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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

In an attempt to include all relevant information for decision-making purposes, Merimore Company estimates bad debts using the aging method. However, for external reporting pur¬ poses, the company
Excerpts from the financial statements of Ticheley Enterprises are provided below. 1997 1996 1995 Income statement Bad debt charge $ 1,700 $ 2,900 $ 2,100 Net income 15,800 15,300 14,400 Balance
Napier Plumbing Supply entered into the following transactions involving short-term notes receivable during 1996. Jan. 29 Sold merchandise with a sales value of $80,000 in exchange for a threemonth
Hughes International is a U.S. company that conducts business throughout the world. Listed below are selected transactions entered into by the company during 1996. 1. Sold merchandise to Royal
International Services entered into a debt covenant requiring it to maintain a current ratio of at least 1.5:1. The company’s condensed balance sheet as of December 31 follows. Assets Liabilities
Excerpts from the June 30, 1994 balance sheet of The Quaker Oats Company are provided below (dollars in millions). (Working capital, debt covenants, and 1994 1993 1992 restrictions on management
In a recent financial statement, AMAX, Inc., a coal-mining company, reported the following: Assets (in thousands) Cash and cash equivalents (Note 9) $46,700 Note 9: AMAX had on deposit with
Throughout the late 1980s major U.S. retailers, such as Sears and J.C. Penney, reported only slight gains in sales. An analyst for this industry said that “consumers are stretched with debt,”
The following information was computed from the 1994 financial report of the merchandising division of Sears, Roebuck and Co. (dollars in millions). 1994 1993 1992 Merchandise sales $26,173 $23,811
The Farm Credit System is the nation’s largest lender to farmers. In the fourth quarter of 1987 it posted a profit of $179 million, avoiding a loss by using an unusual accounting technique. As
The Wall Street Journal (April 7, 1993) reported that “For more than 10 years, IBM has qui¬ etly turned to Merrill Lynch & Co. and others to execute a rare financial maneuver that propped up the
This chapter notes that First Republic Bank, the largest banking concern in Texas, experienced serious financial problems in 1988 because many of its outstanding loans were not performing. It also
An article in Forbes noted that “accounting rules ... can often change the way companies do business.” Under the accounting rule covering receivables and payables denominated in foreign
Refer to the annual report of MCI and answer the following questions. a.What title does MCI use to describe cash on the balance sheet? What does MCI include (MCI) as “cash equivalents?”b. What
State the fundamental accounting equation. What financial statement is a statement of this equation?
What characterizes business transactions and how are they reported in the financial records of a company so that the equality of the accounting equation is maintained? Choose five different
Explain each of the four financial statements in terms of the fundamental accounting equation.
Consider the following transactions and explain how recording each in journal entry form maintains the equality of the fundamental accounting equation.a. Issue stock for cash.b. Provide a service in
What is an economic event? What two criteria must be met before an economic event can be recorded? Why?
Define objectivity as it is defined in the chapter. What kind of economic events meet this definition of objectivity? What economic forces combine to ensure that accounting state¬ ments reflect only
Assume that a company purchases a piece of equipment for $5,000. What accounts are affected? What is the direction of the effect? What is the dollar value of the transaction? How do the answers to
Refer to Figure 5-7, the journal entry box, and prepare journal entries for the following transactions: (1) purchase of machinery for $5,000 cash, (2) payment of $500 cash for an outstanding account
Show how each of the four transactions in (8) above affect the basic accounting equation. What stockholders’ equity account does the completion of a service and the payment of cash wages affect?
Why are T-accounts useful?
Distinguish temporary accounts from permanent accounts. There are six basic categories of accounts: assets, liabilities, stockholders’ equities, revenues, expenses, and dividends. Which are
Is it possible for the Retained Earnings account to have a negative (debit) balance? What conditions could give rise to such a result?
In general terms, describe how the balance sheet is related to the income statement. Give several journal entries to illustrate this relationship. What is the role of the Retained Earnings account in
Under what situations are book gains and losses recognized on the financial statements? Explain how such transactions affect the statements.
Briefly describe accrual accounting. Construct an example to show that the primary dif¬ ference between accrual and cash accounting is the timing of the performance recognition.
Which of the two systems, accrual or cash accounting, provides the most useful informa¬ tion? What kind of investors (equity or debt) tend to be most interested in accrual-based accounting numbers
Define the matching principle, and explain how it relates to the accrual system of measur¬ ing performance.
What are adjusting journal entries, and how do they relate to the accrual system of account¬ ing? Why are they recorded in the books?
Differentiate a cost expiration from an accrual.
Explain the difference between capitalizing a cost and expensing it. How do these two accounting treatments affect the balance sheet and income statement? Which of the two treatments has the more
Explain how the choice of capitalizing or expensing a given cost relates to the matching principle, and discuss how this decision reflects the distinction between a capital transac¬ tion and an
Explain how a cost expiration adjusting journal entry helps to apply the matching princi¬ ple appropriately. Provide three examples of cost expiration adjusting journal entries.
When is the cost of purchasing inventory matched against the benefit the inventory pro¬ duces for a company? How and why is this done on the books? Provide an example.
When is the cost of paying salaries matched against the benefit it produces for a company? How and why is this done on the books? Provide an example.
