

Back 102

Management

Front 103

Management is responsible for maintaining and assessing the company's _____ control procedures.

Back 103

internal

Front 104

The auditors' report expresses the auditors' opinion as to the _____ of presentation of the financial statements in conformity with generally accepted accounting principles. The auditors' report must comply with specifications of the Public Companies Accounting Oversight Board (PCAOB).

Back 104

fairness

Front 105

An auditors opinion that is issued when the financial statements present fairly the financial position, results of operations, and cash flows and are in conformity with U.S. GAAP.

Back 105

unqualified (good)

Front 106

An auditors opinion that is issued when there is an exception that is not of sufficient seriousness to invalidate the financial statements as a whole.

Back 106

qualified

Front 107

An auditors opinion that is issued when the exceptions are so serious that a qualified opinion is not justified (rarely happens)

Back 107

adverse

Front 108

An auditors opinion that is issued when insufficient information has been gathered to express an opinion

Back 108

disclaimer

Front 109

A _____ statement is sent each year to all shareholders, usually in the same mailing with the annual report. It includes information such as: salary, bonus, stock awards, option awards and other compensation.

Back 109

proxy

Front 110

_____ Financial Statements allow financial statement users to compare year-to-year financial position, results of operations, and cash flows.

Back 110

Comparative

Front 111

_____ Analysis expresses each item in the financial statements as a percentage of that same item in the financial statements of another year (base amount).

Back 111

Horizontal

Front 112

_____ Analysis involves expressing each item in the financial statements as a percentage of an appropriate corresponding total, or base amount, within the same year.

Back 112

Vertical

Front 113

_____ Analysis allows analysts to control for size differences over time and among firms.

Back 113

Ratio

Front 114

You generally want a _____ current ratio.

Back 114

higher

Front 115

The _____ ratio measures a company's ability to satisfy its short-term liabilities.

Back 115

current

Front 116

The _____ ratio eliminates some current assets (inventories, prepaids, other assets) that are not as easily converted to cash and provides a more stringent indication of a company's ability to pay its current liabilities.

Back 116

Acid-test

Front 117

The _____ ratio indicates the extent of reliance on creditors, rather than owners, in providing resources.

Back 117

debt to equity

Front 118

The _____ ratio indicates the margin of safety provided to creditors.

Back 118

times interest earned