AFM123 Lecture Notes - Lecture 1: Retained Earnings, Income Statement, Financial Statement

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taupeporpoise877

23 Feb 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM123

Professor

Mohsin Bashir

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Document Summary

Describe various organizational forms and business decision makers. Sole proprietorships are owned by one individual, are relatively inexpensive to form, and are not treated legally as separate from their owners. Thus, all profits or losses become part of the taxable income of the owner, who is also responsible personally for all debts of the business. Partnerships are businesses legally similar to sole proprietorships, but with two or more owners. Corporations are separate legal entities (thus, corporations pay taxes) that issue shares to investors (shareholders) and are more costly to establish. Shareholders cannot be held liable for more than their investment in the corporation. Private corporations issue shares to a few individuals while public corporations issue shares in the stock market. Business decision makers include creditors (banks, suppliers), investors (shareholders), customers, governments, and other external users. Describe the purpose, structure, and content of the four basic financial statements.

Related Questions

QUESTION 1 The knowledge of financial accounting can assist people with decisions such as whether to extend credit to a business. True False 0.2 points Saved QUESTION 2 Employees of a company would not have a reason to use the information provided by financial accounting. True False 0.2 points Saved

QUESTION 3 Financial accounting should be used for assessing the financial health of large organizations only. True False 0.2 points Saved

QUESTION 4 Financial accounting can be helpful for a job candidate who is assessing the financial future of a potential employer. True False 0.2 points Saved QUESTION 5 Lenders might use the information produced by financial accounting when making loan decisions. True False 0.2 points Saved

QUESTION 6 Credit analysts prefer not to use information provided by financial accounting, as it is not accurate. True False 0.2 points Saved

QUESTION 7 Financial accounting is helpful to investment advisors. True False 0.2 points Saved

QUESTION 8 Financial accounting is more useful than managerial accounting. True False 0.2 points Saved

QUESTION 9 The decision to buy or rent equipment is an example of a decision aided by managerial accounting. True False 0.2 points Saved

QUESTION 10 Which of the following statements is true of financial accounting? A. It is used by external parties to make investment decisions. B. It is used to make lease or purchase decisions. C. Managerial accounting is another name for financial accounting, D. It is primarily used to make internal decisions of a business. E. The effectiveness of advertising can be judged using financial accounting. 0.2 points Saved QUESTION 11 The charge for using money over time, often associated with long-term loans, is known as: A. interest. B. principal. C. distribution charge. D. cash dividend. E. preferred dividend. 0.2 points Saved QUESTION 12 Which of the following is a common feature of financial and managerial accounting? A. Both have same objectives B. Both are prepared according to U.S. GAAP C. Both are reported at year end in the annual report D. Both are analyzed by external users while making investment decisions E. Both are used by the management in making decisions 0.2 points Saved

QUESTION 13 Dividends are required to be paid to stockholders on an annual basis. True False 0.2 points Saved

QUESTION 14 An individual who owns one or more shares of stock in a corporation is an owner of that corporation. True False 0.2 points Saved

QUESTION 15 Corporations do not exist as separate legal entities apart from their owners. True False 0.2 points Save Answer

QUESTION 16 It is very difficult to buy or sell ownership shares of a corporation in a stock exchange. True False 0.2 points Saved

QUESTION 17 Stock markets match up investors who wish to buy shares with those who wish to sell them. True False 0.2 points Saved

QUESTION 18 Legal process by which owners of an organization apply to a state government to have it identified as an entity legally separate from its owners is called: A. stocking. B. filling. C. attributing. D. registration. E. incorporation. 0.2 points Saved

QUESTION 19 An advantage of ownership in a sole proprietorship over ownership in a corporation is: A. tax benefits. B. having a board of directors. C. the ability to raise capital through issuance of stock. D. separation of owner and business as legal entities. E. limited liability for debts. 0.2 points Saved

QUESTION 20 Who hires the management of a corporation? A. Stockholders B. Board of directors C. Creditors D. Government E. SEC 0.2 points Saved QUESTION 21 Inventory refers to the: A. excess amount paid for an asset over its fair value. B. intangible assets of a business. C. merchandise bought or manufactured for the purpose of selling. D. amount of net income reinvested by company for future operations. E. revenue generated from investment. 0.2 points Saved QUESTION 22 Investors use financial information to predict whether a: A. company will recruit more employees. B. company's stock price will increase C. company has invested in buildings. D. company will pay salaries. E. company's bond price will increase. 0.2 points Saved

QUESTION 23 Financial accounting can be compared to a portrait. True False 0.2 points Saved

QUESTION 24 Financial statements provide the form and structure for the conveyance of financial information that will create a likeness of the reporting organization. True False 0.2 points Saved

QUESTION 25 The information reported in financial statements must be exact for an investor to make any decision. True False 0.2 points Saved

beigeant306

1 of 50

Investments in debt securities, such as bonds, may be classifiedas either current or long-term assets.

	True
	False

Question

2 of 50

Marketable securities that are held until the due date of thesecurities are

	trading and held-to-maturitysecurities.
	available-for sale securities.
	held-to-maturity securities.
	trading securities.