When a cash payment is received before a service is provided, how is this accounted for in the books? How is this accounting treatment an application of the revenue recognition principle? Compare
Suppose that Mr. Gizmo, chief executive officer of Galaxy Enterprises, purchased a piece of machinery at the beginning of 1997 and wants net income on the income statement of that year to be as high
Explain how a prepayment for a three-year insurance policy is treated on the books, and compare this treatment to the method used to account for the purchase of a piece of equip¬ ment. You will note
What is a multinational company, and how do such companies report to stockholders, cred¬ itors, and other interested parties who transact in different currencies, speak different lan¬ guages, and
(Appendix 5A) List the sixteen steps of the accounting cycle. Why is it so important that journal entries be recorded correctly?
(Appendix 5A) Distinguish the journal from the ledger. Why is the ledger referred to as a scoreboardl
(Appendix 5A) Explain the function of a work sheet. Is it an official book of record like the journal? Why or why not?
(Appendix 5A) What is placed in the first two columns of the work sheet following the account names? From where do these balances come?
(Appendix 5A) Where do adjusting journal entries come in the accounting cycle? Adding the adjusting entries to the unadjusted trial balance gives rise to what?
(Appendix 5A) Describe the closing process and list its four basic steps.
(Appendix 5A) Is Income Summary a temporary or permanent account? What role does it play in the closing process?
(Appendix 5A) Why is the Dividend account closed directly to the Retained Earnings account instead of through the Income Summary account?
(Appendix 5A) In terms of the accounting cycle, where can one find the numbers to be placed on the income statement, the statement of retained earnings, the balance sheet, and the statement of cash
(Appendix 5B) What is T-account analysis and why is it useful to managers?
(Appendix 5B) Describe the steps involved in T-account analysis.
(Appendix 5B) Assume that Prepaid Rent on the 1996 and 1997 balance sheets of Taylor Company were $5,600 and $4,700, respectively, and that the company’s 1997 income statement indicated Rent
Distinguish between borrowed capital, contributed capital, and earned capital, and explain why such a distinction is important to creditors and investors, managers, and auditors. How is this
Why might a manager wish to structure a financing transaction so that it can be reported as equity instead of debt?
Name and briefly describe the accounts that compose the stockholders’ equity section of the balance sheet.
Provide several reasons why major U.S. corporations tend to rely on debt more heavily than contributed capital or earned capital as a source of financing.
Explain how a debt covenant might impose restrictions on management that are expressed in terms of stockholders’ equity accounts.
Differentiate debt from equity, and describe why such a differentiation is important to investors and creditors, managers, and accountants.
What basic trade-offs does a manager face when deciding to raise capital by issuing either debt or equity?
Distinguish preferred stock from common stock. How do the rights of preferred stock¬ holders differ from those of common stockholders?
Why would the authorization of new shares be a concern of the existing stockholders?
What are dividends in arrears? Are they considered liabilities? Why or why not?
Explain how common stockholders have control over management. What is the role of the board of directors?
Define and differentiate among the market value, book value, and par value of a share of common stock.
Why is the book value of a share of stock often below its market value and how is the market-to-book ratio useful?
What is treasury stock, and why do major U.S. corporations purchase so much of it?
How can the purchase of treasury stock be equivalent to a dividend?
When treasury stock is reissued for a dollar amount less than its original cost, what two accounts can be debited for the difference between the cost and the proceeds?
What is a stock option, and why do corporations use them to compensate executives? Explain the controversy surrounding the methods used to account for stock options.
What is a dividend, and what three dates are relevant when accounting for dividends?
Briefly explain some of the different dividend strategies followed by major U.S. compa¬ nies. Why would an investor ever wish to invest in a company that paid no dividends?
What is the difference between a stock dividend, a stock split in the form of a dividend, and a stock split?
What is an appropriation of retained earnings? Explain how a debt covenant might under¬ lie an appropriation of retained earnings. Are any assets or liabilities affected when retained earnings are
Briefly describe the statement of stockholders’ equity, and describe the kind of informa¬ tion that can be found on it that is not found elsewhere in the financial report.
Discuss some of the implications that the increasing level of international equity trading has on accountants.
(Appendix 12A) Identify and describe the essential features of a corporation.
(Appendix 12A) Describe the trade-offs between organizing a business as a partnership instead of as a corporation
What are hybrid securities, and what kinds of problems do they present for accountants?
Explain why managers are concerned by them. What is dilution, and how does it relate to corporate takeovers?
How might purchasing outstanding stock help to block a takeover attempt?
Why is preferred stock listed at the top of the stockholders’ equity section?
Should preferred stock always be considered con¬ tributed capital?
Why does the number of outstanding shares often differ from the number of issued shares?
Explain how the purchase of treasury stock can increase the eamings-per-share ratio.
How does this method of accounting often confuse the distinction between contributed capital and earned capital?
Why do companies split their stock? Why do companies issue stock div¬ idends?
What are some of the important advantages and disadvantages of the corporate form of business?
What role do short-term investments in securities play in managing the cash balance?
What two criteria must be met before an investment in a security can be listed as current?
What is the difference between a realized gain/loss and a recognized gain/loss?
Differentiate a trading security from an available-for-sale security. In what ways are they accounted for differently?
Evaluate the mark-to-market rule as applied to investments in equity securities. In what manner does it provide useful information, and how and to what extent can management’s subjective judgment
Differentiate a short-term equity investment from a long-term equity investment in terms of management’s intention.
What bearing does the percentage of stock ownership have on the method used to account for a long-term equity investment? Why?
Refer to Figure 8-8 and describe the conditions under which the following four methods are used to account for short- and long-term equity investments: (a) mark-to-market, (b) cost, (c) equity, and
Under the equity method, why do dividends declared by the investee company reduce the Long-Term Investment account?
Why must users be cautious when analyzing the financial statement of a company that uses the equity method?
What is the difference between a business acquisition and a merger?

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