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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

What is goodwill?LO1.
What is a parent-subsidiary relationship?LO1.
Explain the basic concept underlying consolidated statements.LO1.
What is the basic element that must be present before consolidated statements are appropriate?LO1.
(Supplement A) What are intercompany eliminations?LO1.
Company A owns 40 percent of Company B and exercises significant influence over the management of Company B. Therefore. Company A uses what method of accounting for reporting its ownership of stock
Company A purchases 10 percent of Company X and Company A intends to hold the stock for at least five years. At the end of the current year, how would Company A's investment in Company X be reported
Di\ ideiids received from a stock that is reported as a security available for sale in the long-term assets section of the balance sheet are reported as vs hich of the following?a. an increase to
Realized gains and losses are recorded on the income statement for which of the following transactions in trading securities and availahle-for-sale securities?a. when adjusting a trading security to
When recording di\ idends recei\ed from a stock in\estment accounted for using the equity method, which of the following statements is true?a. Total assets are increased and net income is
When using the equity method of accounting, when is revenue recorded on the books of the investor companya. w hen the market \ alue of the investee stock increasesb. w hen a di\ idend is recei\ed
Which of the follow ing items is reported in the in\ esting section of the statement of cash tlou s when a stock investment is sold?a. the subtraction of a resulting gain on the saleb. the addition
Which of the follow ing statements regarding goodwill is false?a. Goodwill appears in the noncurrent asset section of the balance sheet.b. When the amortization of goodwill was halted in 2002, cash
Which of the follow ing is true regarding the return on assets ratio?a. This ratio is used to evaluate the efficiency of a company given the capital contributed by owners.b. This ratio is used to e\
Consolidated financial statements are required in which of the following situations?a. only when a company can exert significant influence over another companyb. only when a company acquires goodw
What is a trial balance? What is its purpose?LO1.
Briefly explain adjusting entries. List the four types of adjusting entries, and give an example of each type.LO1.
What is a contra-asset? Give an example of one.LO1.
Explain how the financial statements relate to each other.LO1.
What is the equation for each of the following statements: (a) income statement, (b) balance sheet, (c) statement of cash flows, and (d) statement of stockholders' equity?LO1.
Explain the effect of adjusting entries on cash.LO1.
How is earnings per share computed and interpreted?LO1.
How is net profit margin computed and interpreted?LO1.
Contrast an unadjusted trial balance w ith an adjusted trial balance. What is the purpose of each?LO1.
What is the puipose of closing entries?LO1.
Differentiate among (a) permanent, (b) temporary, (c) real, and (d) nominal accounts.LO1.
Why are the income statement accounts closed but the balance sheet accounts are not?LO1.
What is a post-closing trial balance? Is it a useful part of the accounting information processing cycle? Explain.LO1.
Which of the following accounts would not appear in a closing entry?a. Interest Incomec. Retained Earningsb. Accumulated Depreciationd. Salary Expense
Which account is least likely to appear in an adjusting journal entry?a. Cashc. Property Tax Expenseb. Interest Receivabled. Salaries Payable
When a concert promoting company collects cash for ticket sales two months in advance of the show date, which of the following accounts is recorded?a. Accrued Expensec. Deferred Expenseb. Accrued
On December 31 (fiscal year-end), an adjustment is made to reclassify a portion of unearned revenue as earned revenue. How many accounts will be affected on the year-end balance sheet by this
Failure to make an adjusting entry to recognize accrued salaries payable would cause which of the following?a. an overstatement of assets and stockholders' equityb. an overstatement of assets and
An adjusted trial balancea. shows the ending account balances in a ""debit" and ""credit" loriiiat belore posting the adjusting journal entries.b. is prepared alter closing entries have been
Company A owns a building. Which of the following statements regarding depreciation as used by accountants is false?a. As the value of the building decreases over time, it "depreciates."b.
Which of the following columns in a trial balance is used as a source for preparing the income statement?a. Unadjusted Trial Balancec. Adjusted Trial Balanceb. Adjustmentsd. Post-Closing Trial Balance
What ratio is required by GAAP to be reported on the financial statements or in the notes to the statements?a. Return on equity ratioc. Current ratiob. Net profit margin ratiod. Earnings per share
If a company is successful in reducing selling and administrative costs while maintaining sales volume and the sales price of its product, what is the effect on the net profit margin ratio?a. The
Describe the roles and responsibilities of management and independent auditors in the t'inancial reporting process.LO1.
Define the following three users of financial accounting disclosures and the relationships among ihem: financidl ciiHilysrs. private investors, and institutional investors.LO1.
Briefly describe the role of information services in the communication of financial information.LO1.
Explain why information must be relevant and reliable to be useful.LO1.
What basis of accounting does GAAP require on the (a) income statement, (b) balance sheet, and(c) statement of cash flows?LO1.
Brietly explain the normal sequence and form of financial reports produced by private companies in a typical year.LO1.
Briefly explain the normal sequence and form of financial reports produced by public companies in a typical year.LO1.
What are the four major subtotals or totals on the income statement 'LO1.
Define e.xtraordinary items. Why should they be reported separately on the income statement?LO1.
List the six major classifications reported on a balance sheet.LO1.
For property, plant, and equipment, as reported on the balance sheet, explain (a) cost, (b) accumulated depreciation, and (c) net book value.LO1.
Briefly explain the major classifications of stockholders" equity for a corporation.LO1.
What are the three major classifications on a statement of cash tlows?LO1.
What are the three major categories of notes or footnotes presented in annual reports? Cite an example of each.LO1.
Briefly define return on equity and v\'hat it measures.LO1.
