Accounting I - Chapter 2 Flashcards
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Accounting I - Chapter 2 Flashcards

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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?

    <p>Net cash through operations - capital expenditures - cash dividends</p> Signup and view all the answers

    How is Earnings per Share calculated?

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

    What is the Going Concern Assumption?

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

    What does the Economic Entity Assumption state?

    <p>Personal and business record keeping should be separately maintained.</p> Signup and view all the answers

    What is the Monetary Unit Assumption?

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

    What does the Periodicity Assumption entail?

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

    What is the Full Disclosure Principle?

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

    What does the Historical Cost Principle refer to?

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

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

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

    How are liabilities generally classified on a balance sheet?

    <p>Current liabilities and long-term liabilities.</p> Signup and view all the answers

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

    <p>As current assets.</p> Signup and view all the answers

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

    <p>Current maturities of long-term debt</p> Signup and view all the answers

    How is Equipment classified on the balance sheet?

    <p>Property, plant, and equipment.</p> Signup and view all the answers

    What are generally accepted accounting principles?

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

    What does the convention of consistency refer to?

    <p>Consistent use of accounting principles among accounting periods.</p> Signup and view all the answers

    What is understandability in the context of financial information?

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

    What is the monetary unit assumption?

    <p>The assumption that requires only those things that can be expressed in money are included in the accounting records.</p> 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?

    <p>Going concern assumption</p> 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?

    <p>Faithful representation</p> Signup and view all the answers

    What are current assets?

    <p>Inventory, prepaid insurance</p> Signup and view all the answers

    What are examples of investments?

    <p>Land (held for investment)</p> Signup and view all the answers

    What are property, plant, and equipment?

    <p>Accumulated depreciation-equipment</p> Signup and view all the answers

    What are intangible assets?

    <p>Patents</p> Signup and view all the answers

    What are current liabilities?

    <p>Salaries and wages payable</p> Signup and view all the answers

    What are long-term liabilities?

    <p>Mortgage payable</p> Signup and view all the answers

    What is interest expense?

    <p>Not on balance sheet</p> Signup and view all the answers

    What is stockholders' equity?

    <p>Retained earnings</p> Signup and view all the answers

    What is confirmatory value?

    <p>Confirms or corrects prior decisions</p> Signup and view all the answers

    What does neutral mean in accounting?

    <p>An unbiased presentation of financial information.</p> 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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    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.

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