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Questions and Answers
A company purchases another company for $1,000,000. The market value of the net assets acquired is $800,000. What amount of goodwill should be recorded?
A company purchases another company for $1,000,000. The market value of the net assets acquired is $800,000. What amount of goodwill should be recorded?
When is the value of goodwill assessed?
When is the value of goodwill assessed?
Which of the following is NOT amortized?
Which of the following is NOT amortized?
If a company has a copyright, how long does the exclusive right to publish their work last?
If a company has a copyright, how long does the exclusive right to publish their work last?
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If two partners invest $100,000 and $300,000 respectively into a partnership, what percentage of the profits or losses do they each get?
If two partners invest $100,000 and $300,000 respectively into a partnership, what percentage of the profits or losses do they each get?
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What is the primary difference between the straight-line and double-declining balance methods of depreciation?
What is the primary difference between the straight-line and double-declining balance methods of depreciation?
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Which of the following best describes the cost of goods sold (COGS)?
Which of the following best describes the cost of goods sold (COGS)?
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A company uses pre-numbered cheques and requires an approved invoice for all cash payments. What internal control activity does this best represent?
A company uses pre-numbered cheques and requires an approved invoice for all cash payments. What internal control activity does this best represent?
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An asset costs $100,000 with a 10-year useful life and a $10,000 residual value. Using the straight-line method, what would be the annual depreciation expense?
An asset costs $100,000 with a 10-year useful life and a $10,000 residual value. Using the straight-line method, what would be the annual depreciation expense?
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Which of the following is a key component of internal control over cash payments?
Which of the following is a key component of internal control over cash payments?
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Which method is most suitable for depreciating an asset that experiences higher usage and productivity during its early years?
Which method is most suitable for depreciating an asset that experiences higher usage and productivity during its early years?
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Which internal control objective focuses on ensuring financial reports are accurate and reliable?
Which internal control objective focuses on ensuring financial reports are accurate and reliable?
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A company purchased a machine for $200,000 with a 5 year lifespan estimating it will function for $100000 hours. What would be the expense for the year if the machine was used for 20000 hours? (using UOP, residual value is $50000)
A company purchased a machine for $200,000 with a 5 year lifespan estimating it will function for $100000 hours. What would be the expense for the year if the machine was used for 20000 hours? (using UOP, residual value is $50000)
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Which averaging method is used to calculate cost of ending inventory and cost of goods sold based average cost per unit?
Which averaging method is used to calculate cost of ending inventory and cost of goods sold based average cost per unit?
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What is the formula for calculating gross profit?
What is the formula for calculating gross profit?
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Which accounting standard is primarily used by publicly traded companies in Canada?
Which accounting standard is primarily used by publicly traded companies in Canada?
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What is the primary focus of a cash flow statement?
What is the primary focus of a cash flow statement?
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What does an adjusting entry primarily aim to do at the end of an accounting period?
What does an adjusting entry primarily aim to do at the end of an accounting period?
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If a customer prepays for a service, how is this initially recorded?
If a customer prepays for a service, how is this initially recorded?
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Which of the following best describes accumulated depreciation?
Which of the following best describes accumulated depreciation?
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In the context of bad debts, what does writing off an uncollectible account involve?
In the context of bad debts, what does writing off an uncollectible account involve?
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What is a key characteristic of journal entries in a perpetual inventory system?
What is a key characteristic of journal entries in a perpetual inventory system?
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What is the purpose of closing temporary accounts at the end of an accounting period?
What is the purpose of closing temporary accounts at the end of an accounting period?
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What is the primary reason for using reversing entries?
What is the primary reason for using reversing entries?
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When a company receives a promissory note in exchange for goods/services, how is this transaction initially recorded?
When a company receives a promissory note in exchange for goods/services, how is this transaction initially recorded?
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How is interest calculated on a promissory note?
How is interest calculated on a promissory note?
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When a note receivable is dishonored
When a note receivable is dishonored
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What happens when a company physically counts inventory?
What happens when a company physically counts inventory?
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What is the main assumption of the LIFO (Last-In, First-Out) inventory valuation method?
What is the main assumption of the LIFO (Last-In, First-Out) inventory valuation method?
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When is the Specific Item Identification method best used?
When is the Specific Item Identification method best used?
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Which of the following best describes what the Accounts Receivable Turnover ratio measures?
Which of the following best describes what the Accounts Receivable Turnover ratio measures?
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What does a higher Days to Pay AP indicate about a company?
What does a higher Days to Pay AP indicate about a company?
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If a company's operating inventory cycle is 70 days, what does this suggest?
If a company's operating inventory cycle is 70 days, what does this suggest?
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Which of these formulas is used to calculate the Equity Ratio?
Which of these formulas is used to calculate the Equity Ratio?
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Which of the following best describes the Times Interest Earned ratio?
Which of the following best describes the Times Interest Earned ratio?
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Which of these indicates what the Return on Equity ratio measures?
Which of these indicates what the Return on Equity ratio measures?