Question

3 of 50

Which of the following business types is most common as measuredby the amount of business transacted?

	Government entities
	Proprietorships
	Partnerships
	Corporations

Question

4 of 50

Depreciation is based upon cost, useful life, and salvagevalue.

	True
	False

Question

5 of 50

Because depreciation is not cash-based, it is NOT reported inthe direct method of the statement of cash flows.

	True
	False

Question

6 of 50

A company has a petty cash fund of $200. At the end of themonth, $6.41 remains in the fund along with $190.96 in variousreceipts. The journal entry to replenish the fund would show adebit(s) to

	various expenses for $190.96 andCash Short of $2.63.
	Cash for $190.96.
	Cash for $193.59.
	various expenses for $190.96 andCash Over of $2.63.

Question

7 of 50

A 12-month, 8% note dated August 1, 2013 for $5,000 would haveaccrued interest payable on December 31, 2013 of $166.67.

	True
	False

Question

8 of 50

Warranty expense must be estimated and matched to revenues.

	True
	False

Question

9 of 50

Upgrading the RAM on a computer would be an example of a(n)

	capital expense.
	betterment.
	ordinary repair.
	extraordinary repair.

Question

10 of 50

The formula for the quick ratio is quick assets divided bynoncurrent assets.

	True
	False

Question

11 of 50

Which of the following are considered to be legal entities thatexist separate and distinct from their owners?

	Sole proprietorships
	Organizations with more than 100partners
	Partnerships
	Corporations

Question

12 of 50

Patents and copyrights can be seen, held, or touched.

	True
	False

Question

13 of 50

Which of the following would be considered part of the cost ofmachinery and equipment?

	Repairs after start-up
	Insurance after purchase
	Maintenance
	Sales taxes

Question

14 of 50

The business or person that signs the note and promises to paythe required amount is called the payee.

	True
	False

Question

15 of 50

Conley Company has a petty cash fund of $300. At the end of themonth, $42.38 remains in the fund along with $260.75 in variousreceipts. The journal entry to replenish the fund would bedebit

	Petty Cash for $257.62 and creditCash for $257.62.
	various expenses, $260.75 andcredit Cash for $260.75.
	various expenses, $260.75, creditCash Over for $3.13, and credit Cash for $257.62.
	various expenses, $254.49, debitCash Short for $3.13, and credit Cash for $257.62.

Question

16 of 50

Neither land nor land improvements are depreciated.

	True
	False

Question

17 of 50

Using a 365-day year, the maturity value of a 180-day note for$2,700 at 9% annual interest is (rounded to the nearest cent)

	$2,819.84.
	$2,821.50.
	$2,943.00.
	$ 119.84.

Question

18 of 50

On January 1, Bestway, Inc. signed a $175,000, 8%, 30-yearmortgage that requires semiannual payments of $7,735 on June 30 andDecember 31 of each year. The journal entry to record the secondsemiannual payment would be (round interest calculation to thenearest dollar) to

	debit Interest expense, $764; debitMortgage payable, $6,971; credit Cash, $7,735.
	debit Mortgage payable, $7,735;credit Cash, $7,735.
	debit Interest expense, $6,971;debit Mortgage expense, $764; credit Cash, $7,735.
	debit Interest expense, $6,971;debit Mortgage payable, $764; credit Cash, $7,735.

Question

19 of 50

Allied Industries purchased a piece of equipment for $65,000with an estimated salvage value of $15,000 on January 1. Itsestimated life is five years. To the nearest dollar, what is theequipment's depreciation using double-declining-balance for yeartwo?

	$ 26,000
	$ 12,000
	$ 20,000
	$ 15,600

Question

20 of 50

Payroll is also called employee compensation and can consist ofmany parts.

	True
	False

Question

21 of 50

The number of shares of stock that a corporation is given theright to sell is called

	authorized stock.
	issued stock.
	outstanding stock.
	capital stock.

Question

22 of 50

Which of the following would NOT be considered part of the costof machinery and equipment?

	In-transit insurance costs
	Delivery charges
	Installation costs
	Repairs and maintenance afterstart-up

Question

23 of 50

Equipment costing $118,000 has accumulated depreciation of$92,000. The equipment is a trade-in for new equipment costing$187,000. If the trade-in value received for the old equipment is$30,000, the journal entry to record this transaction is to

	debit Equipment (New) for $187,000,debit Accumulated Depreciation â Equipment for $92,000, creditEquipment (Old) for $118,000, and credit Cash for $161,000.
	debit Equipment (New) for $187,000and credit Cash for $187,000.
	debit Accumulated Depreciation âTruck for $50,000, debit Loss on Disposal $6,000, and credit Truckfor $56,000.
	debit Equipment (New) for $187,000,debit Accumulated Depreciation â Equipment for $92,000, debit Losson Exchange of Assets for $26,000, credit Equipment (Old) for$118,000 and credit Cash for $187,000.

