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ACC 305 Lecture Notes - Lecture 20: Financial Statement Analysis, Financial Statement, Accounting Equation

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orangegnat648
17 Aug 2019
School
McKendree University
Department
Accounting
Course
ACC 305
Professor
Brasel

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Related Questions

QUESTION 1

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

QUESTION 2

We use the accounting equation to identify what a company ownsand owes. The accounting equation is:
Assets = Liabilities + Equity
Assets = Liabilities – Equity
Assets = Liabilities + Revenues
Equity = Liabilities + Revenues
QUESTION 3

______ are beliefs that distinguish right from wrong. Thesebeliefs are accepted standards of gauging good and dishonestbehavior.
Accounting Standards
Ethics
Generally Accepted Accounting Principles
FASB
QUESTION 4

The _____ is a collection of all accounts within a company’saccounting system.
General Journal
Chart of Accounts
General Ledger
Balance Sheet
QUESTION 5

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

QUESTION 6

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.
True
False
QUESTION 7

The purchase of supplies on credit will ____ assets and ____liabilities.
Increase, decrease
Decrease, increase
Decrease, decrease
Increase, increase
QUESTION 8

During the accounting cycle, we analyze transactions toprepare statements.
True
False
QUESTION 9

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
QUESTION 10

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.
QUESTION 11

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 Owner’sEquity
Income statement, adjusted trial balance, Statement of Owner’sEquity
Balance sheet, Income statement, Statement of Owner’sEquity

QUESTION 12

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
Worksheet
Post-closing trial balance
Unadjusted trial balance
General ledger
QUESTION 13

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 accountingperiod’s revenues and expenses.
QUESTION 14

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

QUESTION 15

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

QUESTION 16

The Income Statement:
Identifies cash inflows (receipts) and cash outflows(payments) over a period-of-time.
Summarize adjusted ledger accounts and amounts
Describes a company’s 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.
QUESTION 17

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.
QUESTION 18

The cost-benefit principle is the second limitation of_______.
Bank reconciliations
Petty cash controls
Voucher system of controls
Internal controls
QUESTION 19

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:
$325 debit
$325 credit
$425 debit
$425 credit
QUESTION 20

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

QUESTION 21

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

QUESTION 22

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

Codification Research Case

1-In light of the full disclosure principle, investors and creditors need to know the balances for assets, liabilities, and equity as well as the accounting policies adopted by management to measure the items reported in the balance sheet.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a)

Identify the literature that addresses the disclosure of accounting policies.

(b)

How are accounting policies defined in the literature?

(c)

What are the three scenarios that would result in detailed disclosure of the accounting methods used?

(d)

What are some examples of common disclosures that are required under this statement?

Codification Research Case

2-At a recent meeting of the accounting staff in your company, the controller raised the issue of using present value techniques to conduct impairment tests for some of the company's fixed assets. Some of the more senior members of the staff admitted having little knowledge of present value concepts in this context, but they had heard about a FASB Concepts Statement that may be relevant. As the junior staff in the department, you have been asked to conduct some research of the authoritative literature on this topic and report back at the staff meeting next week.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and access the FASB Statements of Financial Accounting Concepts. When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.)

(a)

Identify the concept statement that addresses present value measurement in accounting.

(b)

What are some of the contexts in which present value concepts are applied in accounting measurement?

(c) Provide definitions for the following terms:

1.Best estimate.

2.Estimated cash flow (contrasted to expected cash flow).

3.Fresh-start measurement.

4.Interest methods of allocation.

Case 1-1 You are the new chief financial officer for Redlands Manufacturing, Inc. The firm that you have just joined has recently paid substantial penalties to settle claims related to fraudulent financial reporting practices. The Board of Directors has also created an Office of Ethics and Compliance in response to the scandals. Francis Bacon, the chief of the newly created ethics office, recently dropped by your office for some insights about accounting and fraudulent financial reporting. The chief ethicist stated that he has a background in philosophy, but he lacks understanding of the accounting discipline. He identifies the tactics that the company employed when it essentially cooked its books. Bacon stated that Redlands employed some devious practices that were obviously unethical, but that he lacked the accounting vocabulary to articulate their financial statement consequences. He essentially wanted to understand why specific practices violated accounting standards, and sought your help with this matter. Bacon began by stating, “I have identified five types of arrangements that Redlands engaged in over the period in question. Each type of activity has a clever sounding name. Here is my list:” Channel Stuffing. Redlands shipped manufactured goods to certain retailers, in certain instances regardless of whether or not the retailers ordered the products. Our firm recognized revenues upon shipment of these non-ordered items, which usually took place towards the end of the year. We informally agreed to take back the merchandise if the retailer could not sell it. It was kind of a wink and a nod deal. Redlands did not recognize an allowance for the merchandise that its retailers could return. Vendor Dinging. Our firm told many of its suppliers that they were shipped a disproportionately large number of raw materials that did not conform to contracted specifications. Consequently, Redlands unilaterally decreased its cash payments to those vendors. Most of the suppliers did not dispute our claims and merely reduced our obligation to them. Of course, many of those materials were of acceptable quality and we used them in manufacturing our products. Capitalizing Revenue Expenditures. Redlands placed numerous recurring business costs on its balance sheet as long-term assets, rather than charging the full cost of the item as an expense in the current reporting period. Our firm then recognized only a portion of those questionable assets’ cost as a current expense, which we called depreciation. These costs, such as salaries expense, had no future benefit beyond the current reporting period. Special Purpose Entities (SPEs). Redlands Manufacturing shielded debt (liabilities) from its balance sheet with these types of arrangements. Our firm contracted with ostensibly independent companies in business ventures that were debt financed. The other companies, not Redlands, reported the debt on their balance sheets. Our SPE partners, however, consisted of businesses established by Redlands executives. Bacon told you that he was preparing to make his initial address to the Board of Directors concerning staff training which should insure that the firm does not engage in the above practices, or any other ones like them. He wants you to explain to him how such unethical practices violate accounting conventions, and how they inflated the financial appearance of the firm. Required: Write a memorandum to Francis Bacon explaining how each practice violates generally accepted accounting principles, and how each type of transaction might affect reported income, financial position, and cash flows.