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Questions and Answers
What is one reason managers handle earnings and dividends?
What is one reason managers handle earnings and dividends?
- To ensure accuracy in accounting (correct)
- To manage daily cash flows
- To prepare tax returns
- To ensure bank reconciliation
Stock issuance adjustments happen monthly.
Stock issuance adjustments happen monthly.
False (B)
What do managers need to ensure about liabilities in financial statements?
What do managers need to ensure about liabilities in financial statements?
That liabilities are properly classified as current or non-current.
The calculations around allowances, depreciation, accruals, and deferred revenue typically occur at the end of the ______.
The calculations around allowances, depreciation, accruals, and deferred revenue typically occur at the end of the ______.
Match the following responsibilities with their importance:
Match the following responsibilities with their importance:
Why is it important for managers to have knowledge and experience in financial reporting?
Why is it important for managers to have knowledge and experience in financial reporting?
Bookkeepers are responsible for more complex adjustments in accounting.
Bookkeepers are responsible for more complex adjustments in accounting.
What is the key principle for cash and cash equivalents in financial reporting?
What is the key principle for cash and cash equivalents in financial reporting?
What does the term 'current assets' refer to?
What does the term 'current assets' refer to?
The balance sheet for Crabcake Inc. shows an ending cash balance of $19 million as of December 2020.
The balance sheet for Crabcake Inc. shows an ending cash balance of $19 million as of December 2020.
What is the principle related to cash and cash equivalents that requires the information to be verifiable?
What is the principle related to cash and cash equivalents that requires the information to be verifiable?
The principles of US GAAP include reliability, _____, historical cost, full disclosure, and conservatism.
The principles of US GAAP include reliability, _____, historical cost, full disclosure, and conservatism.
Match the financial terms with their descriptions:
Match the financial terms with their descriptions:
Which principle emphasizes that information should be confirmed by an independent source?
Which principle emphasizes that information should be confirmed by an independent source?
Full disclosure is not an important principle in preparing financial statements.
Full disclosure is not an important principle in preparing financial statements.
What is an example of a short-term investment?
What is an example of a short-term investment?
When is the Allowance for Doubtful Accounts calculation typically performed?
When is the Allowance for Doubtful Accounts calculation typically performed?
Managers do not need to have experience to estimate bad debts.
Managers do not need to have experience to estimate bad debts.
What method is commonly used for calculating depreciation?
What method is commonly used for calculating depreciation?
____________ adjustments are often made at the end of the month for long-term contracts.
____________ adjustments are often made at the end of the month for long-term contracts.
Which of the following is true regarding inventory adjustments?
Which of the following is true regarding inventory adjustments?
Interest accrual for debt is usually adjusted annually.
Interest accrual for debt is usually adjusted annually.
When are retained earnings adjusted?
When are retained earnings adjusted?
Match the following calculations with when they are typically performed:
Match the following calculations with when they are typically performed:
What should you compare to check for errors in the trial balance?
What should you compare to check for errors in the trial balance?
The subsidiary ledgers should not match the corresponding GL balances.
The subsidiary ledgers should not match the corresponding GL balances.
What should you investigate if you find unusual transactions?
What should you investigate if you find unusual transactions?
To ensure accuracy, journal entries must be properly _____ in the GL.
To ensure accuracy, journal entries must be properly _____ in the GL.
Match each step with its purpose:
Match each step with its purpose:
What might an out-of-balance account in the trial balance indicate?
What might an out-of-balance account in the trial balance indicate?
Cut-off errors occur when transactions are recorded in the wrong accounting period.
Cut-off errors occur when transactions are recorded in the wrong accounting period.
What should be ensured regarding transactions for effective financial reporting?
What should be ensured regarding transactions for effective financial reporting?
What should a company do with excess cash when it does not know what to do with it?
What should a company do with excess cash when it does not know what to do with it?
Equity investments must be disclosed in the company's investment policy.
Equity investments must be disclosed in the company's investment policy.
What type of statements can be used to verify equity investments?
What type of statements can be used to verify equity investments?
A company must accrue any interest that is owed but not yet __________.
A company must accrue any interest that is owed but not yet __________.
Match the principles with their descriptions:
Match the principles with their descriptions:
What is an example of a conservative investment for a smaller company?
What is an example of a conservative investment for a smaller company?
Short term debt must be verified through internal records only.
Short term debt must be verified through internal records only.
Explain the accrual principle in relation to dividends.
Explain the accrual principle in relation to dividends.
What principle requires the disclosure of terms of payments and loan duration to investors?
What principle requires the disclosure of terms of payments and loan duration to investors?
Accrued liabilities are recorded only when the cash payment has been made.
