ACFI1001 Lecture Notes - Lecture 2: Retained Earnings, Going Concern, Book Value

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mauveeel452

2 Jun 2018

School

University of Newcastle

Department

Accounting

Course

ACFI1001

Professor

Marcus

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Statement of financial position – balance sheet – Statement 3

The purpose of the statement of financial position is to set out the financial position of a business at

a particular point in time

Shows assets, liabilities and equity position of the entity

To be considered an asset four conditions must apply:

• A probable future economic benefit

• The business has exclusive right to control the benefit

• The benefit must arise from some past transaction or event

• The asset must be capable of reliable measurement in monetary terms

Conditions of a liability:

• probable that an outflow will occur

• capable of reliable measurement in monetary terms

Provision:

• Estimated liability, greater uncertainty regarding the amount or timing of the amount than

for a normal liability

Contingent liability:

• Potential liability that might arise if a particular event occurs

• Not recognised in financial position until the event actually occurs

The accounting equation:

Assets = Liabilities + Equity

Assets are classified as current where:

• they are held for sale or consumption duig the usiesss normal operating cycle

• they are expected to be sold within the next year

• they are held principally for trading, and/or

• they are cash, or near-cash (such as easily marketable, short-term investments)

A usiesss operating cycle is the time between the acquisition of the assets and their ultimate

realisation in cash or cash equivalents

Liabilities are classified as current where:

• they are expected to be settled within the usiesss normal operating cycle

• they are held principally for trading purposes

• they are due to be settled within a year after the date of the relevant statement of financial

position, and/or

• there is no right to defer settlement beyond a year after the date of the relevant statement

of financial position

Tpiall, thee ategoies of oes euit:

• Ownes’ euity contributed – initial funds contributed plus any specific increases

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Document Summary

Statement of financial position balance sheet statement 3. The purpose of the statement of financial position is to set out the financial position of a business at a particular point in time. Shows assets, liabilities and equity position of the entity. Conditions of a liability: probable that an outflow will occur, capable of reliable measurement in monetary terms. Provision: estimated liability, greater uncertainty regarding the amount or timing of the amount than for a normal liability. Contingent liability: potential liability that might arise if a particular event occurs, not recognised in financial position until the event actually occurs. A (cid:271)usi(cid:374)ess(cid:859)s operating cycle is the time between the acquisition of the assets and their ultimate realisation in cash or cash equivalents. Format of statement of financial position: horizontal format also referred to as the (cid:858)t a(cid:272)(cid:272)ou(cid:374)t(cid:859) fo(cid:396)(cid:373)at, vertical format also (cid:396)efe(cid:396)(cid:396)ed to as the (cid:858)(cid:374)a(cid:396)(cid:396)ati(cid:448)e(cid:859) fo(cid:396)(cid:373)at.

Related Questions

QUESTION 5 Which of the following statements BEST definesfinancial statements? A. Financial statements are plans andforecasts for future time periods. B. Financial statements are theverbal statements made to business news organizations by chieffinancial officers. C. Financial statements are documents thatreport on a business in monetary terms, providing information tohelp people make informed business decisions. D. Financialstatements are the information systems that record and measurebusiness transactions.

QUESTION 6 Which of the following statements is true of a trialbalance? A. A trial balance has the same format as a balance sheet.B. A trial balance presents data in debit and credit format. C. Atrial balance shows total amounts of assets, liabilities, but notequity. D. A trial balance is prepared after the balance sheet.

QUESTION 7 There are relatively few types of revenue. Which ofthe following in NOT a type of revenue? A. Sales B. Service C.Interest D. Unearned Revenue

QUESTION 8 The financial statements should be prepared in whatorder? A. Income statement, statement of owner's equity, balancesheet, statement of cash flows B. Balance sheet, statement ofowner's equity, income statement, statement of cash flows C.Statement of owner's equity, balance sheet, income statement,statement of cash flows D. Balance sheet, income statement,statement of owner's equity, statement of cash flows

QUESTION 9 Which of the following journal entries would berecorded if a business makes a cash payment to a supplier of $600"on account" (the business had purchased supplies on account in theprevious month)? A. Accounts payable 600 Cash 600 B. Accountspayable 600 Supplies 600 C. Cash 600 Supplies 600 D. Cash 600Accounts payable 600

QUESTION 10 Which of the following statements about revenue isCORRECT? A. Revenues increase owner's equity, so a revenueaccount's normal balance is a credit balance. B. Revenues decreaseowner's equity, so a revenue account's normal balance is a debitbalance. C. Revenues increase owner's equity, so a revenueaccount's normal balance is a debit balance. D. Revenues decreaseowner's equity, so a revenue account's normal balance is a creditbalance.

QUESTION 11 From a legal perspective, a proprietorship is: A.not a distinct entity from its proprietor. B. authorized understate charter. C. an entity separate from its proprietor. D.subject to regulation by the SEC.

