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business
understanding financial accounting

Questions and Answers of Understanding Financial Accounting

When a perpetual inventory system is used, unit costs of the items sold are known at the date of each sale. In contrast, when a periodic inventory system is used, unit costs are known only at the end
Which of the follow ing statements are true regarding Cost of Goods Sold?1. Cost of goods sold represents the cost that a company incurred to purchase or produce in\'entory in the cunent period.2.
The inventory costing method selected by a company will affecta. the balance sheet.c. the statement of retained earnings.b. the income statement.d. all of the above.(Appendix)
Which of the following is noi a component of the cost of inventory?a. administrative overheadc. raw materialsb. direct labord. factory overhead(Appendix)
Each perieid. the cost of goods available for sale is allocated betweena. assets and liabilities.c. assets and revenues.b. assets and expenses.d. expenses and liabilities.(Appendix)
A New York bridal dress designer who makes high-end custom wedding dresses most likely uses which inventory costing method?a. FIFOc. Weighted averageb. LIFOd. Specific identification(Appendix)
An increasing inventory turnover ratioa. indicates a longer time span between the ordering and receiving of inventory.b. indicates a shorter time span between the ordering and receiving of
If the ending balance in accounts payable decreases from one period to the next, which of the following is true?a. Cash payments to suppliers exceeded current period purchases.b. Cash payments to
Which of the following regarding the lower ofeos! or market rule for inventory are true?1 . The lower of cost or market rule is an example of the historical cost principle.2. When the replacement
Which inventory method provides a better matching of current costs with sales revenue on the income statement and outdated values for inventory on the balance sheet?a. FIFOc. LIFOb. weighted
Which of the following is false regarding a peipetual inventory system?a. Physical counts are not needed since records are maintained on a transaction-by-transaction basis.b. The balance in the
Define long-lived assets. Why are they considered to be a "bundle of future services"?LO1.
How is the fixed asset turnover ratio computed? Explain its meaning.LO1.
What are the classifications of long-lived assets? Explain each.LO1.
Relate the cost principle to the accounting for long-lived assets. Under the cost principle, vvhat amounts should be included in the acquisition cost of a long-lived asset?LO1.
Describe the relationship between the matching principle and accounting for long-lived assets.LO1.
Distinguish betweena. Capital expenditures and revenue expenditures. How is each accounted for?b. Ordinary repairs and improvements. How is each accounted for?LO1.
Distinguish among depreciation, depletion, and amortization.LO1.
In computing depreciation, three values must be known or estimated: identify and explain the nature of each.LO1.
The estimated useful life and residual \ alue of a long-lived asset relate to the cuixent owner or user rather than all potential users. Explain this statement.LO1.
What type of depreciation expense pattern is used under each of the following methods and when is its use appropriate?a. The straight-line method.h. The units-of-production method.c. The
Over what period should an addition to an existing long-lived asset be depreciated? Explain.LO1.
What is an asset iiiipainiieni '.' How is it accounted for?LO1.
When equipment is sold tor more than net hool\ vakie. how is the transaction recorded? For less than net hook \ akie? What is net booi< value 'LO1.
Define iiitiiiif^i/)lc assei. What period should be used to amorli/e an intantzible asset with a definite life?LO1.
Define i^oodwill. When is it appropriate to record goodwill as an intangible asset?LO1.
Why is depreciation expense added to net income on the statement of cash flows?LO1.
Simon Company and Allen Company both bought a new delivery truck on January 1 , 2005. Both companies paid exactly the same cost, $30,000 for their respective vehicles. As of December 3 1, 2008. the
Barber. Inc.. followed the practice of depreciating its building on a straight-line basis. A building was purchased in 2007 and had an estimated useful life of 20 years and a residual \alue
ACME. Inc.. uses straight-line depreciation for all of its depreciable assets. ACME sold a used piece of machinery on December 3 1 . 2008. that it purchased on January 1 . 2007. for $ 10.000. The
Under what method(s) of depreciation is an asset's net hook value the depreciable base (the amount to be depreciated)?a. Straight-line methodc. Declining-balance methodb. Units-of-production methodd.
