ACC 550 EXAM 1 QUESTIONS AND VERIFIED
ANSWERS
4 basic financial statements - Answers - 1. Balance Sheet
2. Income Statement
3. Statement of Stockholders' equity
4. Statement of Cash Flows
Three sections of a balance sheet - Answers - 1. Assets
2. Liabilities
3. Stockholders' equity
The accounting equation - Answers - Assets = Liabilities + Owner's Equity
What is a classified balance sheet? - Answers - Breaks assets and liabilities into
categories:
- current assets: those to be used or turned into cash within a year
- noncurrent assets: those that will last longer than a year
- current liabilities: those obligations to be paid or settled within a year
Current Assets - Answers - cash, cash equivalents, short-term investments, accounts
receivables, inventories, prepaid expenses
Long-term assets - Answers - property, plant and equipment(land, buildings, and
equipment), long-term investments, intangible and other assets
Current liabilities - Answers - accounts payable, accrued liabilities(expenses), unearned
revenues(deferred revenues), short-term debt, current maturities of long-term debt
(current portion)
Noncurrent liabilities - Answers - long-term debt, other long-term liabilities
Stockholders' equity- contributed capital - Answers - common stock, additional paid-in
capital(capital in excess of par), preferred stock, treasury stock
Stockholders' equity- earned capital - Answers - retained earnings
Income Statement - Answers - reports on a company's performance over a period of
time and lists:
- revenues
- expenses
- net income or loss (revenue - expenses)
, What is on an income statement? - Answers - revenue, cost of goods sold, gross profit,
operating expenses, income before taxes, income after taxes, net income
Statement of cash flows format - Answers - Measures activities involving cash receipts
and cash payments over an interval of time:
- cash flows from operating activities
- cash flows from investing activities
- cash flows from financing activities
- Net increase (decrease) in cash
- beginning cash
- ending cash
What are the elements of the statement of stockholders' equity - Answers - Contributed
capital and retained earnings; formula is beginning retained earnings + net income -
dividends = ending retained earnings
Accrual accounting - Answers - revenues and expenses recognized on the income
statement are not determined by the cash received or paid. The two principles are:
- revenue recognition principle
- expense recognition principle
Revenue recognition principle - Answers - recognize revenue when a performance
obligation is satisfied by transferring to a customer a promised good or service. This
may or may not coincide with cash received
Expense recognition principle - Answers - Recognize expense when incurred. This may
or may not coincide with cash payment
Return on equity formula - Answers - ROE = net income/average stockholders' equity
Gross profit margin formula - Answers - Gross profit/revenue
Common size balance sheet - Answers - This expresses the balance sheet in % terms.
It is every line on the balance sheet (A, L, & Eq) divided by total assets
Common size income statement - Answers - This is every line item on the income
statement divided by total revenue
- Transaction 1: Issue Common Stock
- Sell shares of common stock for $25,000 to obtain the funds necessary to start the
business
- What is one account affected by the transaction?
- Does that account increase or decrease?
- What is a second account affected by the transaction?
- Does that account increase or decrease? - Answers - - cash
- increase by $25,000
ANSWERS
4 basic financial statements - Answers - 1. Balance Sheet
2. Income Statement
3. Statement of Stockholders' equity
4. Statement of Cash Flows
Three sections of a balance sheet - Answers - 1. Assets
2. Liabilities
3. Stockholders' equity
The accounting equation - Answers - Assets = Liabilities + Owner's Equity
What is a classified balance sheet? - Answers - Breaks assets and liabilities into
categories:
- current assets: those to be used or turned into cash within a year
- noncurrent assets: those that will last longer than a year
- current liabilities: those obligations to be paid or settled within a year
Current Assets - Answers - cash, cash equivalents, short-term investments, accounts
receivables, inventories, prepaid expenses
Long-term assets - Answers - property, plant and equipment(land, buildings, and
equipment), long-term investments, intangible and other assets
Current liabilities - Answers - accounts payable, accrued liabilities(expenses), unearned
revenues(deferred revenues), short-term debt, current maturities of long-term debt
(current portion)
Noncurrent liabilities - Answers - long-term debt, other long-term liabilities
Stockholders' equity- contributed capital - Answers - common stock, additional paid-in
capital(capital in excess of par), preferred stock, treasury stock
Stockholders' equity- earned capital - Answers - retained earnings
Income Statement - Answers - reports on a company's performance over a period of
time and lists:
- revenues
- expenses
- net income or loss (revenue - expenses)
, What is on an income statement? - Answers - revenue, cost of goods sold, gross profit,
operating expenses, income before taxes, income after taxes, net income
Statement of cash flows format - Answers - Measures activities involving cash receipts
and cash payments over an interval of time:
- cash flows from operating activities
- cash flows from investing activities
- cash flows from financing activities
- Net increase (decrease) in cash
- beginning cash
- ending cash
What are the elements of the statement of stockholders' equity - Answers - Contributed
capital and retained earnings; formula is beginning retained earnings + net income -
dividends = ending retained earnings
Accrual accounting - Answers - revenues and expenses recognized on the income
statement are not determined by the cash received or paid. The two principles are:
- revenue recognition principle
- expense recognition principle
Revenue recognition principle - Answers - recognize revenue when a performance
obligation is satisfied by transferring to a customer a promised good or service. This
may or may not coincide with cash received
Expense recognition principle - Answers - Recognize expense when incurred. This may
or may not coincide with cash payment
Return on equity formula - Answers - ROE = net income/average stockholders' equity
Gross profit margin formula - Answers - Gross profit/revenue
Common size balance sheet - Answers - This expresses the balance sheet in % terms.
It is every line on the balance sheet (A, L, & Eq) divided by total assets
Common size income statement - Answers - This is every line item on the income
statement divided by total revenue
- Transaction 1: Issue Common Stock
- Sell shares of common stock for $25,000 to obtain the funds necessary to start the
business
- What is one account affected by the transaction?
- Does that account increase or decrease?
- What is a second account affected by the transaction?
- Does that account increase or decrease? - Answers - - cash
- increase by $25,000
