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Questions and Answers
Which of the following accounts would not appear on a conventional balance sheet?
Which of the following accounts would not appear on a conventional balance sheet?
- Accounts Receivable
- Accounts Payable
- Patents
- Gain from Sale of Land (correct)
Current assets typically include all of the following except:
Current assets typically include all of the following except:
- Cash restricted for the retirement of bonds (correct)
- Receivables
- Marketable securities
- Unrestricted cash
The Current Liabilities section of the balance sheet should include:
The Current Liabilities section of the balance sheet should include:
- Preferred Stock
- Accounts Payable (correct)
- Bonds Payable
- Land
Inventories for a manufacturing firm include all of the following EXCEPT:
Inventories for a manufacturing firm include all of the following EXCEPT:
Which of the following accounts would not usually be classified as a current liability?
Which of the following accounts would not usually be classified as a current liability?
For the issuing firm, how should redeemable preferred stock be classified for analysis purposes?
For the issuing firm, how should redeemable preferred stock be classified for analysis purposes?
Which of the following accounts would not be classified as an intangible asset?
Which of the following accounts would not be classified as an intangible asset?
Growth Company had total assets of $100,000 and total liabilities of $60,000. What is the balance of the stockholders' equity?
Growth Company had total assets of $100,000 and total liabilities of $60,000. What is the balance of the stockholders' equity?
The Current Assets section of the balance sheet should include:
The Current Assets section of the balance sheet should include:
Which of the following is not a typical current liability?
Which of the following is not a typical current liability?
Which of the following is a current liability?
Which of the following is a current liability?
The accounting equation expresses the relationship between:
The accounting equation expresses the relationship between:
What is the primary criterion for classifying an asset as current?
What is the primary criterion for classifying an asset as current?
What is the carrying basis of marketable securities?
What is the carrying basis of marketable securities?
What is the most typical allowance related to account receivables?
What is the most typical allowance related to account receivables?
How will inventories be carried?
How will inventories be carried?
Which of the following assets is not subject to depreciation?
Which of the following assets is not subject to depreciation?
How are assets leased under an operating lease treated on the balance sheet?
How are assets leased under an operating lease treated on the balance sheet?
How are debt securities classified as held-to-maturity securities carried?
How are debt securities classified as held-to-maturity securities carried?
Which of the following best describes 'minority interest' in long-term liabilities?
Which of the following best describes 'minority interest' in long-term liabilities?
What are 'dividends in arrears'?
What are 'dividends in arrears'?
When does a firm create treasury stock?
When does a firm create treasury stock?
Assets are normally divided into two major categories:
Assets are normally divided into two major categories:
Current assets are listed on the balance sheet in what order?
Current assets are listed on the balance sheet in what order?
Savings account are classified as:
Savings account are classified as:
Treasury bills, commercial papers and certificates of deposits are:
Treasury bills, commercial papers and certificates of deposits are:
Allowances are shown in the:
Allowances are shown in the:
Land is:
Land is:
Assets leased under operating lease do not:
Assets leased under operating lease do not:
What kind of securities are long-term investments?
What kind of securities are long-term investments?
What is the accounting procedure that makes the company start over with a zero balance rather than a deficit?
What is the accounting procedure that makes the company start over with a zero balance rather than a deficit?
What is the amount of passed dividends called?
What is the amount of passed dividends called?
What does a credit agreement have?
What does a credit agreement have?
The depreciation expense taken each period is accumulated in a:
The depreciation expense taken each period is accumulated in a:
How would long-term investments in debt securities with the intent and ability to be held to maturity be classified?
How would long-term investments in debt securities with the intent and ability to be held to maturity be classified?
What are the components of the balance sheet?
What are the components of the balance sheet?
What does Common stock shares represent?
What does Common stock shares represent?
What should the current ratios be?
What should the current ratios be?
If insurance is paid in advance for three years, at the end of the first year the insurance paid is:
If insurance is paid in advance for three years, at the end of the first year the insurance paid is:
Callable preferred stock may be:
Callable preferred stock may be:
Flashcards
What is the balance sheet?
What is the balance sheet?
Financial statement showing an entity's assets, liabilities, and equity at a specific point in time.
What are assets?
What are assets?
Probable future economic benefits obtained or controlled by an entity.
What are liabilities?
What are liabilities?
Debts or obligations of an entity to others.
What is Stockholders' Equity?
What is Stockholders' Equity?
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What is the accounting equation?
What is the accounting equation?
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What are current assets?
What are current assets?
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What are noncurrent assets?
What are noncurrent assets?
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What is liquidity?
What is liquidity?
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What is cash?
What is cash?
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What are marketable securities?
What are marketable securities?
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What are accounts receivable?
What are accounts receivable?
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What are inventories?
What are inventories?
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What are prepaids?
What are prepaids?
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What are tangible assets?
What are tangible assets?
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What is Depreciation?
What is Depreciation?
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What is book value?
What is book value?
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What are intangibles?
What are intangibles?
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What are current liabilities?
What are current liabilities?
