Test 2 ACCT 2301
Terms
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- What is a Classified Financial Statement?
- A financial statement divided into useful subcategories
- What is a Classified Balance Sheet?
- A Balance sheet where assets, liabilities, and stockholder's equity sections are subdivided into useful categories
- What are the subdivisions under Assets?
- Current Assets, Investments, Property, plant, and Equipment, & Intangible Assets
- What are the subdivisions under Liabilities?
- Current Liabilities & Long-term Liabilities
- What are the subdivisions under Stockholder's Equity
- Contributed Capital & Retained Earnings
- Define Current Assets
- Cash and other assets that are reasonably expected to be converted to cash, sold, or consumed within either one year or within the normal operating cycle of the business (whichever is longer)
- What are current assets?
- Cash, Temporary Investments, Accounts Receivable, Inventory, & Prepaid Expenses
- What is the Normal Operating Cycle?
- The average time needed to go from cash to cash (usually less than one year, with the exception of products that require more than one year to produce)
- What does reasonable expectation refer to?
- The fact that current assets include assets other than cash that are reasonably expected to be converted to cash, sold, or consumed within one year.
- Define Investments
- Assets, usually long-term, that are not used in the normal operation of the business and that management does not plan to convert to cash within the next year.
- Define Property Plant and Equipment
- Long-term assets used in the continuing operation of the business - a place to operate equipment and to produce, sell, deliver, and service the company's goods
- What assets are depreciated?
- Property Plant and Equipment - with one exception (land?)
- Operating Assets, Fixed Assets, Tangible Assets, Long-Lived Assets, and Plant Assets are also known as...
- Property Plant and Equipment
- How are natural resources classified on a balance sheet?
- If they are used in the regular course of business, they are listed in the property, plant, and equipment category. If they are not used in the course of running the business, they are listed in the investments category.
- What are intangible Assets?
- Long-term assets that have no physical substance but have a value based on rights or privileges that belong to their owner. They are recorded at cost (spread over the expected life of the right or privilege)
- What is Goodwill?
- The excess of the amount paid for a business over the fair market value of the business's net assets.
- What are examples of current liabilities?
- Notes payable, accounts payable, current portion of long-term debt, salaries/wages payable, taxes payable, customer advances/unearned revenues
- What are some examples of long-term liabilities?
- Mortgages Payable, long-term notes, bonds payable, employee pension, & long-term lease liabilities
- How is contributed capital shown?
- Par value of the issued stock, or in amounts paid in, in excess of the par value per share
- What is a merchandising business?
- A business that earns income by buying and selling products or merchandise
- What series of transactions take place during the operating cycle of a merchandising business?
- Purchase, Pay for, Sell, & Collect Payment for: Merchandise Inventory
- What is the perpetual inventory system?
- Keeps continuous records of quantity and the cost of individual items as they are bought and sold
- What is the periodic inventory system?
- Does not keep continuous records, instead determines inventory by a physical count taken at the end of the accounting period
- What is the primary objective of inventory accounting?
- the cost of inventory sold is reported on the same income statement as the revenue from the sale
- What are the different methods of valuing ending inventory?
- Specific Identification, Average Cost, LIFO, & FIFO
- What is included in the inventory cost?
- Invoice Price less purchases discounts, freight-in, taxes, cost for ordering, receiving, and storing
- Why should the status of merchandise in transit be examined?
- To determine if it should be included in the inventory count.
- What two things are included in merchandise inventory that are in transit?
- Outgoing goods shipped FOB destination, and Incoming goods shipped FOB shipping point (both costs are on the current business)
- What merchandise could a company have on hand that is not included in inventory?
- Merchandise sold but not yet shipped, and goods held on consignment
- Specific Identification Method
- Identifies the cost of each item in ending inventory as coming from a specific purchase - it is difficult and impractical to keep track of the purchase and sale of individual items
- Average-Cost Method
- Tends to level out the effects of cost increases and decreases
- FIFO Method
- Cost of ending inventory reflects the cost of merchandise from most recent purchases, and costs assigned to COGS are from the earliest purchases (it magnifies the effects of the business cycle on income)
- LIFO Method
- Doesn't record the actual physical movement of goods in the business so current inventory value is unrealistic, but it's the fairest determination of income when current costs are compared to current prices, and it smoothes out fluctuations in the business cycle.
- In times of declining prices: ____ results in lowest Gross Margin; _____ results in highest Gross Margin
- FIFO;LIFO
- LIFO Method is best suited for...
- the income statement because it matches revenues and cost of goods sold.
- FIFO Method is best suited for...
- the balance sheet because the ending inventory is closest to current values, it also gives a more realistic view of the current financial assets of a business.
- When would the Lower-of-Cost-or-Market Rule apply?
- Sometimes inventory should be shown on financial statements at less than its cost, physical deterioration, obsolescence or decline in price level may cause a loss to occur
- The Lower-of-cost-or-market (LCM) rule requires that...
- when the replacement cost of inventory falls below historical cost, based on one of the conventional inventory costingmethods, the inventory is written down to the lower value and a loss is recorded.
- If ending inventory is overstated what is the effect on COGS and Income?
- COGS - understated Income - overstated
- If ending inventory is understated what is the effect on COGS and Income?
- COGS - overstated Income - understated
- What is inventory turnover?
- The number of times a company's average inventory is sold during an accounting period (cost of goods sold/average inventory)
- Days' Inventory on Hand
- THe average number of days required to sell the inventory on hand (365/inventory turnover)
- How do you get Net Sales
- Gross Sales - Sales Returns and Allowances - Discounts
- What is Cost of Goods Sold?
- The amount paid for merchandise sold, or the cost to manufacture products that were sold, during an accounting period
- What is Gross Margin
- Net Sales - Cost of Goods Sold
- How do you get percentage of Gross Margin
- Gross Margin/Net Sales
- What are Operateing Expenses?
- Expenses, other than cost of goods sold, that are incurred in running a business (selling expenses & General Administrative expenses)
- Examples of Selling Expenses
- Cost of storing goods, cost of preparing goods for sale, advertising, delivering goods
- Examples of General and Administrative Costs
- General office expenses (accounting, personnel, credit and collections), & General occupancy expenses (rent, utilities, insurance)
- What is Income from Operations?
- Also known as operating income, it represents income from a company's main business (Gross Margin- Operating Expenses)
- What are Other Revenues and Expenses?
- Not part of a company's operating activities
- What does Other Revenues and Expenses include?
- Rev/Exp from investments (Dividends or interest), & any other Rev/Exp not related to the company's normal business operations
- How do you find income before income taxes?
- Income from Operations - Other revenues and Expenses
- Why would a company want to know what income was before taxes?
- To compare profitability - comapnies may be subject to different income tax rates.
- What is Earnings per Share?
- Tells stock owners how much profit is made per share (net income/# of shares of common stock outstanding)
- What figures are used to measure a company's liquidity?
- Working capital and current ratio
- What is Current Ratio?
- the ratio of current assets to current liabilities (Current Assets/Current Liabilities)
- What figures are used to evaluate profitability?
- Profit margin, asset turnover, return on assets, debt to equity ratio, and return on equity
- What is Profit Margin?
- The percentage of each sales dollar that results in net income (Net income/Net Sales)
- What is return on Assets?
- It measures how efficiently a company uses its assets to produce income (Net Income/Average Total Assets)
- What is Debt to Equity Ratio?
- The proportion of the company's assets that is financed by dreditors in comparison to that financed by stockholders (total liabilities/Stockholders' Equity)
- What is Return on Equity?
- Measures how much income was earned on each dollar invested by stockholders (Net Income/Average Stockholders' Equity)