Question

24 of 50

Liberty Company has declared a $40,000 cash dividend toshareholders. The company has 5,000 shares of $20-par, 6% preferredstock and 10,000 shares of $15-par common stock. The preferredstock is cumulative. How much will be distributed to the preferredand common stockholders on the date of payment if the preferredstock is $12,000 in arrears?

	$18,000 preferred, $22,000common
	$20,000 preferred, $20,000common
	$6,000 preferred, $34,000common
	$40,000 preferred, $0 common

Question

25 of 50

In accounting, what is the meaning of capitalized?

	Capitalized means that a given cityhas been selected as a government center.
	Capitalized means that the cost ofan asset is recorded as a debit (increase) to expense.
	Capitalized means that a liabilityaccount is credited (increase
	Capitalized means that an assetaccount is debited (increased) for the cost of an asset.

Question

26 of 50

Interest is an expense to the debtor and income to thecreditor.

	True
	False

Question

27 of 50

Cash consists of anything that a bank will take as adeposit.

	True
	False

Question

28 of 50

The cost of long-term assets must be allocated to an expense asthe asset is used up.

	True
	False

Question

29 of 50

The process of acquiring merchandise from a supplier begins withthe

	purchase order.
	check for payment.
	receiving report.
	invoice.

Question

30 of 50

Appleway Corporation purchases a machine for $125,000. It has anestimated salvage value of $10,000 and is expected to produce50,000 units in its lifetime. During the first year of operation,it produced 14,500 units. To the nearest dollar, the depreciationfor the first year under the units of production method will be

	$35,500.
	$31,250.
	$36,250.
	$33,350.

Question

31 of 50

Book value is depreciable cost minus accumulateddepreciation.

	True
	False

Question

32 of 50

The records of Inland Equipment showed a net loss of $30,000,depreciation expense of $25,000, and an increase in supplies onhand of $5,000. The amount of net cash flow from operatingactivities using the indirect method is

	($10,000).
	$15,000.
	$20,000.
	($15,000).

Question

33 of 50

Retained earnings represent internally generated capital.

	True
	False

Question

34 of 50

A company issues 15,000 shares of its $25 par common stock for$29 per share. The amount to be debited to Cash is

	$435,000.
	$375,000.
	$405,000.
	$ 60,000.

Question

35 of 50

On September 1, 2012, Juno Corp. lent $2,400 to Bill Askins on asix-month 8% promissory note. The journal entry to record the notefor Juno Corp. would be to:

	debit Note Receivable/Tim, $2,400;credit Cash, $2,400.
	debit Note Receivable/Tim, $96;credit Interest Income, $96.
	debit Note Receivable/Tim, $2,496;credit Cash, $2,496.
	debit Cash, $2,400; credit NotePayable/Tim, $2,400.

Question

36 of 50

Separation of duties is essential for internal control over cashreceipts and cash payments.

	True
	False

Question

37 of 50

Which of the following would indicate poor internal control overaccounts receivable?

	The same person handling cashreceipts also records the accounts receivable transactions.
	The person handling cash receiptspasses the receipts to someone who enters them into accountsreceivable.
	The mailroom employees open themail and give the cash receipts to another employee.
	The person who handles accountsreceivable would not write off accounts as uncollectible.

Question

38 of 50

Limited liability means that the stockholders of a corporationshare a personal liability for all debts of the corporation.

	True
	False

Question

39 of 50

Accumulated depletion is a(n)

	contra-asset account.
	cash account.
	contra-liability account.
	expense account.

Question

40 of 50

Allied Industries reported net income of $52,000, depreciationexpenses of $13,000, a gain on a land sale of $3,000, and adecrease in accounts receivable of $1,500. Under the indirectmethod, net cash flows from operations is

	$63,500.
	$66,500.
	$69,500.
	$60,555.

Question

41 of 50

The portion of stockholders' equity that can be used fordividends is referred to as legal capital.

	True
	False

Question

42 of 50

Franklin Industries had total assets of $560,000; totalliabilities of $250,000; and total stockholders' equity of$310,000. Franklin Industries debt ratio is

	55.4%.
	28.7%.
	44.6%.
	80.6%.

Question

43 of 50

Financial analysis is used to predict the future of abusiness.

	True
	False

Question

44 of 50

Online banking should NOT be used to reconcile the bankaccount.

	True
	False

Question

45 of 50

Costs of testing machinery or equipment before they are usedwould be included in the price of the machinery or theequipment.

	True
	False

Question

46 of 50

There are two methods for accounting for uncollectiblereceivables.

	True
	False

Question

47 of 50

Assets that are NOT expected to provide benefits for a number ofaccounting periods are called

	current assets.
	property, plant, andequipment.
	long-term assets.
	natural resources.

Question

48 of 50

The allowance method of accounting for bad debts is required byGAAP because of the materiality principle.

	True
	False

Question

49 of 50

A stock dividend affects total stockholders' equity.

	True
	False

Question

50 of 50

Realized gains and losses only occur when the security is soldfor more or less than the original cost.

	True
	False

AFM123 Lecture Notes - Lecture 1: Retained Earnings, Income Statement, Financial Statement

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