Accounting I - Chapter 2 Flashcards

Questions and Answers

Which of the following items is classified as current liabilities?

Land (in use)

Income taxes payable (correct)

Accounts receivable

Buildings

What is the formula for Current Ratio?

Current Assets / Current Liabilities (correct)

Current Liabilities / Current Assets

Current Assets + Current Liabilities

Total Assets / Total Liabilities

What is the Debt to Assets Ratio?

Total liabilities / Total assets

What does Free Cash Flow represent?

Net cash through operations - capital expenditures - cash dividends Signup and view all the answers

How is Earnings per Share calculated?

(Net income - preferred dividends) / Average common shares outstanding Signup and view all the answers

What is the Going Concern Assumption?

Rationale why plant assets are not reported at liquidation value. Signup and view all the answers

What does the Economic Entity Assumption state?

Personal and business record keeping should be separately maintained. Signup and view all the answers

What is the Monetary Unit Assumption?

The dollar is the measuring stick used to report on financial performance. Signup and view all the answers

What does the Periodicity Assumption entail?

Separates financial information into time periods for reporting purposes. Signup and view all the answers

What is the Full Disclosure Principle?

Companies disclose circumstances and events that make a difference to financial statement users. Signup and view all the answers

What does the Historical Cost Principle refer to?

Measurement basis used when a reliable estimate of fair value is not available. Signup and view all the answers

In a classified balance sheet, how are assets usually classified?

Current assets; long-term investments; property, plant, and equipment; and intangible assets. Signup and view all the answers

How are liabilities generally classified on a balance sheet?

Current liabilities and long-term liabilities. Signup and view all the answers

On a classified balance sheet, how are short-term investments classified?

As current assets. Signup and view all the answers

Which of the following would not be classified as a long-term liability?

Current maturities of long-term debt Signup and view all the answers

How is Equipment classified on the balance sheet?

Property, plant, and equipment. Signup and view all the answers

What are generally accepted accounting principles?

Accounting rules that are recognized as a general guide for financial reporting. Signup and view all the answers

What does the convention of consistency refer to?

Consistent use of accounting principles among accounting periods. Signup and view all the answers

What is understandability in the context of financial information?

Information presented in a clear and concise fashion so that users can comprehend its meaning. Signup and view all the answers

What is the monetary unit assumption?

The assumption that requires only those things that can be expressed in money are included in the accounting records. Signup and view all the answers

Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments?

Going concern assumption Signup and view all the answers

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?

Faithful representation Signup and view all the answers

What are current assets?

Inventory, prepaid insurance Signup and view all the answers

What are examples of investments?

Land (held for investment) Signup and view all the answers

What are property, plant, and equipment?

Accumulated depreciation-equipment Signup and view all the answers

What are intangible assets?

Patents Signup and view all the answers

What are current liabilities?

Salaries and wages payable Signup and view all the answers

What are long-term liabilities?

Mortgage payable Signup and view all the answers

What is interest expense?

Not on balance sheet Signup and view all the answers

What is stockholders' equity?

Retained earnings Signup and view all the answers

What is confirmatory value?

Confirms or corrects prior decisions Signup and view all the answers

What does neutral mean in accounting?

An unbiased presentation of financial information. Signup and view all the answers

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.

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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.