If average total assets increase, but net income, net sales, and average stockholders" equit\ remain the same, what is the impact on the return on equity ratio?a. Increasesc. Remains the sameb.
If a company plans to differentiate its products by offering low prices and discounts for items packaged in bulk (like a discount retailer that requires memberships for its customers), which
If a company reported the following items on its income statement (cost of goods sold S5.000.income tax expense $2,000. interest expense $500. operating expenses $3,500. sales revenue$14,000), what
Which ol the following is not one of the possible nonrecurring items that must be shown in a separate line item below the Income from Continuing Operations subtotal in the income statement?a. Gains
Which of the following reports is filed annually with the SEC?a. Form 10-Qc. Form 8-Kb. Form 1 0-Kd. Press release
Common-size income statements are used for which of the following?a. Comparing the performance of different companies in the same industryb. Comparing the performance of a single company over timec.
Which of the following is noi a normal function of a financial analyst?a. Issue earnings forecastsb. Examine the records underlying the financial statements to certify their conformance with GAAPc.
The classified balance sheet format allows one to ascertain quickly which of the following?a. The most valuable asset of the companyb. The specific due date for all liabilities of the companyc. What
When companies issue par value stock for cash, which accounts are normally affected?a. Common Stock; Additional Paid-in Capital; and Property. Plant, and Equipment, Netb. Cash and Property. Plant,
What type of audit report does a client hope to include with its annual report?a. Conservativec. Comparableb. Qualifiedd. Unqualified
Explain the ditYerence between sales revenue and net sales.LO1.
What is gross profit or gross margin on sales? How is the gross profit ratio computed? In your explanation, assume that net sales revenue was $100,000 and cost of goods sold was $60,000.LO1.
What is a credit card discount? How does it affect amounts reported on the income statement?LO1.
What is a sales discount? Use l/IO, n/30 in your explanation.LO1.
What is the distinction between soles allowances and sales cliscoimis '.'LO1.
Differentiate accounts receivable from notes receivable.LO1.
Which basic accounting principle is the allowance method of accounting for bad debts designed to satisfy?LO1.
Using the allowance method, is bad debt expense recognized in (a) the period in which sales related to the uncollectible account were made or (b) the period in which the seller learns that the
What is the effect of the write-off of bad debts (using the allowance method) on (a) net income and (b) accounts receivable, net?LO1.
Does an increase in the recei\ ahles turno\ er ratio generally indicate faster or slower collection of receivables? Explain.LO1.
Define cash and cash equivalents in the context of accounting. Indicate the types of items that should be included and excluded.LO1.
Summarize the primary characteristics of an effective internal control system for cash.LO1.
Why should cash-handling and cash-recording activities be separated? How is this separation accomplished?LO1.
What are the purposes of a bank reconciliation? What balances are reconciled?LO1.
Brietly explain how the total amount of cash reported on the balance sheet is computed.LO1.
(Chapter Supplement A) Under the gross method of recording sales discounts discussed in this chapter, is the amount of sales discount taken recorded (a) at the time the sale is recorded or (b) at the
What is the best description of a credit card discount?a. The discount offered by a seller to a consumer for using a national credit card such as VISAb. The fee charged by a seller to a consumer for
Sales discounts with terms 2/10. n/30 mean:a. 10 percent discount for payment uithin 30 daysb. 2 percent discount for payment within 10 days or the full amount (less returns) is due within 30 daysc.
A company has been successful in reducing the costs of its manufactured inventory by relocating the factory to another locale. What effect will this factor have on the company's gross profit
When a company using the allowance method writes otT a specif ic customer's account receivable from the accounting system, which of the following statements are true?1 . Total stockholders' equity
You have determined that Company X estimates bad debt expense with an aging of accounts receivable schedule. Company X's estimate of uncollectible receivables resulting from the aging analysis
Upon review of the most recent bank statement, you discover that you recently received an "insufficient funds check" from a customer. Which of the following describes the actions to be taken when
Which of the following is not a step toward effective internal control over cash?a. Require signatures from a manager and one financial officer on all checks.b. Require that cash be deposited daily
When using the allowance method, as bad debt expense is recorded.a. total assets remain the same and stockholders' equity reinains the same.b. total assets decrease and stockholders' equity
Which of the following best describes the proper presentation of accounts receivable in the financial statements?a. gross accounts receivable plus the allowance for doubtful accounts in the asset
Which of the following is not a component of net sales?a. sales returns and allowancesc. cost of goods soldb. sales discountsd. credit card discounts(Appendix)
Why is inventory an important item to both internal (management) and external users of financial statements?LO1.
What are the general guidelines for deciding which items should be included in inventory?LO1.
Explain the application of the cost principle to an item in the ending inventory.LO1.
Define i^oods avdilable for sale. How docs it differ from cost of goods sold'.'LO1.
Define lH'i;inniii}^ inventory and ciulini> iiivcniory.LO1.
The chapter discussed four inventory costing methods. List the four methods and briefly explain each.LO1.
Explain how income can be manipulated when the specific identification inventory ct>sting method is used.LO1.
Contrast the effects of LIFO versus FIFO on reported assets (i.e.. the ending inventory) when(a) prices are rising and (b) prices are falling.LO1.
Contrast the income statement effect of LIFO versus FIFO (i.e.. on pretax income) when(a) prices are rising and (b) prices are falling.LO1.
Contrast the effects of LIFO versus FIFO on cash outflow and inllow.LO1.
Explain briefly the application of the LCM concept to the ending inventory and its effect on the income statement and balance sheet when market is lower than cost.LO1.

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