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What are payables?
What are payables?
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What is Unearned income?
What is Unearned income?
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What are long-term notes payable?
What are long-term notes payable?
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What are bonds payable?
What are bonds payable?
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What are credit agreements?
What are credit agreements?
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What is Commitment fee?
What is Commitment fee?
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What is common stock?
What is common stock?
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What is preferred stock?
What is preferred stock?
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What are retained earnings?
What are retained earnings?
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What is quasi-reorganization?
What is quasi-reorganization?
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What is accumulated other comprehensive income?
What is accumulated other comprehensive income?
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What is employee stock ownership plan (ESOP)?
What is employee stock ownership plan (ESOP)?
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What is treasury stock?
What is treasury stock?
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What is historical cost?
What is historical cost?
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How are held-to-maturity securities carried?
How are held-to-maturity securities carried?
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What is an unearned revenue?
What is an unearned revenue?
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What is bonds payable?
What is bonds payable?
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Study Notes
- A balance sheet shows the financial condition of an accounting entity as of a particular date.
- The balance sheet consists of assets, liabilities, and stockholders' equity.
- Assets are the resources of the firm.
- Liabilities are the debts of the firm.
- Stockholders' equity is the owners' interest in the firm.
- Assets are derived from creditors and owners.
- Assets must equal the contribution of creditors and owners at any point in time.
- The accounting equation is: Assets = Liabilities + Stockholders' Equity.
- Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
- Assets are normally divided into two major categories: current and noncurrent (long-term).
- Current assets are in the form of cash.
- Current assets will normally be realized in cash or conserve the use of cash during the operating cycle of a firm or for one year, whichever is longer.
- Noncurrent or long-term assets take longer than a year or an operating cycle to be converted to cash or to conserve cash.
- Current assets are listed on the balance sheet in order of liquidity.
- Liquidity is the ability to be converted to cash.
- Current assets typically include cash, marketable securities, short-term receivables, inventories, and prepaids.
- Cash is the most liquid asset.
- Cash includes negotiable checks and unrestricted balances in checking accounts, as well as cash on hand.
- Savings accounts are classified as cash even though the bank may not release the money for a specific period of time.
- It is important to consider the release date in financial analysis, especially in times of crisis.
- Marketable securities, also labeled short-term investments, are characterized by their marketability at a readily determinable market price.
- A firm holds marketable securities to earn a return on near-cash resources.
- Marketable securities should be separated into cash equivalents and other marketable securities.
- Cash equivalents are liquid assets with short maturity and low risk and are traded in the money market.
- Cash equivalents include treasury bills, commercial papers, and certificates of deposit.
- Other marketable securities are ones that management intends to hold for a short period but can be volatile.
- The first type of marketable security should be considered a cash equivalent, and the second should be considered an investment.
- Management must intend to convert assets to cash during the current period for them to be classified as marketable securities.
- The carrying basis is fair value.
- Accounts receivable are monies due on accounts that arise from sales or services rendered to customers.
- Accounts receivable are shown in the balance sheet net of allowances to reflect their realizable value.
- Allowances are shown in the notes to the financial statements.
- The most typical allowances are for bad debts (uncollectible accounts).
- Inventories are the balance of goods on hand.
- In a manufacturing firm, inventories include raw materials, work in process, and finished goods.
- Inventories will be carried at cost, expressed in terms of lower-of-cost-or-market.
- Prepaid is an expenditure made in advance of the use of the service or goods.
- Prepaids represent future benefits that have resulted from past transactions.
- If insurance is paid in advance for three years, at the end of the first year, two years' worth of the outlay will be prepaid.
- Prepaids are usually a small account.
- Tangible assets are the physical facilities used in the operations of the business.
- Tangible assets include land, buildings, machinery, and construction in progress.
- It is important to distinguish "construction in progress" from other tangible assets which indicates the growth potential of a company.
- Tangible assets can be shown net of accumulated depreciation.
- Land is carried at acquisition cost, it is not subject to depreciation, and natural resources are depleted.
- Buildings are depreciated (expensed) over the estimated useful life.
- Machinery's acquisition cost includes costs of delivery, installation, and permanent improvements.
- Machinery is depreciated over the useful life.
- Construction in Progress are assets under construction.
- Depreciation is the process of allocating the cost of buildings and machinery over the periods benefited.
- The depreciation expense taken each period is accumulated in a separate account (Accumulated Depreciation).
- Accumulated depreciation is subtracted from the cost of plant and equipment.
- The net amount is the book value of the asset.
- Most companies use straight line depreciation.
- Leases are classified as operating leases or capital leases.
- Assets leased under a capital lease are classified as long-term assets.
- They are shown net of amortization (depreciation) and listed with plant, property, and equipment.
- Assets leased under operating lease do not show on the balance sheet, rather they only affect the income statement.
- Most companies prefer to record leases as operating not capital to reduce the liabilities of the company.
- Long-term investments, usually stocks and bonds of other companies, are often held to maintain a business relationship or to exercise control.
