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ADMS 1500 Lecture Notes - Lecture 3: Inventory Turnover, Asset Turnover, Gross Profit

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coffeegrasshopper461

26 Jan 2018

School

York University

Department

Administrative Studies

Course

Professor

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Document Summary

The accounting equation as a framework for financial reporting. The basic accounting equation is a powerful framework for collecting, organizing and reporting financial information. Short-term survival is critically dependent on the relationship between immediate obligations (current liabilities) and the liquid assets that are available to pay them (current assets). Profitability ratios express some measure of profits against the resources used to create them. 1. 34 means for every dollar of assets we generate 34% in sales: receivables turnover, comparing receivables to sales revenue shows the turnover ratio. The more frequently these are turned over, the more efficiently the company is operating: sales receivables, receivables collection period, receivables collection period is how long it takes to be paid back. receivables (sales 365) Inventory turnover: the less the inventory for a given level of sales revenue, the more efficiently the company is operating, sales inventory, higher number is good!

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Related Questions

1. The budget informationprepared by a company must be a part of financial statementsincluded in form 10-k.

A. True B. False

2. MD&A ( included in form 10-k) stands for:

A. Minor disclosure and Analysis

B. Management's disclosure and Analysis

C. Management's discussion and Analysis

3. The statement of cash flows can provide statement users withinformation about which of the following:

A. how a company is generating its cash

B. whether the income reported on the income statement isrealized as cash

C. how the company used its cash resources.

D. All of the above

4. A process cost accounting system is best suited to accumlatethe manfacturing costs for which of the following products?

A. Construction of an electric power generation facility

B. a house

C. Paper clips

D. an automobile

5. The statement of cash flows focuses only on what happenedto:

A. revenues and expenses

B. fixed asset purchases

C. the issuance of stock and bonds

D. cash

6. The balance sheet equation ( the accounting equation) can bedefined as which of the following:

A. Assets - liabilities = stock holder equity

B. Assets + liabilities = stockholders equity

C. Assets= liabilities - stockholders equity

D. Assets + stockholders equity= Liabilities

7. One of the major criticisms aimed at financial accountants isthat their information is not

A. accurate

B. timely

C.proper

D. Added correctly

8. Which of the following provides the greatest level ofdetail?

A. general ledger system

B. balance sheet

C. income statement

D. cost accounting system

9. Which audit opinion states " The financial statements followGAAP except in the following sentences..."?

A. Unqualifed

B. Qualified

C. Adverse

D. Disclaimer of Opinion

10. Which of the following management functions orcharacteristics are most enhanced by the budget process?

A. timeliness and responsiveness

B. planning and accuracy

C. control and accountability

D. focus and accountability

Unit 6 GAAP Application-Conceptual Framework of Accounting TheConceptual Framework allows for the systematic adaptation ofaccounting standards to a changing business environment. The FASBuses the conceptual framework to aid in an organized and consistentdevelopment of new accounting standards. The conceptual frameworkoutlines the objectives of financial reporting and the qualities ofgood accounting information, precisely defines commonly used termssuch as asset and revenue, and provides guidance about appropriaterecognition, measurement, and reporting. Understanding theterminology associated with the framework is imperative. Match thenumbered statements below with the lettered terms. An answer(letter) may used more than once, and some terms require more thanone answer (letter). 1. Key ingredients in quality of relevance. 2.Traditional assumptions that influence the FASB's conceptualframework. 3. The idea that information should represent what itpurports to represent. 4. An important constraint relating to costsand benefits. 5. An example of conservatism 6. The availability ofinformation when it is needed. 7. Recording an item in theaccounting records. 8. Determines the threshold for recognition. 9.Implies consensus. 10. Transactions between independent parties. a)Cost-effectiveness b) Representational faithfulness c) Recognitiond) Verifiability e) Time periods f) Unrealized g) Completeness h)Timeliness i) Materiality j) Predictive value k) Economic entity l)Lower-of-cost-or-market rule m) Phrenology n) Arm's-lengthtransactions Now that you have reviewed the terminology, for eachsituation listed below, indicate by letter the appropriatequalitative characteristic(s) or accounting concept(s) applied. Aletter may be used more than once, and more than one characteristicor concept may apply to a particular situation. Explain why youchose your answer.

1. Goodwill is recorded in the accounts only when it arises fromthe purchase of another entity at a price higher than the fairmarket value of the purchased entity's identifiable assets. 2. Landis valued at cost. 3. All payments out of petty cash are debited toMiscellaneous Expense. 4. Plant assets are classified separately asland or buildings, with an accumulated depre-ciation account forbuildings. 5. Periodic payments of $1,500 per month for services ofH. Hay, who is the sole propri-etor of the company, are reported aswithdrawals. 6. Small tools used by a large manufacturing firm are^recorded as expenses when purchased. 7. Investments in equitysecurities are initially recorded at cost. 8. A retail storeestimates inventory rather than taking a complete physical countfor purposes of preparing monthly financial statements. 9. A notedescribing the company's possible liability in a lawsuit isincluded with the financial statements even though no formalliability exists at the balance sheet date. 10. Depreciation onplant assets is consistently computed each year by thestraight-line method. a) Understandability b) Verifiability c)Timeliness d) Representational faithfulness e) Neutrality f)Relevance g) Going concern h) Economic entity i) Historical cost j)Measurability k) Materiality l) Comparability Type your answers ina Word Document, and submit to the Drop Box.

