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Test 1

Internal users of accounting information

...

external users of accounting information

Investors, creditors, employees, labor unions, customers, suppliers, government regulatory agencies, financial intermediaries

financial accounting

Provides relevant financial information to various external users.

managerial accounting

deals with the concepts and methods used to provide information to an organization's internal users

GAAP

set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes

SEC

responsible for setting accounting and reporting standards for companies whose securities are publicly traded

FASB

the current private sector body that has been delegated the task of setting accounting standards.

IASB

objectives are to develop a single set of high-quality understandable global accounting standards, to promote the use of those standards, and to bring about the convergence of national accounting standards and international accounting standards

IFRS

developed by the IASB and used by more than 100 countries

SOX

law provides for the regulation of the key players in the financial reporting process

Initial market transactions

involves issuance of stocks and bonds by the corporation

Secondary market transactions

involves the transfer of stocks and bonds between individuals and institutions

Maltec Corporation has started placing its quarterly financial statements on its web page, thereby reducing by 10 days the time to get information to investors and creditors. The qualitative concept improved is:

Timeliness

Timeliness

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

Consistency

permits valid comparisons between different periods

Faithful representation

exists when there is agreement between a measure or description and the phenomenon it purports to represent

Comparability

the ability to help users see similarities and differences among events and conditions

Astro Turf Company recognizes an expense, cost of goods sold, in the period the product is manufactured.

The matching principle

Cloud Drug Company owns a patent that it purchased three years ago for $2 million. The controller recently revalued the patent to its approximate market value of $8 million.

The historical cost (original transaction value) principle

Philips Company pays the monthly mortgage on the home of its president, Larry Crosswhite, and charges the expenditure to miscellaneous expense.

The economic entity assumption

The economic entity assumption

of an entity be kept separated from activities of its owner

The matching principle

expenses are recognized in the same period as the related revenues

The historical cost principle

original transaction value

Liability

Obligation to transfer cash or other resources as a result of a past transaction.

distribution to owners

Dividends paid by a corporation to its shareholders.

revenue

Inflow of an asset from providing a good or service.

Assets, liabilities and equity

The financial position of a company.

Comprehensive income

Increase in equity during a period from nonowner transactions.

Gain

Increase in equity from peripheral or incidental transaction.

Loss

Sale of an asset used in the operations of a business for less than the asset's book value.

Equity

The owners' residual interest in the assets of a company.

Asset

An item owned by the company representing probable future benefits.

Net income

Revenues plus gains less expenses and losses.

Investment by owner

An owner's contribution of cash to a corporation in exchange for ownership shares of stock.

Expense

Outflow of an asset related to the production of revenue.

Economic entity assumption

The enterprise is separate from its owners and other entities.

Periodicity

A common denominator is the dollar.

Historical cost principle

The entity will continue indefinitely.

Materiality

Record expenses in the period the related revenue is recognized.

Realization principle

The original transaction value upon acquisition.

Going concern assumption

All information that could affect decisions should be reported.

Monetary unit assumption

The life of an enterprise can be divided into artificial time periods.

Economic entity assumption

Criteria usually satisfied at point of sale.

Full-disclosure principle

Concerns the relative size of an item and its effect on decisions.

Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet.

The historical cost (original transaction value) principle

Atwell Corporation has not prepared financial statements for external users for over three years.

The periodicity assumption

The Klingon Company sells farm machinery. Revenue from a large order of machinery from a new buyer was recorded the day the order was received.

The realization (revenue recognition) principle

Don Smith is the sole owner of a company called Hardware City. The company recently paid a $150 utility bill for Smith's personal residence and recorded a $150 expense.

The economic entity assumption

Golden Book Company purchased a large printing machine for $1,000,000 (a material amount) and recorded the purchase as an expense.

The matching principle; materiality

Ace Appliance Company is involved in a major lawsuit involving injuries sustained by some of its employees in the manufacturing plant. The company is being sued for $2,000,000, a material amount, and is not insured. The suit was not disclosed in the most recent financial statements because no settlement had been reached.