QUESTION 12 Sharon Samson starts a plumbing service namedReliable Waterworks. Selected transactions are described asfollows: A) Sharon deposits $7,000 into a new checking account forthe business, recording the capital contribution. B) Reliable pays$4,000 cash for equipment to be used for plumbing repairs. C)Reliable borrows $15,000 from a local bank and deposits the moneyin the checking account. D) Reliable pays $600 rent for the firstmonth. E) Reliable pays $400 cash for plumbing supplies to be usedon various jobs in the future. F) Reliable completes a plumbingrepair project for a local lawyer and receives $1,300 cash. G)Sharon takes a cash withdrawal of $2,500. After all of thetransactions, what is the amount of total assets? A. $25,700 B.$20,200 C. $24,200 D. $5,200

QUESTION 13 The Accounts Payable account is a(n) ________account and carries a ________ normal balance. A. liability; debitB. asset; debit C. liability; credit D. asset; credit

QUESTION 14 The following are the ending month's balances forToys Galore. Accounts payable $6,790 Revenue $8,680 Cash $4,500Expenses $1,050 Furniture $8,370 Accounts receivable $ 7,710Capital $930 Notes payable $5,230 What is the total amount ofcredits for the trial balance? A. $30,310 B. $16,400 C. $21,630 D.$20,580

QUESTION 15 The Sarbanes-Oxley Act ("SOX") made it a criminaloffense to: A. steal shareholders' money. B. default on loans fromcreditors. C. declare bankruptcy. D. falsify financialinformation.

QUESTION 16 Which of the following is the order of steps tojournalize an entry? A. Record the transaction, identify eachaccount affected, determine increase or decrease in each account.B. Identify each account affected, determine increase or decreasein each account, record the transaction. C. Identify each accountaffected, record the transaction, determine increase or decrease ineach account. D. Determine increase or decrease in each account,identify each account affected, record the transaction

QUESTION 17 Mitchell Florists had the following total assets,liabilities, and equity as of December 31. Assets $450,000Liabilities 135,000 Equity 315,000 What is Mitchell's debt ratio asof December 31? A. 30% B. 70% C. 100% D. 43%

QUESTION 18 Which of the following financial statements reportsrevenues? A. Statement of cash flows B. Income statement C.Statement of owner's equity D. Balance sheet

QUESTION 19 Following is a list of account balances (except forowner's capital) of Wilson Mowing Service as of December 31 of thefirst year of operation: Accounts receivable $2,500 Accountspayable $3,500 Salary expense $4,500 Repairs expense $800 Truck$8,500 Equipment $6,300 Notes payable $8,200 Cash $6,800 Suppliesexpense $1,600 Service revenue $31,900 Gasoline expense $3,800Salary payable $200 The proprietor, J.D. Wilson, contributed $3,000at the beginning of the year; during the year, the proprietor took$12,000 in drawings. At the end of the year, what is net income? A.$11,900 B. $21,200 C. $24,100 D. $12,200

QUESTION 20 Which of the following is an asset account? A.Salaries Expense B. Accounts Payable C. Service Revenue D. PrepaidExpense

QUESTION 21 A journal entry for a $75 payment for Rent expensewas posted as a debit to Salary expense and a credit to Cash. Thiserror will cause which of the following conditions on the trialbalance? A. The sum of the credits will equal the sum of thedebits. B. The sum of the debits will exceed the sum of the creditsby $75. C. The sum of the credits will exceed the sum of the debitsby $150. D. The sum of the debits will exceed the sum of thecredits by $150.

QUESTION 22 The business receives cash from a customer that isowed to the company "on account," based on services rendered to thecustomer previously. How does the collection of the cash affect theaccounting equation? A. Assets increase; owner's equity increases.B. Assets increase; liabilities increase. C. Assets decrease;owner's equity decreases. D. One asset increases; one assetdecreases

QUESTION 23 A business completes service to a client and sendsout a sales invoice. The amount will be collected from the customerat a later time. Which of the following would be TRUE at the timewhen the invoice is sent out? A. Total assets will decrease. B. Netincome will increase. C. Owner's equity will decrease. D. Totalliabilities will increase.

QUESTION 24 Which of the following accounts increases with adebit? A. Cash B. Interest Payable C. Accounts Payable D. Smith,Capital

QUESTION 25 The Accounts Receivable account of Nuptials Inc. isshown below. Accounts Receivable Dr Cr 26,000 3,500 5,000 Calculatethe ending balance of the account. A. $33,500 debit B. $31,000,debit C. $3,500, credit D. $27,500, debit

QUESTION 26 The following transactions for the month of Marchhave been journalized and posted to the proper accounts. Mar. 1Martinez invested $9,000 cash in his new design services business.Mar. 2 Paid the first month's rent of $800. Mar. 3 Purchasedequipment by paying $3,000 cash and executing a note payable for$5,000. Mar. 4 Purchased office supplies for $750 cash. Mar. 5Billed a client for $10,000 of design services completed. Mar. 6Received $8,000 on account for the services previously recorded.What is the balance in Cash? A. $13,250 B. $12,450 C. $15,450 D.$14,000

QUESTION 27 Which of the following sequences states the order inwhich a trial balance lists accounts? A. Equity â Assets âLiabilities B. Liabilities â Assets â Equity C. Assets â Equity âLiabilities D. Assets â Liabilities â Equity

QUESTION 28 Which of the following statements is FALSE? A. Atrial balance shows total amounts for assets, liabilities, andequity. B. A trial balance is created before the balance sheet isprepared. C. A trial balance presents data in debit and creditformat, but a balance sheet does not. D. A trial balance showstotal debits and total credits.