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Which of the following correctly states the relationship between the matching principle and expense recording?
Which of the following correctly states the relationship between the matching principle and expense recording?
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Under the indirect method for the cash flow statement, what adjustments are made to net income when calculating cash flows from operations?
Under the indirect method for the cash flow statement, what adjustments are made to net income when calculating cash flows from operations?
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What is the purpose of the 'Days’ Sales Outstanding' ratio?
What is the purpose of the 'Days’ Sales Outstanding' ratio?
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A company's debt to equity ratio is 1.4, what could this indicate about the business?
A company's debt to equity ratio is 1.4, what could this indicate about the business?
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Which of the following journal entries correctly represents the initial investment of a new partner into a partnership, where the partner pays an extra amount to join?
Which of the following journal entries correctly represents the initial investment of a new partner into a partnership, where the partner pays an extra amount to join?
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In a partnership dissolution, after assets are sold and creditors are paid, what is the next step in the distribution of remaining assets?
In a partnership dissolution, after assets are sold and creditors are paid, what is the next step in the distribution of remaining assets?
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Why are corporations considered separate legal entities?
Why are corporations considered separate legal entities?
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What is a key disadvantage of corporations regarding taxation?
What is a key disadvantage of corporations regarding taxation?
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When a corporation declares a cash dividend, what is the correct journal entry?
When a corporation declares a cash dividend, what is the correct journal entry?
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How is a stock dividend different from a cash dividend?
How is a stock dividend different from a cash dividend?
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What does issuing bonds represent for a corporation?
What does issuing bonds represent for a corporation?
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How do you calculate the interest on a bond?
How do you calculate the interest on a bond?
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If a company is considering long-term financing, what is a key characteristic of debt financing through bonds?
If a company is considering long-term financing, what is a key characteristic of debt financing through bonds?
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Which type of financing involves the scheduled repayment of a loan over a period exceeding one year, typically monthly?
Which type of financing involves the scheduled repayment of a loan over a period exceeding one year, typically monthly?
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What is a major advantage of debt financing over equity financing, related to ownership?
What is a major advantage of debt financing over equity financing, related to ownership?
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What is a key characteristic of equity financing?
What is a key characteristic of equity financing?
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Why would a business with a poor credit history choose equity financing over debt financing?
Why would a business with a poor credit history choose equity financing over debt financing?
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Which of the following is the correct formula for calculating working capital?
Which of the following is the correct formula for calculating working capital?
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What does the inventory turnover ratio measure?
What does the inventory turnover ratio measure?
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Study Notes
Canadian Accounting Standards
- IFRS (International Financial Reporting Standards) replaced GAAPs in 2011 for publicly traded Canadian businesses.
- Small to medium-sized Canadian firms typically use U.S. GAAPs.
- Public corporations use IFRS and require annual reports to adhere to these standards.
ASPE (Accounting Standards for Private Enterprises)
- ASPE is used by private Canadian businesses (those without a public listing).
- It is set by the Canadian Accounting Standards Board.
- Private corporations can choose between IFRS or ASPE.
GAAP (Generally Accepted Accounting Principles)
- GAAP is a set of broad accounting principles and practices, including rules and procedures, used for accounting information.
- It evolves over time.
- CPA Canada (formerly CICA) created GAAPs.
- GAAPs are supported by US and Canadian banks, companies, and institutions.
- Canadian Business Corporations Act and Ontario Securities Commissions recognize these standards.
Financial Statements
Balance Sheet
- Presents a company's financial position at a specific point in time (a "snapshot").
- Includes assets, liabilities, and owner's equity.
- Important for loan qualifications.
- Stakeholders: investors, managers, suppliers, customers, competitors, government, and labour unions.
Income Statement
- Also known as the profit and loss statement or statement of operations.
- Shows a company's profitability over a specified period.
- Includes revenues, expenses, gains, and losses.
- Stakeholders: lenders, investors, managers, competitors, government, and labour unions. Profitability affects new credit opportunities.
Cash Flow Statement
- Shows cash inflows and outflows during a period.
- Includes operating, investing, and financing activities.
- Operating activities convert accrual accounting to cash accounting.
- Investing activities involve assets like property, plant, and equipment.
- Financing activities relate to debt and equity.
- Includes supplemental information on items not involving cash.
Statement of Owner's Equity (Sole Proprietorship)
- Beginning Equity + Net Income - Drawings = Ending Equity
Statement of Retained Earnings (Corporation)
- Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
Statement of Partnership Equity
- Beginning capital + net income/loss - drawings = ending capital
Adjusting Entries
- Made at the end of an accounting period to adjust account balances.
- Updates related revenue and expense accounts.
Prepaid Expenses
- Items paid in advance, where revenue is recognized later.
- Prepaid expenses are assets and become expenses as they are used.
Prepaid Insurance
- Insurance premiums paid in advance require an adjusting entry.
Supplies Used
- Companies adjust for remaining supplies at the end of a period.
Unearned Revenue
- Revenue received in advance from customers.
- Recognized when the service/good is provided. A liability account.