Accrued liabilities are recorded only when the cash payment has been made.
What must be disclosed if a vendor makes up 20% of accounts payable?
What must be disclosed if a vendor makes up 20% of accounts payable?
The difference between __________ and cash-based accounting is that accrual records liabilities when expenses are probable, rather than when cash is paid.
The difference between __________ and cash-based accounting is that accrual records liabilities when expenses are probable, rather than when cash is paid.
Match the following terms with their definitions:
Match the following terms with their definitions:
What is the significance of the full disclosure principle in terms of accounts payable?
What is the significance of the full disclosure principle in terms of accounts payable?
The cash-based accounting method records expenses when they are incurred regardless of cash flow.
The cash-based accounting method records expenses when they are incurred regardless of cash flow.
What must evidence support when recording accrued liabilities?
What must evidence support when recording accrued liabilities?
Flashcards
Allowance for Doubtful Accounts
Allowance for Doubtful Accounts
Estimating the amount of uncollectible accounts receivable based on historical trends and customer credit risk. This is often done monthly or quarterly.
Inventory Adjustments
Inventory Adjustments
This is the process of adjusting inventory to reflect the lower of its cost or its net realizable value (selling price less costs to sell). This is often done monthly or quarterly.
Depreciation
Depreciation
This is the process of allocating the cost of a tangible asset over its useful life. It is typically calculated monthly, but reviewed and adjusted during month-end closing.
Interest Accrual
Interest Accrual
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Deferred Revenue
Deferred Revenue
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Retained Earnings
Retained Earnings
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Balance Sheet Equation
Balance Sheet Equation
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Why Managers Handle These Calculations
Why Managers Handle These Calculations
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Bank and Credit Card Reconciliation
Bank and Credit Card Reconciliation
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Allowance, Depreciation, Accruals, and Deferred Revenue Calculations
Allowance, Depreciation, Accruals, and Deferred Revenue Calculations
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Adjusting Stock Issuance and Paid-In Capital
Adjusting Stock Issuance and Paid-In Capital
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Liabilities and Equity Calculations
Liabilities and Equity Calculations
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Earnings and Dividends Calculation
Earnings and Dividends Calculation
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Cash and Cash Equivalents Verification
Cash and Cash Equivalents Verification
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Full Disclosure
Full Disclosure
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Why Managers Handle Complex Calculations
Why Managers Handle Complex Calculations
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Verify Trial Balance
Verify Trial Balance
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Reconciling Subsidiary Ledgers
Reconciling Subsidiary Ledgers
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Investigate Unusual Transactions
Investigate Unusual Transactions
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Check for Timing Issues (Cut-off Errors)
Check for Timing Issues (Cut-off Errors)
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Verify Posting of Journal Entries
Verify Posting of Journal Entries
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Review Financial Reports
Review Financial Reports
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Trace Connections in Reports
Trace Connections in Reports
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Verify Supporting Evidence
Verify Supporting Evidence
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Reliability Principle
Reliability Principle
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Full Disclosure Principle
Full Disclosure Principle
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Current Assets
Current Assets
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Short-Term Investments
Short-Term Investments
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Accrual Accounting
Accrual Accounting
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Historical Cost Principle
Historical Cost Principle
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Conservatism Principle
Conservatism Principle
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Ending Balance
Ending Balance
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How to verify equity investments?
How to verify equity investments?
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Accrual principle for equity investments
Accrual principle for equity investments
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Investment Policy
Investment Policy
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How to verify short-term debt?
How to verify short-term debt?
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Accrual principle for short-term debt
Accrual principle for short-term debt
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Accrual Principle
Accrual Principle
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Accounts Payable
Accounts Payable
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Accrued Liabilities
Accrued Liabilities
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Vendor Concentration
Vendor Concentration
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Disclosure of Legal Claims
Disclosure of Legal Claims
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Accrual vs. Cash-Based Accounting
Accrual vs. Cash-Based Accounting
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Study Notes
Balance Sheet Categories
- Assets: Represents a company's resources.
- Current Assets: Items expected to be converted into cash within a year.
- Cash and Cash Equivalents: Bank balances, cash, and highly liquid investments. Calculated by reporting the balance.
- Accounts Receivable: Money owed by customers. Adjusted for doubtful accounts (estimate of bad debts).
- Inventory: Goods available for sale.Adjusted for obsolescence or expiration, recorded at the lower of cost or net realizable value.
- Non-Current Assets: Items not expected to be converted into cash within a year.
- Property, Plant, and Equipment (PP&E): Tangible fixed assets (land, buildings, machinery). Calculated by subtracting depreciation from historical cost and considering impairments.