QUESTION 29 A promise received from a business's customers topay for goods and services that they received from the business iscalled a(n): A. revenue. B. account receivable. C. account payable.D. expense.

QUESTION 30 You can evaluate the economic resources, debt, andoverall financial position of a company in which of the followingfinancial statements? A. Income statement B. Balance sheet C.Statement of owner's equity D. Statement of cash flows

QUESTION 31 A book holding all of the accounts is called the: A.income statement. B. journal. C. ledger. D. balance sheet.

QUESTION 32 Which of the following groups of accounts BOTHnormally have a debit balance? A. Assets and Liabilities B.Liabilities and Owner's equity C. Revenues and Expenses D. Assetsand Expenses

QUESTION 33 A business buys $500 of supplies on account. Whichaccount is debited? A. Supplies B. Cash C. Service revenue D.Accounts payable

1.The useful life of a plant asset is:

The length of time it is used productively in a company'soperations

Never related to its physical life

Its productive life, but not to exceed one year

Determined by the FASB

Determined by law

2. Depreciation:

Measures the decline in market value of an asset

Measures physical deterioration of an asset

Is the process of allocating to expense the cost of a plantasset

Is an outflow of cash from the use of a plant asset

Is applied to land

3. Plant assets are

Tangible assets used in the operation of a business that have auseful life of more than one accounting period

Current assets

Held for sale

Intangible assets used in the operations of a business that havea useful life of more than one accounting period

Tangible assets used in the operation of business that have auseful life of less than one accounting period

4. A company has net sales of $870,000 and average accountsreceivable of $174,000. What is its accounts receivable turnoverfor the period?

0.20

5.00

20.0

73.0

1,825

5. FICA taxes include:

Social Security taxes

Charitable giving

Employee income taxes

Unemployment taxes

6. Times interest earned is calculated by:

Multiplying interest expense times income

Dividing interest expense by income before interest expense

Dividing income before interest expense and any income tax byinterest expense

Dividing interest and income tax expense by income beforeinterest and income tax expense

7. Amortization:

Is the systematic allocation of the cost of an intangible assetto expense over its estimated useful life

Is the process of allocating to expense the cost of a plantasset to the accounting periods benefiting from its use

Is the process of allocating the cost of natural resources toperiods when they are consumed

Is an accelerated form of expensing an asset's cost

Is the same as depletion

8. A method of estimating bad debts expense that involves adetailed examination of outstanding accounts and their length oftime past due is the:

Direct write-off method

Aging of accounts receivable method

Percentage of sales method

Aging of investments method

Percent of accounts receivable method

9. A company purchased a tract of land for its natural resourcesat a cost of $1,500,000. It expects to mine 2,000,000 tons of orefrom this land. The salvage value of the land is expected to be$250,000. The depletion expense per ton of ore is:

$0.75

$0.625

$0.875

$6.00

$8.00

10. The matching principle requires:

That expenses be ignored if their effect on the financialstatements are less important than revenues to the financialstatement user

The use of the direct write-off method for bad debts

The use of the allowance method of accounting for bad debts

That bad debts be disclosed in the financial statements

That bad debts not be written off

11. Liabilities:

Must be certain

Must sometimes be estimated

Must be for a specific amount

Must always have a definite date for payment

Must involve an outflow of cash

12. In the accounting records of a defendant, lawsuits:

Are estimated liabilities

Should always be recorded

Should always be disclosed

Should be recorded if payment for damages is probable and theamount can be reasonably estimated

13. A contingent liability:

Is always of a specific amount

Is a potential obligation that depends on a future event arisingout of a past transaction or event

Is an obligation not requiring future payment

Is an obligation arising from the purchase of goods or serviceson credit

Is an obligation arising from a future event

14. Total asset turnover is calculated by dividing:

Gross profit by average total assets

Average total assets by gross profit

Net sales by average total assets

Average total assets by net sales

Net assets by total assets

15. If the times interest ratio:

Increases, then risk increases

Increases, then risk decreases

Is greater than 1.5, then the company is in default

Is less than 1.5, the company is carrying too little debt

16. Promissory notes that require the issuer to make a series ofpayments consisting of both interest and principal are:

Debentures

Discounted notes

Installment notes

Indentures

Investment notes

17. A company borrowed $300,000 cash from the bank by signing a5-year, 8% installment note. The present value factor for anannuity at 8% for 5 years is 3.9927. Each annuity payment equals$75,137. The present value of the note is:

$75,137

$94,013

$300,000

$375,685

18. A bond traded at 102

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ACFI1001 Lecture Notes - Lecture 2: Retained Earnings, Going Concern, Book Value

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