UPDATED MGT 8803 FINAL EXAM ACTUAL EXAM QUESTIONS AND CORRECT DETAILED ANSWERS WITH RATIONALES (VERIFIED ANSWERS) |A+ GUARANTEED

What are the (5) assumptions of financial accounting? - ANSWER- 1. Separate entity 2. Unit of measurement 3. Going concern 4. Periodicity 5. Materiality What does materiality mean? - ANSWER- The only information that needs to be disclosed in financial statements is information that will be useful for those who rely on the financial statements to make decisions. What are the qualities of financial statements? (6) - ANSWER- 1. Understandability 2. Timeliness 3. Full disclosure 4. Comparability 5. Objectivity 6. Decision relevance What are the three basic financial statements? - ANSWER- 1. Balance sheet 2. Income statement 3. Statement of cash flows What does the balance sheet do? - ANSWER- Measure the financial position of the company at a point in time What are the three categories of the balance sheet? - ANSWER- Assets Liabilities Owner's Equity What is the accounting equation? - ANSWER- Assets = Liabilities + owner's equity List 6 common asset accounts. - ANSWER- 1. Cash 2. Accounts receivable and notes receivable 3. Inventory 4. Investments 5. Building and equipment 6. Copyrights and patents Presented in the order of liquidity What does liquidity mean? - ANSWER- The closer something is to being cash the more liquid it is. List 4 ways to determine the value of assets. - ANSWER- 1. Historical cost 2. Sales value 3. replacement cost 4. general price-level adjustment costs (taking original cost and adjusting for inflation) What is the cost principle? - ANSWER- Assets are valued at their historical costs. (there are exceptions) List 5 common liability accounts. - ANSWER- 1. Accounts payable 2. Notes payable 3. Interest payable 4. Deferred revenue 5. Accrued wages and salaries What makes an asset current (vs long term)? - ANSWER- Expected to be converted to cash within one year. What makes a liability current (vs long term)? - ANSWER- Due within one year. What is owner's equity? - ANSWER- Residual interest of owners to assets. What are the two components of the owner's equity section of the balance sheet? - ANSWER- Capital stock Retained earnings Which forms of stock fall under Capital stock? - ANSWER- Common stock Preferred stock What are retained earnings? - ANSWER- accumulated earnings less dividends What form of accounting does GAAP use? - ANSWER- Accrual basis (vs cash basis which only recognizes revenue or expenses when cash changes hands) What is the revenue recognition principle (accrual basis accounting)? - ANSWER- Revenue is recognized when it is earned. What is the 4 criteria for recognizing revenue? - ANSWER- 1. Arrangement 2. Delivery 3. Set Price 4. Collectability What are the two main components of the matching principle? - ANSWER- 1. Costs are reported as expenses in the same time period as their related revenues 2. Costs that cannot be matched with specific revenues are matched with future time periods that benefit from the cost. What does the income statement show? - ANSWER- The results of a company's operations (success) over a period of time. What is the difference between the income statement and balance sheet? - ANSWER- The balance sheet gives you a point in time and the income statement covers a period of time. What are 4 things that fall under S,G & A (selling, general and administrative) - ANSWER- utilities, salaries, insurance, rent. What is operating income? - ANSWER- Gross margin minus S, G & A What is gross margin? - ANSWER- Net Sales (Revenues) minus COGS What is the formula for EPS (earnings per share)? - ANSWER- Net income over # of shares of stock What is the difference between EPS and fully diluted EPS? - ANSWER- Fully diluted EPS includes the potential number of shares in the denominator. What does the statement of cash flows show? - ANSWER- How the company received cash and how it used the cash. What are the three sections of the statement of cash flows? - ANSWER- 1. Operating activities 2. Investing activities 3. Financing activities What is the allowance method? - ANSWER- A method of estimating losses, which is used for bad debts on the balance sheet so you can record them in the same period as revenue for the matching principle. Allowance for bad debt (contra-asset)