What assets should be amortized using the straight-line method 'a. Natural resourcesc. Intangible assets with indefinite livesb. Intangible assets with definite livesd. All of the above(Appendix)
A company wishes to report the highest earnings possible for financial reporting purposes. Therefore, when calculating depreciation.a. it will follow the MACRS depreciation tables prescribed by the
How many of the following statements regarding goodwill are true?Goodwill is not reported unless purchased in an exchange.Goodwill must be reviewed annually for possible impairment.Impairment of
Company X is going to retire equipment that is fully depreciated with no residual value. The equipment will simply be disposed of. not sold. Which of the following statements is false?a. Total assets
When recording depreciation, which of the following statements is true?a. Total assets increase and stockholders' equity increases.b. Total assets decrease and total liabilities increase.c. Total
(Supplement) Thornton Industries purchased a machine for $45 ,()()() and is depreciating it with the straight-line method over a life of 10 years, using a residual value of $3,000. At the beginning
Define liuhility. Differentiate between a current liability and a long-term liability.LO1.
How can external parties be informed about the liabilities of a business?LO1.
Liabilities are measured and reported at their current cash equivalent amount. Explain.LO1.
A liuhility is a known obligation of either a definite or an estimated amount. Explain.LO1.
Define working capital. How is it computed?LO1.
What is the cunent ratio? How is it related to the classification of liabilities?LO1.
Define accrued liability. What type of entry usually rellects an accrued liability?LO1.
Define deferred revenue. Why is it a liability?LO1.
Define note payable. Differentiate between a secured and an unsecured note.LO1.
What is a contingent liability? How is a contingent liability reported?LO1.
Compute 2006 interest expense for the following note: face. $4,000; 12 percent interest: date of note. April 1. 2006.LO1.
Explain the concept of the time value of money.LO1.
Explain the basic difference between future value and present value.LO1.
If you hold a valid contract that will pay you $8,000 cash 10 years hence and the going rate of interest is 10 percent, what is its present value? Show your computations.LO1.
What is an annuity?LO1.
Complete the following schedule:LO1. Concept PV of $1 PV of annuity of SI Table Values 5.11 4:7 10%. 146 # 10
You purchased an XIT auto for $18,000 by making a $3,000 cash payment and six semiannual installment payments for the balance at 12 percent interest. Use a convenient format to display computation of
What is the present value factor for an annuity of five periods and an interest rate of 10 percent?a. 1.6105c. 3.7908b. 6.1051d. 7.7217(Appendix)
The university spirit organization needs to buy a car to travel to football games. A dealership in Lockhart has agreed to the following terms: $4,000 down plus 20 monthly payments of $750. A
Which of the following best describes accrued liabilities?a. Long-term liabilities.b. Cunent amounts owed to suppliers of inventory.c. Current liabilities to be recognized as revenue in a future
Company X has borrowed $1(X).()()0 I'roin the bank to be repaid over the next five years, with payments beginning next month. Which of the following best describes the presentation of this debt in
A company is facing a class-action lawsuit in the upcoming year. It is possible, but not probable, that the company will have to pay a settlement of approximately $2,000,000. How would this fact be
Which of the following transactions would usually cause accounts payable turnover to increase?a. Payment of cash to a supplier.c. Purchase of merchandise on credit.b. Collection of cash from a
How is working capital calculated?a. Current assets multiplied by current liabilities.b. Current assets plus current liabilities.c. Current assets minus current liabilities.d. Current assets divided
Which of the following is least likely to be an annuity?a. Monthly payments to a savings account.c. Monthly payments on a home moilgage.b. Monthly receipts from a pension plan.d. Monthly utility bill
At what value are liabilities presented in the financial statements?a. Net book value.c. Future value.b. Present value.d. Cash flow value.(Appendix)
Fred wants to save enough money each year so that he can purchase a sports car in January 201 1 Fred receives a large bonus from his employer every December 3 1 . He anticipates that the car will
What are the primary characteristics of a bond? For what purposes are bonds usually issued?LO1.