- Investments: Stocks, bonds, or other equity investments. Value is recorded at cost or fair market value, depending on the type of investment; interest or dividends are accrued if necessary.
- Equity and Other Investments: Stocks, bonds, and other equity-related investments.
- Liabilities: Represents a company's obligations.
- Current Liabilities: Items due within a year.
- Short-Term Debt: Loans and obligations within the year. Calculated by accruing interest expenses (if not yet paid).
- Accounts Payable: Money owed to vendors for goods/services. No calculation required, just report outstanding balances.
- Accrued Liabilities: Expenses incurred, but not yet paid (e.g., salaries, taxes).
Stockholders' Equity
- Common Stock: Value of shares issued; recorded at par value. Calculated by multiplying the par value per share by the number of shares.
- Additional Paid-In Capital: Amount paid to investors exceeding the par value. Calculated by determining the excess paid above the par value.
- Retained Earnings: Cumulative net income that's been retained. Calculated by adding the beginning retained earnings, net income, and subtracting any dividends paid.
Calculations and Formulas
- Allowance for Doubtful Accounts (Accounts Receivable): Formula: Allowance for Doubtful Accounts = Estimated Percentage of Uncollectible Receivables x Accounts Receivable Balance. Explanation: Estimate a percentage of receivables that may be uncollectible, based on past experience or an aging analysis.
- Inventory Adjustments (Lower of Cost or Net Realizable Value): Formula: Inventory Value = min (Cost of Inventory, or Net Realizable Value). Explanation: If the market value of inventory drops below its cost, the inventory is recorded at the lower value.
- Straight-Line Depreciation: Formula: Depreciation Expense = (Cost of Asset - Salvage Value) / Useful Life of the Asset.Explanation: Calculates depreciation evenly over the asset's useful life.
- Double-Declining Balance Depreciation: Formula: Depreciation Expense = 2 x (1/Useful Life) x Book Value at Beginning of Period Explanation: Calculates depreciation by applying a rate twice as high as the straight-line rate, accelerating the write-off of the asset.
- Interest Accrual for Debt: Formula: Interest Accrued = Principal x Interest Rate x Time Period/360. Explanation: Calculates interest expense that's been incurred but not paid yet.
Balance Sheet Breakdown and Key Principles
- Cash and Cash Equivalents: Verify balance through bank statements. Disclose restricted cash.
- Accounts Receivable: Confirm balances with customers, estimate doubtful accounts. Disclose large customer concentrations and at-risk accounts.
- Inventory: Verify via independent count; record at lower of cost or market value; disclose inventory risks.
- Property, Plant, and Equipment (PP&E): Verify via documentation; record at historical cost; disclose depreciation method and impairments.
- Equity and Other Investments: Verify balances with custodian statements; accrue interest/dividends; disclose investment policy.
- Short-Term Debt: Confirm with lender; accrue interest payable; disclose loan terms and conditions.
- Accounts Payable: Verify with vendor invoices; accrue liabilities; disclose significant vendor concentrations.
- Accrued Liabilities: Calculate based on the balance sheet equation.
- Deferred Revenue: Support with contracts and schedules; accrue when obligations are met; disclose significant contracts.
- Long-Term Debt: Verify balances with lender statements; accrue interest owed; disclose loan terms and payment schedule.
- Stockholders' Equity: Trace stock issuance, par value, and paid-in capital; disclose retained earnings.
Performance Task Using Balance Sheet
- Compare Debits and Credits: Ensure debits equal credits in the General Ledger (GL). Check individual transactions for potential errors.
- Verify Account Balances: Match GL balances to financial report balances.
- Check for Missing/Duplicated Entries: Identify any missing or duplicated entries in the GL.
- Reconcile Bank/Credit Card Statements: Compare bank reconciliations to the GL; account for outstanding checks, deposits in transit and timing differences.
- Review Adjustments to Depreciation and Accruals: Ensure consistency of depreciation and accrual schedules and amounts.
- Check the Trial Balance: Verify that total debit and credit entries are equal. Identify any out-of-balance accounts.
- Reconcile Subsidiary Ledgers: Ensure subsidiary (e.g., accounts receivable) balances match the corresponding GL balances.
- Look for Unusual Transactions: Identify unusual or out-of-place transactions or those inconsistent with typical business operations.
- Check Timing Issues: Ensure transactions are recorded in the correct accounting period.
- Verify Posting of Journal Entries: Ensure journal entries are posted accurately and supported by appropriate documentation.
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Description
Test your knowledge on the essentials of financial reporting management. This quiz covers topics including earnings handling, liabilities, cash equivalents, and key GAAP principles. Perfect for financial professionals looking to enhance their expertise!