Accounting is an information and measurement system thatidentifies, records, and communicates relevant, reliable, andcomparable information about an organization's businessactivities.

We use the accounting equation to identify what a company ownsand owes. The accounting equation is:

Assets = Liabilities + Equity

Assets = Liabilities â Equity

Assets = Liabilities + Revenues

Equity = Liabilities + Revenues

______ are beliefs that distinguish right from wrong. Thesebeliefs are accepted standards of gauging good and dishonestbehavior.

Accounting Standards

Generally Accepted Accounting Principles

The _____ is a collection of all accounts within a companyâsaccounting system.

General Journal

Chart of Accounts

We use the accounting equation to identify what a company ownsand owes. _____ are resources a company owns or controls, _____ areclaims creditors have against a companyâs assets, and _____ is theownerâs claim on a companyâs assets.

In double entry accounting a credit to an asset account willrepresent an increase in the asset account balance; and a debitwill represent a decrease in the asset account balance.

The purchase of supplies on credit will ____ assets and ____liabilities.

Increase, decrease

Decrease, increase

Decrease, decrease

Increase, increase

During the accounting cycle, we analyze transactions toprepare statements.

The supplies account for a company has a $1,000 debit balanceat the beginning of the year. Supplies of $2,000 were purchasedduring the year and debited to the Supplies account. A December 31physical count shows $500 of supplies remaining at the end of theyear. Assume no other adjusting entries are made during the year.Using the 3-step process for creating adjusting entries, calculatethe adjustment amount for supplies (no journal entry isrequired).

$1,000 adjustment

$2,000 adjustment

$2,500 adjustment

$3,000 adjustment

During the accounting cycle, to complete step 7 youwould:

Prepare post-closing trial balance--Test clerical accuracy ofthe closing procedures.

Prepare adjusted trial balance--Summarize adjusted ledgeraccounts and amounts.

Prepare statements--Use adjusted trial balance to preparefinancial statements.

Close--Journalize and post entries to close temporaryaccounts.

The three financial statements that should be prepared duringthe accounting cycle are the:

Balance sheet, adjusted trial balance, income statement

Balance sheet, unadjusted trial balance, Statement of OwnerâsEquity

Income statement, adjusted trial balance, Statement of OwnerâsEquity

Balance sheet, Income statement, Statement of OwnerâsEquity

An optional working paper, which is not a required report oran accounting record, but is used to prepare a company's unadjustedtrial balance, adjusting entries, adjusted trial balance, andfinancial statements is a(n):

Adjusted trial balance

Post-closing trial balance

Unadjusted trial balance

The two goals for completing the closing process are:

To identify accounts for closing and record the closingentries

To journalize and post transactions

To post transactions and prepare post-closing trialbalance

To reset revenues, expenses, and withdrawal account balancesto zero at the end of each period, and help summarize an accountingperiodâs revenues and expenses.

Fill in the Blank: The _____ describes a companyâs financialposition â by the types and amounts of assets, liabilities, andequity -- at a point in time.

Return on Assets is useful in evaluating management, analyzingand forecasting profits, and planning activities.

The Income Statement:

Identifies cash inflows (receipts) and cash outflows(payments) over a period-of-time.

Summarize adjusted ledger accounts and amounts

Describes a companyâs revenues and expenses along with theresulting net income or net loss -- over a period-of-time due toearnings activities

Resets revenues, expenses, and withdrawal account balances tozero at the end of each period.

An internal control system consists of the policies andprocedures used to:

Protect assets and Ensure reliable accounting

Urge adherence to company policies and Promote efficientoperations

All of the above

None of the above.

The cost-benefit principle is the second limitation of_______.

Bank reconciliations

Petty cash controls

Voucher system of controls

Internal controls

The Unadjusted Trial Balance columns of a company's work sheetshows the Store Supplies account with a balance of $750. TheAdjustments columns shows a credit of $425 for supplies used duringthe period. The amount shown as Store Supplies in the Balance Sheetcolumns of the work sheet is:

A company shows a $600 balance in Prepaid Rent in theUnadjusted Trial Balance columns of the work sheet. The Adjustmentscolumns show expired rent of $200. This adjusting entry resultsin:

$200 decrease to net income

$200 increase to net income

$200 different between the debit and credit columns of theUnadjusted Trial Balance

An error in the Balance Sheet

This semester we have discussed four major financialstatements. List the 4 financial statements and describe them. Makesure to include how they flow together.

Explain the purpose of adjusting entries at the end of aperiod.

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