What is the difference between a bond indenture and a bond certificate?LO1.
Differentiate secured bonds from unsecured bt)nds.LO1.
Differentiate between callable and convertible bonds.LO1.
From the perspective of the issuer, what are some advantages of issuing bonds instead of capital stock'LO1.
As the tax rate increases, the net cost of borrowing money decreases. Explain.LO1.
At the date of issuance, bonds are recorded at their current cash equivalent amount. Explain.LO1.
Explain the nature of the discount and premium on bonds payable.LO1.
What is the difference between the stated interest rate and the effective-interest rate on a bond?LO1.
Differentiate anK)ng the stated and effective rates of interest on a bond (a) sold at par. (b) sold at a discoiMit, and (c) sold at a premium.LO1.
What is the book value of a bond payable?LO1.
Explain the basic difference between the straight-line and effective-interest methods of amortizing bond discount or premium. Explain when each method should or may be used.LO1.
Annual interest expense for a single bond issue continues to increase over the life of the bonds.Which of the following explains this?a. The market rate of interest has increased since the bonds were
Which of the following is not an advantage of issuing bonds when compared to issuing additional shares of stock in order to obtain additional capital?a. Stockholders maintain proportionate ownership
Which of the following does not impact the calculation of the cash interest payments to be made to bondholders?a. par value of the bondc. market rate of interestb. coupon rate of interestd. the
Which account would not be included in the debt to equity ratio calculation?a. Unearned Revenuec. Income Taxes Payableb. Retained Earningsd. All of the above are included.(Appendix)
Which of the following is false when a bond is issued at a premium?a. The bond will issue for an amoiuit above its par value.b. Bonds Payable will be credited for the par value of the bond.c.
When the issuing corporation has the right to terminate the relationship with the bondholder early and repay the amount borrowed ahead of schedule, we say that the bond isa. convertible.c.
To determine whether a bond will be sold at a premium, discount, or at face value, one must know which of the following pairs of information?a. the par value and the coupon rate on the date the bonds
When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by thea. par value of the bonds.b. coupon rate of interest stated in the bond
Which of the following would not appear in the financing section of the statement of cash flows?a. cash interest payments to bondholdersb. principal repayments to bondholdersc. amounts borrowed from
When using the effective-interest method of amortization, the book value of the bonds changes by what amount on each interest payment date?a. interest expensec. amortizationb. cash interest paymentd.
Define the term corporation and identify the primary advantages of this form of business organization.LO1.
What is the charier of a corporation?LO1.
Explain each of the following terms: (a) authorized capital stock, (b) issued capital stock, and(c) outstanding capital stock.LO1.
Differentiate between common stock and preferred slock.LO1.
Explain tlie distinction between par value and no-pur value capital slock.LO1.
What are the usual characteristics of preferred stock'.'LO1.
What are the two basic sources of stockholders" equity'.' E.xplain each.LO1.
Owners" equity is accounted for by source. What does source mean'.'LO1.
Define nvasun- .slock. Why do corporations acqiure treasury stock 'LO1.
How is treasury stock reported on the balance sheet'.' How is the "jzain or loss'" on treasury stock that has been sold reported on the financial statements'.'LO1.
What are the two basic requirements to support the declaration ot a cash dividend ' What arc the effects of a cash dividend on assets and stockholders" equity'.'LO1.
Differentiate between cumulative and noncumulalive preferred stock.LO1.
Define sicu k dividend. How does a stock dividend differ from a cash dividend'.'LO1.
What arc the primary reasons for issuing a stock dividend'.'LO1.

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