The full disclosure principle

One of the elements that many believe distinguishes a profession from other occupations is the acceptance of responsibility by its members for the interest of those it serves, which is often articulated in:

its code of ethics

The enhancing qualitative characteristic of understand ability means that information should be understood by

those who have a reasonable understanding of business and economic activities

Revenue is recognized only after certain criteria are satisfied.

Realization principle

Information that could affect decision making should be reported.

Full-disclosure principle

Cause-and-effect relationship between revenues and expenses.

Matching principle

The basis for measurement of many assets and liabilities.

Historical cost principle

Relates to the qualitative characteristic of timeliness.

Periodicity assumption

All economic events can be identified with a particular entity.

Economic entity assumption

The benefits of providing accounting information should exceed the cost of doing so.

Cost effectiveness

A consequence is that GAAP need not be followed in all situations.

Materiality

Not a qualitative characteristic, but a practical justification for some accounting choices.

Conservatism

Assumes the entity will continue indefinitely.

Going concern assumption

Inflation causes a violation of this assumption.

Monetary unit assumption

Common stock

credit

Indicate whether each of the following assets and liabilities should be classified as current or noncurrent:
(a) accounts receivable
(b) prepaid rent for the next six months
(c) note receivable due in two years
(d) not payable due in 90 days
(e) note payable due in five years
(f) patent

(a) current
(b) current
(c) noncurrent
(d) current
(e) noncurrent
(f) noncurrent

The most important objective for financial reporting is to provide information useful for:
(a) increasing future profits
(b) determining taxable income
(c) providing accountability
(d) making decisions

making decisions

The possibility that the capital markets' focus on periodic profits may tempt a company's management to bend or even break accounting rules to inflate reported net income is an example of:
(a) an accounting theory issue
(b) a technical accounting issue
(c) an ethical dilemma
(d) non of the above is correct

an ethical dilemma

Independent auditors express an opinion on the:

Fairness of financial statements

Disclosure notes to a company's financial statements:

are an integral part of a company's financial statements

GAAP is an abbreviation for:

Generally accepted accounting principles

Porite company recognizes revenue in the period in which it records an asset for the related account receivable, rather than in the period in which the account receivable is collected in cash. Porite's practice is an example of:

Accrual accounting

Revenue should not be recognized until:

the earnings process is complete and collection is reasonably assured

will be satisfied in the next year or the operating cycle, whichever is longer

current liabilities

presented fairly in conformity with GAAP

unqualified opinion

the larger the better from a debt holder's perspective

times interest earned ratio

supported by a negotiable instrument

notes receivable

expenses incurred but not yet paid

accrued liabilities

scope limitation or a departure from GAAP

qualified opinion

related to the debt to equity ratio

long-term solvency

relates to the amount of time before an asset is converted to cash or a liability is paid

liquidity

recorded when an expense is incurred but not yet paid

accrued liabilities

ownership of an exclusive right

intangible asset

one-month U.S. treasury bill

cash equivalent

Occurs after the fiscal year-end, but before the statements are issued

subsequent events

Liquid investments not classified as cash equivalents

short-term investments

items expected to be converted to cash or consumed within one year of the operating cycle

current assets

includes buildings and machinery

property, plant, and equipment

due to substantial reporting errors, qualified opinion is not appropriate

adverse opinion

due from customers in the ordinary course of business

accounts receivable

current assets minus current liabilities

working capital

insurance premiums paid in advance

prepaid expenses

converting cash to inventory to receivables to cash

operating cycle

auditor's reports

unqualified
qualified
adverse
disclaimer

disclosure notes

additional insights about company operations, accounting principles, contractual agreements, and pending litigation

Management discussion and analysis (MDA)

provides a biased but informed perspective of a company's operations, liquidity, and capital resources

Current ratio

current assets\ current liabilities

Debt to equity

total liabilities\ shareholder's equity

times interest earned

earnings before interest tax\ net interest expense

return on equity

Net Income/Shareholder's Equity

acid-test ratio

current assets-inventory\ current liabilities

subsequent event

a significant development that takes place after the company's fiscal year-end but before the financial statements are issued

related-party transactions

transactions with owners, management, families of owners or management, affiliated companies, and other parties that can significantly influence or be influenced by the company

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