Questions and Answers
Which of the following items is classified as current liabilities?
What is the formula for Current Ratio?
What is the Debt to Assets Ratio?
Total liabilities / Total assets
What does Free Cash Flow represent?
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How is Earnings per Share calculated?
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What is the Going Concern Assumption?
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What does the Economic Entity Assumption state?
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What is the Monetary Unit Assumption?
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What does the Periodicity Assumption entail?
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What is the Full Disclosure Principle?
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What does the Historical Cost Principle refer to?
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In a classified balance sheet, how are assets usually classified?
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How are liabilities generally classified on a balance sheet?
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On a classified balance sheet, how are short-term investments classified?
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Which of the following would not be classified as a long-term liability?
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How is Equipment classified on the balance sheet?
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What are generally accepted accounting principles?
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What does the convention of consistency refer to?
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What is understandability in the context of financial information?
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What is the monetary unit assumption?
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Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments?
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Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which quality of useful information has Jackson most likely violated?
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What are current assets?
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What are examples of investments?
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What are property, plant, and equipment?
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What are intangible assets?
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What are current liabilities?
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What are long-term liabilities?
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What is interest expense?
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What is stockholders' equity?
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What is confirmatory value?
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What does neutral mean in accounting?
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Study Notes
Financial Statement Items Classification
- Accounts payable: Current liabilities
- Accounts receivable: Current assets
- Accumulated depreciation—equipment: Property, plant, and equipment
- Buildings: Property, plant, and equipment
- Cash: Current assets
- Interest payable: Current liabilities
- Goodwill: Intangible assets
- Income taxes payable: Current liabilities
- Inventory: Current assets
- Stock investments (to be sold in 7 months): Current assets
- Land (in use): Property, plant, and equipment
- Mortgage payable: Long-term liabilities
- Supplies: Current assets
- Equipment: Property, plant, and equipment
- Prepaid rent: Current assets
Key Financial Ratios
- Current Ratio = Current Assets ÷ Current Liabilities
- Debt to Assets Ratio = Total Liabilities ÷ Total Assets
- Free Cash Flow = Net Cash from Operations - Capital Expenditures - Cash Dividends
- Earnings per Share = (Net Income - Preferred Dividends) ÷ Average Common Shares Outstanding
Accounting Assumptions
- Going Concern Assumption: Plant assets not reported at liquidation value due to expectation of ongoing operations.
- Economic Entity Assumption: Personal and business finances maintained separately.
- Monetary Unit Assumption: Dollar used as the measuring stick for financial reporting.
- Periodicity Assumption: Financial information separated into time periods for reporting.
Accounting Principles
- Full Disclosure Principle: Companies must disclose all relevant circumstances impacting financial statement users.
- Historical Cost Principle: Used when reliable fair value estimates are unavailable.
- Convention of Consistency: Consistent use of accounting principles across periods is required.
Balance Sheet Classifications
- Assets classified as: Current assets, long-term investments, property, plant, and equipment, intangible assets.
- Liabilities classified as: Current liabilities and long-term liabilities.
- Short-term investments classified as: Current assets.
Specific Classifications
- Equipment: Classified under property, plant, and equipment.
- Current assets include: Inventory and prepaid insurance.
- Long-term liabilities include: Mortgage payable.
Qualities of Useful Information
- Confirmatory Value: Information that can confirm or adjust previous decisions.
- Faithful Representation: Importance of presenting accurate information; violations lead to misleading reports.
- Understandability: Information must be presented clearly for comprehension.
Specific Financial Concepts
- Current maturities of long-term debt: Not classified as long-term liability.
- Interest expense is not on the balance sheet.
- Stockholders' equity includes retained earnings.
Studying That Suits You
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Description
Test your knowledge on financial statement classifications with these flashcards from Accounting I Chapter 2. Each flashcard presents items from Ming Corporation's balance sheet that must be classified correctly. Ideal for students preparing for exams or seeking to reinforce their accounting skills.