102 terms

Intermediate Accounting

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
set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes
responsible for setting accounting and reporting standards for companies whose securities are publicly traded
the current private sector body that has been delegated the task of setting accounting standards.
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
developed by the IASB and used by more than 100 countries
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:
information that is available to users early enough to allow its use in the decision process
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
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
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.
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.
Increase in equity from peripheral or incidental transaction.
Sale of an asset used in the operations of a business for less than the asset's book value.
The owners' residual interest in the assets of a company.
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.
Outflow of an asset related to the production of revenue.
Economic entity assumption
The enterprise is separate from its owners and other entities.
A common denominator is the dollar.
Historical cost principle
The entity will continue indefinitely.
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.
Not a qualitative characteristic, but a practical justification for some accounting choices.
Assumes the entity will continue indefinitely.
Going concern assumption
Inflation causes a violation of this assumption.
Monetary unit assumption
Common stock
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
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
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