- Debt securities under investments are either held-to-maturity securities or available-for-sale securities.
- Held-to-maturity securities are securities that the firm has the intent and ability to hold to maturity and are carried at amortized cost.
- Debt securities classified as available-for-sale securities are carried at fair value.
- Equity securities under investments are to be carried at fair value.
- Intangibles are nonphysical assets, such as patents and copyrights.
- Intangibles are recorded at historical cost and amortized over their useful lives or their legal lives, whichever is shorter.
- Most companies in Jordan and the Gulf region do not have many intangibles.
- Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the futures as a result of past transactions or events.
- Liabilities can be current or long-term.
- Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities within a year or operating cycle, whichever is longer.
- Payables are short-term obligations created by the acquisition of goods and services, such as accounts payable for materials or goods bought for use or resale, wages payable, and taxes payable.
- Payables may also be in the form of a written promissory note, notes payable.
- Unearned income are payments collected in advance of the performance of service.
- Unearned income includes rent income and subscription income.
- Other current liabilities include many other current obligations requiring payment during the year.
- Notes payable due in periods greater than one year or one operating cycle, whichever is longer, are classified as long term.
- Payables may also be in the form of a written promissory note, notes payable.
- A bond is a debt security normally issued with $1,000 par per bond and requiring semiannual interest payments based on the coupon rate.
- Bonds payable are usually for a longer duration than notes payable.
- Credit agreements are also called lines of credit, credit lines, revolving credit agreements, and loan commitments.
- Many firms arrange loan commitments from banks or insurance companies for future loans.
- Often, the firm does not intend to obtain these loans but has arranged the credit agreement just in case a need exists for additional funds.
- The credit agreement has a ceiling (say 10m).
- The withdrawn (used) part is recorded in the liabilities section.
- The unwithdrawn (unused) part is very important in the liquidity analysis and is shown in the notes.
- In return for giving a credit agreement, the bank or insurance company obtains a fee called commitment fee.
- The company pays interest over the used part.
- Also, banks often require the firm to keep a specified sum in its bank account, referred to as a compensating balance, and this amount is restricted.
- Liabilities relating to operational obligations include pension obligations, postretirement benefit obligations, deferred taxes, and service warranties.
- Minority interest reflects the ownership of minority shareholders in the equity of consolidated subsidiaries less than wholly owned.
- Redeemable preferred stock is subject to mandatory redemption requirements or has a redemption feature outside the control of the issuer.
- If this feature is coupled with specifications such as a fixed return, then this type of preferred stock is more like debt than equity.
- Stockholders' equity is the residual ownership interest in the assets of an entity that remains after deducting its liabilities.
- Paid-in capital is the first type of paid-in capital account and is capital stock.
- Two basic types of capital stock are preferred and common.
- Common stock shares in all the stockholders' rights and represents ownership that has voting and liquidation rights.
- Common stockholders elect the board of directors and vote on major corporate decisions.
- In the event of liquidation, the liquidation rights of common stockholders give them claims to company assets after all creditors' and preferred stockholders' rights have been fulfilled.
- Preferred stock seldom has voting rights however it can occur if dividends have been missed.
- Preference as to dividends means the current year's preferred stock dividend must be paid before a dividend can be paid to common stockholders.
- If a corporation fails to declare the usual dividend on the cumulative preferred stock, the amount of passed dividends becomes dividends in arrears.
- Common stockholders cannot be paid any dividends until the preferred dividends in arrears and the current preferred dividends are paid.
- When preferred stock is participating, preferred stockholders may receive an extra dividend beyond the stated dividend rate.
- Convertibility into common stock is a provision that allows the preferred stockholders, at their option, to convert the share of preferred stock at a specific exchange ratio into another security of the corporation.
- Callable preferred stock may be retired (recalled) by the corporation at its option.
- The preferred stockholders normally have priority over common stockholders for settlement of claims.
- Other accounts in the stockholders' equity include donated capital and retained earnings.
- Donated capital may be included in the paid-in capital and is donated to the company by stockholders, creditors, or other parties (such as a city).
- Retained earnings are the undistributed earnings of the corporation—that is, the net income for all past periods minus the dividends (both cash and stock) that have been declared.
- A quasi-reorganization is an accounting procedure equivalent to an accounting fresh start.
- A company with a deficit balance in retained earnings "starts over" with a zero balance rather than a deficit.
- A quasi-reorganization involves the removal of the deficit and an equal amount from paid-in capital.
- Accumulated other comprehensive income represents retained earnings from other comprehensive income.
- An employee stock ownership plan (ESOP) is a qualified stock-bonus, or combination stock bonus and money-purchase pension plan, designed to invest primarily in the employer's securities.
- A firm creates treasury stock when it repurchases its own stock and does not retire it.
- Since treasury stock lowers the stock outstanding, it is subtracted from stockholders' equity.
- Financial analysis is complicated by many assets recorded at cost rather than fair value.
- Varying valuation methods can be found from item to item within a firm and within an industry from company to company.
- Not all items of value are listed as assets, such as certain contingent liabilities.
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