Depreciation/Amortization
- Allocates the cost of long-term assets over their useful life.
Bad Debts
- The estimated amount of uncollectible accounts receivable.
- Matching expected loss to sales; allowance for doubtful accounts is a contra-asset account.
- Writing off bad debts removes unrecoverable accounts. Recovering a bad debt reverses the write-off entry.
Journal Entries (Various Types)
- Cash Transactions: Show cash inflows and outflows in accounting records.
- Perpetual Inventory System: Detailed tracking of inventory levels in real-time (sales record COGS).
- Periodic Inventory System: Inventory levels determined periodically; suitable for low-cost goods (one entry for sales).
Closing Accounts
- Temporary accounts (revenues, expenses, withdrawals) are set to zero to prepare for the next accounting period.
- Net income transferred to the capital account.
Reversing Entries
- Simplify adjustments for timing issues.
- Made at the start of the next accounting period.
Promissory Notes
- Written promise to pay a specific amount on a future date.
- Note Receivable: A promissory note due within a year.
- Interest: Calculated as Principal × Interest Rate × Time (in years).
Notes Receivable Entries
- Receipt of a note: DR: Notes Receivable, CR: Sales.
- Collecting a note on a future date: DR: Cash, CR: Notes Receivable, CR: Interest Receivable, CR: Interest Revenue).
- Dishonoring a note: DR: Accounts Receivable, CR: Notes Receivable, CR: Interest Revenue.
Notes Payable
- Issued when a business borrows funds.
- Issue a note: DR: Asset, CR: Notes Payable
- Paying a note: DR: Notes Payable, DR: Interest Expense, CR: Cash
Physical Inventory Counts
- Periodic counts to determine inventory levels and Cost of Goods Sold (COGS).
Inventory Valuations (Methods)
- FIFO (First-In, First-Out): Earliest goods are sold first.
- LIFO (Last-In, First-Out): Most recent goods sold first.
- Specific Identification: Cost of each item is tracked.
- Average Cost: Calculate an average cost per unit.
Gross Profit
- Revenue less the cost of goods sold (COGS).
COGS (Cost of Goods Sold)
- Expense representing the cost of merchandise sold during the period.
Internal Controls
- Systems designed to identify, assess, and protect risks.
- Includes objectives of operational efficiency, error/fraud detection, asset safeguarding, and accurate information.
- Key principles: control environment, risk assessment, control procedures, and control monitoring.
Internal Controls Over Cash Payments
- Secure cash, accurate records, separate cash handling and recordkeeping.
- Deposit cash daily, make payments by check, and use e-payments.
- Control activities: signing responsibility, human resource controls, duty segregation, and physical/IT controls.
Depreciation
- Allocates cost over an asset's useful life.
Depreciation Methods
- Straight-line: Equal amortization each year.
- Double-declining balance: Higher amortization in early years.
- Units-of-production: Amortization based on asset usage.
- Single diminishing-balance: Similar to double-declining balance without doubling rate.
Copyrights
- Intangible assets, granted by government (creator's life + 50 years). Amortize over useful life.
Journal Entries for Partnerships
- Share profits/losses based on agreed percentages.
Corporations
- Separate legal entity. Pros: limited liability, ease of raising capital, transferable ownership, continuous existence.
Issuing Cash Dividends vs. Stock Dividends
- Cash Dividends: Board declares, record payable, pay shareholders (DR: Dividends Payable, CR: Cash).
- Stock Dividends: Alternative to cash, issue more shares. (DR: Common Stock Dividend, CR: Common Stock Dividend Distributable, and issue shares).
Issuing Bonds vs. Common Shares
- Bonds: Long-term debt, promise to pay interest and principal.
- Interest Expense: Accrued interest is recorded at end of each period.
- Bonds Payable: Liability account.
Bonds for Long-Term Financing
- Long-term debt with scheduled principal and interest payments.
Debt vs. Equity Financing
- Debt Financing: Borrowed money; regular interest payments.
- Equity Financing: Owners' investments; no interest payments.
Financial Ratios
- Liquidity: Working capital, current ratio, quick ratio, inventory to net working capital.
- Efficiency: Inventory turnover, inventory turnover period, accounts receivable turnover, accounts receivable turnover period, accounts payable turnover, days to pay accounts payable, operating inventory cycle, days' sales outstanding.
- Solvency: Times interest earned, equity ratio, debt ratio, debt-to-equity ratio.
- Profitability: Profit margin, gross profit margin, return on equity, return on assets, earnings per share.
Cash Flow Statement
- Direct Method: Shows cash inflows and outflows directly.
- Indirect Method: Starts with net income and adjusts for non-cash items.
Steps for Indirect Method
- (1) Start with net income (2) Add non-cash expenses (3) Add losses from asset sales (4) Deduct gains from asset sales (5) Analyze changes in current assets/liabilities.
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Description
Test your knowledge of essential accounting principles, including goodwill calculation, depreciation methods, and internal control activities. This quiz covers various aspects of financial accounting and partnership profit sharing.
