Exam 11: Understanding Accounting

Suppose a company unexpectedly receives a huge order for its main product. To cope with this, the owner borrows money to rent an additional facility to fill the orders and to pay the temporary workers who will produce the large order. The owner does this hoping that the additional costs will be more than covered by the revenue from selling the additional units of the product. Which ratio will be MOST affected by these decisions? The short-term solvency ratio The long-term solvency ratio The profitability ratio The activity ratio The equity ratio

Discuss the accounting principles of revenue recognition and matching.

The current ratio measures a firm's ability to meet interest payments. long-term liabilities. short-term liabilities. all liabilities. dividend payments.

A forensic accountant is a special type of accountant who audits companies that have gone bankrupt.

Don wants to compute the earnings per share for SFX Ltd. How does he do it? Divide sales by the number of common shares outstanding Divide cost of goods sold by the number of common shares Divide net income by the number of common shares outstanding Divide cost of goods sold by average inventory Divide net income by sales

The income statement details a firm's yearly cash receipts and cash payments.

What is an income statement?

Who are the users of financial statements? Why would they be interested in these statements?

________ is the amount of money owners would theoretically receive if they sold all of a firm's assets and paid all of its liabilities. Asset Debit Credit Liability Owners' equity

Cash flow from operations refers to money received from borrowing or issuing stock. cash transactions from buying and selling goods and services. cash used in, or provided by, investing. the cash outflow required to pay dividends. all of these.

How does a current asset differ from a fixed asset?

At Lexi Corp., sales revenue is $20 million, the cost of goods sold is $14 million, operating expenses are $3 million, and income taxes are $1 million. What is the company's net income? $6 million $17 million $16 million $2 million The answer cannot be computed with the information provided

Forensic accountants are sometimes used to ensure that the accounting system adheres to GAAP. track down hidden funds in business firms. ensure auditors follow auditing standards. ensure businesses remain profitable. do all of these.

The accounting equation is owners' equity - assets = liabilities. owners' equity - liabilities = assets. assets + liabilities = owners' equity. assets + owners' equity = liabilities. assets = liabilities + owners' equity.

A current liability is additional money, above proceeds from a stock sale, paid directly to a firm by its owners. the process of distributing the cost of an asset over its useful life. the amount paid for an existing business above the value of its other assets. a debt that is not due for at least one year. a debt that must be paid within the year.

How is the debt-to-owners'-equity ratio used? To describe the extent to which the firm is financed through borrowed money To determine how much net income the business earns for each dollar invested To determine how readily the firm can meet unexpected demands for cash To indicate the percentage of revenue which will be profit To determine the percentage of profits paid out to debtholders

Firm A enjoys a better activity ratio than Firm B. What might this mean? Firm A likely generates greater profits or sales. Firm A uses its resources more efficiently than Firm B. Firm A has more customers than Firm B. Firm A generates greater profits on sales and uses its resources more efficiently than B. It might not mean anything.

Which of the following is correct with regard to private accountants? They are hired by business firms who do not want to use the services of CAs or CGAs. They are employed by business firms in areas such as marketing research, law, and production technology. They are becoming less common as CAs, CGAs, and CMAs become more prominent and skilled. They are almost exclusively found at the head office of business firms. They are hired to deal with companies' day-to-day accounting needs.

Describe the major elements of an income statement.

What is an asset?